Failing the test
March 6, 2011
The European Union's new stress tests for banks are too lax, according to the head of a leading German economic think-tank.
Hans-Werner Sinn of Munich's Ifo Institute said in an interview in Sunday's edition of the Frankfurter Allgemeine newspaper that the tests will fail to expose all loans at risk of default.
"Accurate stress tests would reveal that many banks are still carrying enormous non-performing burdens," Sinn said.
He argued that EU rules still allow banks to declare many securities at their nominal value, not their lower market value. This included Greek government bonds which currently trade at less than 70 percent of their nominal value.
"The new stress tests will be just as bad at uncovering these non-performing assets at the old ones were," he warned.
Weathering a potential storm
Stress tests are designed to expose whether each EU bank can remain viable if the market experiences a downturn or a new recession develops.
Tests carried out on 91 EU banks in 2010 were criticized for being too weak, which is a primary factor behind the new round of tests prepared by the European Banking Authority (EBA).
Only seven banks failed the last slate of tests. In fact, all of Ireland's banks passed just months before that country's banking crisis forced Dublin to appeal for an international bailout.
Author: Catherine Bolsover (dpa/Reuters)
Editor: Kyle James