The European Commission is calling for new stress tests for European banks. The reason? Well, it appears that the previous stress tests during the summer failed to spot huge problems at the heart of Ireland’s financial institutions.
Oli Rehn is quoted saying that Ireland’s banking meltdown was a one-off case that would not be repeated elsewhere in Europe. Well, I disagree.
Back in July I noted that stress tests must also include really worst-case scenarios, as in worst-case scenarios. Worst, not best. And all of them. We know that summer stress tests failed to do that. Now we are led to believe that the new stress tests will do the job. That is unlikely.
The problem is analyzed very well by Richard Field. He claims that there is only one way to restore trust and erect a firewall against contagion. Governments must make the statement about which banks are or are not solvent in their system and make the asset-level data available to support it.