A new Eurozone bank stress test--with even less stress?

03/09/2011 7:39 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

Thank goodness they learned their lesson.

Last time bank regulators conducted a stress test of European banks, the tests were derided as too easy and meaningless. That criticism gained a certain credibility when Ireland was forced to bail out its two biggest banks, both of which had passed the summer of 2010 tests.

So what are regulators doing this time? They’re watering down the tests even more.

Hard to believe though it might be, the proposed test will model the effect of a 15% drop in stocks market on bank balance sheets this time—as opposed to a 20% drop in the 2010 model. The new test will look at the effect of a 0.5% drop in Eurozone GDP in 2011 and 0.2% in 2012. That’s also less than in the 4% drop over two years and 3% drop in 2010 in the earlier test.

Only seven out of 91 Eurozone banks failed the 2010 test. They were required to raise a total of about $4.6 billion in new capital. In earlier U.S. stress tests—widely criticized as too easy at the time and now seen as a model of discipline—10 of 19 banks failed and they were required to raised $75 billion in new capital.

The current round of tests is brought to investors by the new European Banking Authority, created in January to replace the Committee of European Bank Supervision. The hope was that the new tests would add to the credibility of the new agency.

"The scenario of the 2011 EU-wide stress test is tough, and more severe than last year," said Andrea Enria, the chairman of the European Banking Authority, in a statement released by the authority.

Good luck with that credibility thing.
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