No Stress Please, We’re Euro

The European Banking Authority (EBA) recently decided to hold off on performing stress tests on Eurozone banks until 2014, citing asset reviews being conducted by the European Central Bank (ECB). The EBA last conducted the stress tests in 2011. You remember 2011. Despite ‘lessons learned’, the EBA gave Dexia a pass in the adverse scenario. Three months later, Dexia wrote down the value of its Greek sovereign debt (as did everyone else) and posted a loss of EUR 4 billion.

My lessons learned from that episode:

  • one adverse scenario isn’t enough
  • ‘adverse’ isn’t enough
  • the banking system and shareholders are different constituencies

Scroll forward to 2013. I would argue that holding off for a year is not a shining example of learning a lesson from the last round. This is like your doctor not screening you for cancer because you promise to quit smoking by next year.

My opinion – stress testing needs to be a regular part of a financial institution’s reporting to the capital markets. It needs to be done with a standardized methodology. It needs to be expanded to cover 75% or more of the assets in each national market. And it needs to report the data in standardized ways using XBRL, like the rest of COREP.

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