Stress Testing Banks In Europe

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The FT reports that the IMF wants to stress test banks in Europe. For the governments of the EU and UK move ahead with such a program, they will have to overcome some high hurdles.

The first of those is whether all of the countries in Europe can agree to a common set of criteria for the tests. Given the lack of cooperation among the nations on other financial matters this may be impossible. But, is is hard to imagine that the financial community will take the results of any evaluations seriously if the measurements differ from nation to nation.

The even more difficult challenge is where the money will come from to make up for any short falls in capital that turn up due to stress tests. The US government has the TARP in place and, arguably, the Fed and Treasury have access to funds to invest in banks if the investment is necessary to make certain that they are solvent and stay solvent over the next two or three years, at least until the end of the recession.

The US banks stress tests showed that the top 19 US banks could faces losses up to $600 billion between now and the end of 2010. There are enough large money center banks in Europe that the losses in the UK and EU could be at least as large, if not larger, than they are expected to be in America.

The concern that the financial system could still face a significant breakdown may no longer focus on trouble in the US. Europe’s banks have not been systematically evaluated for future problems. Massive losses and an immediate need for more capital across the Atlantic could still take the global credit system back to where it was late last year.

Douglas A. McIntyre