Tag Archives: stress tests

Whither New Stress Tests for European Banks?

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.

Achievements and Omissions in the European Council Conclusions on the EU Economy

I’ll make an attempt to list the achievements and the omissions in the European Council conclusions from the meeting on the 17 June 2010 on the EU economy.

Achievements:

The Europe 2020 Strategy – it is supposed to promote a series of reforms aimed at competitiveness and employment, placing research and development at the centre of economic initiatives for the next decade. The aim is to raise to 75% the employment rate for women and men aged 20-64, raising combined public and private investment levels in research and development to 3% of GDP, reducing greenhouse gas emissions by 20%, reducing school drop-out rates to less than 10%, and aiming to lift at least 20 million people out of the risk of poverty and exclusion.

Economic governance – explicit objective for strengthening both the preventive and corrective arms of the Stability and Growth Pact; introducing the concept of dynamic debt; a scoreboard to better assess competitiveness developments and imbalances and allowing for an early detection of unsustainable or dangerous trends; publication of results of ongoing stress tests by banking supervisor; introduction of systems of levies and taxes on financial institutions to ensure fair burden-sharing and to set incentives to contain systemic risk.

Iceland – start of accession negotiations.

Estonia – adoption of the euro on 1 January 2011.

Iran – new sanctions based on UN Security Council Resolution 1929.

Omissions – the European Council failed to produce any specific measures on dealing with growth imbalances and actual, serious fiscal policy coordination. In other words the European Council delayed taking painful decisions on the future of economic governance in the European Union, while setting strategic objectives that may or may not produce effective results.