Don’t stress…Posted: July 22, 2010
The European Union will release tomorrow the results of the so called bank stress tests. Those tests are aimed at estimate the strength of European banks and their ability to survive a financial crisis.
Since the beginning of the week, there has been an increasing expectation and concern among economists and analysts – which translated into a fall back of the Euro – particularly at a time when the fear of a double dip or W-shape recession is growing due to gloomy indicators in the US.
Here are a list of possible scenarios :
- Straight A: if all the banks pass the test summa cum laude, that will simply be too good to be true [*], and the assumption that Europe has some bad news to hide will fuel the doubts on European finance.
- Bad news: Some bad news, like too much banks failing, or big banks doesn’t passing would be a very bad surprise, and naturally start a new trust crisis.
- Overall OK: The only acceptable outcome would be to have the big banks passing and a few smaller, less important, failing or near failing. A result with no bad surprise, neither good surprise. (Basically, the market will be happy only if it gets what it expects)
- Clear test: A final element is how clear and transparent the tests are. If it is not clear enough what the banks have to achieve to pass the test and how it asserted, that would raise the concerns that Europe wants to hide some not-too-good details.
Given this possible outcomes, one extra element is going to be very important:
A bank failing the test is not on the verge of collapse, it will just be in danger in case of a violent economic incident (which is not so muhc unlikely now that the fear of a double dip are growing) ; so the big question for failing banks is what is the plan to get them more solid : will there be any requirement, government plan to help them, …
All will be answer tomorrow, so see you this weekend for a debrief.