mr president last summer's stress tests were meant to restore confidence in banks
this was europe's attempt to tell global markets to calm down dear
it failed
nineteen weeks later the irish banks collapsed and taxpayers across europe were forced into a bail-out and just last week we learnt that eur twelve billion of the proposed portuguese bail-out is for their banks
the sovereign debt crisis will not be solved until the bank crisis is solved and the bank crisis will not be solved until markets are confident in providing capital and liquidity to banks
stress tests are meant to stress risks
to assuage market concerns they must stress the risks that the markets are concerned about and right now the markets are concerned about sovereign debt levels
refusing to test the sovereign debt held on the whole bank balance sheet will not restore confidence
the european banking authority is of course caught between a rock and a hard place publicly admitting that the risk of a write-down exists may perpetuate the risk of it occurring but denying that it exists at all would be downright irresponsible for a regulator
and then there are the trillion dollar questions
behind closed doors the argument has focused on the numerator
what type of capital do banks hold
the longer individual countries fight for their own opt-outs the more everyone becomes aware that not all banks are equal and market concerns multiply
but we should also be concerned about the denominator
what is the risk of the assets on the balance sheets and can you trust the risk weights applied to those assets
if us banks have risk weights fifty higher than european counterparts are europe's banks being allowed to fundamentally misrepresent the risks on their balance sheets
the financial crisis should have taught us all to value transparency
for depositors investors borrowers and taxpayers these stress tests do not offer transparency and that is a travesty
