Open

Coming up

Don't miss

Replay


LATEST SHOWS

AFRICA NEWS

Virunga Park chief shot

Read more

MEDIAWATCH

Algerian election: Bouteflika votes in wheelchair

Read more

MEDIAWATCH

Algeria's media: a mixture of censorship and free speech

Read more

DEBATE

Algeria: What's the Choice? Incumbent Bouteflika Votes in Wheelchair

Read more

WEB NEWS

Nigerian web users call for end to violence

Read more

FOCUS

Bitcoin in the US: A monetary revolution?

Read more

ENCORE!

Fast cars and slow trains

Read more

WEB NEWS

Chile: online mobilization to help Valparaiso fire victims

Read more

FACE-OFF

François Hollande: France's most unpopular president

Read more

  • Russia and West agree on steps to ease Ukraine crisis

    Read more

  • Low turnout in Algerian election tipped to return Bouteflika

    Read more

  • Hundreds still trapped in sunken South Korea ferry

    Read more

  • Nobel-winning Colombian writer Gabriel Garcia Marquez dies at 87

    Read more

  • Deadly attack on civilians sheltering in UN base in South Sudan

    Read more

  • With a strong French presence, veterans and fresh faces, Cannes aims to please

    Read more

  • Eurostar train delay "chaos"

    Read more

  • Chelsea Clinton says she is pregnant

    Read more

  • French troops free five aid workers kidnapped in Mali by Islamists

    Read more

  • In pictures: Iranian woman pardons son’s killer at the gallows

    Read more

  • After cup defeat, Spanish pundits read last rites for Barcelona

    Read more

  • India heads to polls in single largest day of voting

    Read more

  • Ukraine talks open in Geneva as Putin talks tough on TV

    Read more

  • Pro-Russian separatists killed in attack on Black Sea base

    Read more

  • Man executed in Texas for 2002 triple murder

    Read more

  • Scandal-hit French doctor Jacques Servier dies at 92

    Read more

  • Belgian head of wildlife reserve shot in DR Congo

    Read more

  • Crunch talks on Ukraine begin in Geneva

    Read more

  • Stagehand of God? Maradona's legendary goal inspires a play

    Read more

  • US rolls out red carpet for French critic of capitalism

    Read more

  • N. Korea not amused by London hair salon's Kim Jong-un ad

    Read more

  • Real Madrid beat old foes Barcelona to lift Copa del Rey

    Read more

  • France's new PM targets welfare in drive to cut spending

    Read more

  • Campaigning against Bouteflika's re-election... in France

    Read more

  • Brazil club Mineiro cancel Anelka signing after no-show

    Read more

Business

What is the purpose of European bank stress tests?

©

Text by Sébastian SEIBT

Latest update : 2010-07-23

Europe is set to publish on Friday the results of a stress test taken by 91 European banks. The purpose of the test is to reassure markets of the solidity of the banking sector. A first stress test was performed in 2009.

What is the point of a stress test?

Banks undergo financial simulations that are supposed to test their resistance in circumstances of severe economic instability. The Committee of European Bank Supervisors then uses the test results to evaluate whether a bank needs extra funds. The results published on July 23 are in a way a health report for European banking establishments. The stress tests have been administered at a moment when several European countries, especially in the south, are undergoing a period of financial turbulence. Authorities hope that the results will reassure financial markets quick to speculate on difficulties in the euro zone.

How are these tests administered?

The test were carried out in July. Economists from the Committee of European Bank Supervisors created various scenarios. Based on data given by the banks being tested, the economists made projections. Two initial hypotheses were posed. One was based on projections of normal growth, the other on a bleaker economic picture. In the second scenario, the experts lowered current growth predictions in the euro zone by three points. In both cases, they included the famous problem of sovereign debts. So for Greece, they predicted a decrease of more than 16% in the value of government bonds, while only 0.7% for France.

Which banks are tested?

When the last stress test was carried out in 2009, only 22 banks were involved. This time, the Committee of European Bank Supervisors aimed for more. In total, the European regulator targeted 91 establishments. The list represents 65% of the European banking sector and 50% of the sector in each country concerned. Spain is the country with the most banks tested (27). Germany has 14, while in France, where the banking sector is very concentrated, only four banks were tested.

What were the criticisms levelled against these tests?

The main criticism of European stress tests is that they don’t go far enough. Certain analysts bitterly regret that no hypothesis included a case of a country simply going bankrupt -- a relevant scenario, given what happened with Greece. The markets have also expressed scepticism about the numbers given for the decrease in the value of government bonds. Another independent stress test administered by Citigroup and Moody’s had Greece with a 40% decrease in government bond value. That is a major departure from the 16% posited by the Committee of European Bank Supervisors. These criticisms have pushed some people to conclude that the results released Friday will not be taken seriously by the markets – in which case, the EU will have failed in what it had set out to do.

Date created : 2010-07-23

Comments

COMMENT(S)