Olli Rehn promises tougher stress tests for European banks

Even more rigorous stress tests on Europe’s banks will be revealed within months, the EU’s economy chief, Olli Rehn, said on Monday, informs.

A bank liquidity crisis was the catalyst for Ireland’s problems late last year, although two of its major banks – AIB and Bank of Ireland – had “passed” in the last set of stress tests, which were based on capital ratios only.

Assessing liquidity raises difficult and sensitive issues about what assumptions should be used concerning central bank support. “We are currently discussing methodology,” Rehn said, acknowledging “weaknesses in some member states” in the last round of tests. He added that the process would be “conducted in the course of February to June”.

The new European Banking Authority, which is spearheading the latest stress testing, signaled last week that it planned “a separate thematic review of liquidity funding risks across the EU banking sector”. It suggested that this would be an internal review only – with results used to “inform supervisory authorities about areas of vulnerability” – rather than a public exercise.

But the liquidity issue is not the only thorny aspect of this subject. Another problem arises over what assumptions are made about sovereign debt holdings and their vulnerability to any potential debt restructuring. “Regulators are in a bind,” said Sony Kapoor, managing director of Re-Define, the economic policy think-tank. “A failure to stress test for Greek debt restructuring will not be credible. Including the possibility in the stress tests may be interpreted as an official sanction to such action and spook markets.”

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