EU's Rehn promises tougher bank stress tests
New tougher stress tests on Europe's banks will be revealed within months, the EU's economy chief said on Monday, as the bloc embarked on a fresh bid to win back investor confidence in the euro zone.
January 18, 2011 / 09:31 IST
New tougher stress tests on Europe's banks will be revealed within months, the EU's economy chief said on Monday, as the bloc embarked on a fresh bid to win back investor confidence in the euro zone.
"Another round of bank stress tests even more rigorous than the one of last year will be conducted in the coming months," EU Economic and Monetary Affairs Commissioner Olli Rehn told journalists after a meeting of euro zone finance ministers.The remarks from the EU's economy chief adds pressure to member states to make the new tests stricter. Many are resisting testing for a liquidity crunch because they fear that the result would exaggerate the scale of the challenge facing Europe's banks."We are currently discussing methodology," Rehn said, acknowledging "weaknesses in some member states" in the last round of tests. "The process will be conducted in the course of February to June."Last July, 91 EU banks were tested to assess how they would cope if lending such as home or commercial property loans turned sour.But they did not consider the risk of a bank being forced out of business if it struggled to get credit itself or if savers withdrew deposits. Both factors contributed to the difficulties of leading banks in Ireland and forced the country to seek an EU/IMF bailout.New stress tests should flag weaknesses in the system and shine light on those banks needing a capital boost."The results of these stress tests will guide the necessary restructuring and parallel restructuring of the banking sector," Rehn said.With investor confidence in the euro zone shaken by indecision over how best to help countries that find it hard to borrow, officials in the European Commission hope a new round of stress tests can prove the bloc's financial system is sound.But they face obstacles. Germany's regional lenders, or landesbanken, among the worst hit by the financial crisis, were reluctant to take part in the last tests and even Deutsche Bank hesitated before revealing its exposure to government debt.Despite the influence of the Commission -- many of the staff in the new banking watchdog in charge of testing will come from its ranks and it has a say in setting criteria -- Rehn needs the support of others to tighten the controls.The EU's July tests were meant to reassure investors by uncovering hidden problems and forcing weaker lenders to recapitalise. Only seven of 91 failed. Not one was from Ireland, prompting critics to label the exercise irrelevant. Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
