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Banking tests do nothing but stress out markets

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By: chen cheng
Category: Apparel
: Fashion
Posted: Jul 07, 2010
Updated: Jul 07, 2010
Views: 165


Another week, another bad idea. With the markets still jumpy about Greece, the sovereign-debt crisis and the banking system, the European Union's leaders have come up with a way to reassure us that everything is just fine in the euro area, and there is really nothing to worry about.

They are called stress tests.

Regulators will take a hard look at the big European lenders, such as Banco Santander SA, BNP Paribas SA and Deutsche Bank AG, then run various catastrophic scenarios past them, and check that the bank has the strength to withstand whatever storms might blow their way.

Sounds like a good idea? Well, not really. In truth, there aren't any common standards, we don't know what scenarios are being tested, and we don't know if all the results are going to be published. All this is doing is sparking another round of feverish speculation.

In effect, it is the stress tests themselves that are stressing out the markets.

The tests probably sounded sensible when they were announced at an EU summit on June 17. The Bank of Spain said it would publish the results of its own tests before German Chancellor Angela Merkel and French President Nicolas Sarkozy followed suit, proposing assessments for all main European banks. "What's important right now is that we have maximum transparency," said Merkel, announcing the initiative.

There is absolutely no sign the tests - which are due to be published later this month - have calmed investors. If anything, they are more nervous about the fragility of the European banking system than ever.

Of course, it is possible to see what Merkel and Sarkozy were hoping to achieve.

Right now, speculators are having a field day. All they have to do is put out the idea that a Spanish savings bank or one of the German Landesbanken has a balance sheet stuffed full of dodgy loans. Then the markets dive. Since no one really knows what bank had lent money to whom, there is space for all kinds of wild rumors to flourish.

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