Germany agrees to release bank stress tests

Germany and other European governments on Thursday took a big step towards revealing if banks can withstand shocks such as hit the global economy two years ago, and now in reaction to concern about finances in Spain.

Germany agrees to release bank stress tests
Photo: DPA

Officials in Germany and Spain have agreed to publish results of so-called stress tests done on banks to reassure investors who fear banks might be hit by massive losses on government bonds and real-estate loans.

Germany, which had resisted such a move, “approves the publication of stress tests within the European Union. The details must be defined by EU finance ministers” meeting in Brussels on Thursday, a finance ministry spokesman told AFP.

“We see that markets are nervous and that trust between banks is lacking,” he added. “Given the context, more transparency might help stabilise the situation.”

Tests throughout the 16-nation eurozone were being coordinated in London by the Committee of European Banking Supervisors, a European Central Bank (ECB) spokesman told AFP.

The CEBS was likely to oversee publication of compiled results as well, he added.

In France, a source close to Economy Minister Christine Lagarde said tests on French banks showed “no particular cause for concern.”

The governor of the French central bank, Christian Noyer, said that he favoured “the publication of the stress tests in Europe broken down by country and by bank.”

In Brussels, EU leaders were to mull how best to publish the results of the tests, which aim to establish how well equipped banks are to absorb a major event such as default by a key debtor.

Stress test critics warn that markets could misinterpret the findings and turn against the banks, though US tests done last year are credited with having restored confidence in the banking sector there.

On Wednesday, the Bank of Spain said it would release information on Spanish banks that have become the target of growing market speculation.

And ECB executive board member Lorenzo Bini Smaghi said that harmonised bank stress tests – fresh ones are being done on some 30 major eurozone banks – would be released for each eurozone member.

“Supervisors in Europe are stress testing the banks and those results will be made public within a couple of weeks, at the latest,” starting with Spain, he told CNBC television in New York.

If banks did not have enough core capital, they would either have to merge with peers or raise fresh funds “within a given deadline,” Smaghi said.

“In some countries like Spain there is some capital being put aside by the government in case the bank doesn’t find it in the private markets,” he added.

Spain’s banking system is laden with loans that went bad after the country’s real-estate market collapsed, and regional savings banks have been frozen out of the interbank money market.

Analysts were not convinced centralised tests were effective or necessary, however.

“It’s a complex exercise, it’s not really something that is easily digested by a wider audience,” Barclays Capital economist Thorsten Polleit told AFP.

Beyond the risk of misinterpretation, Polleit said it was up to investors like insurance companies and pension funds “first and foremost to do risk analyses” themselves.

“People cannot rely on third parties to do the work properly,” he added.

ING senior economist Carsten Brzeski saw two sides to the issue, he said.

“If you have nothing to hide then just come out with the stress tests,” he told AFP.

Then again, Brzeski noted markets were not panicking as they did a few weeks ago, and wondered whether EU governments should “always be hijacked by markets and always be pushed into this kind of ad-hoc reactive mode.”

He suggested authorities should focus on problems with weak regional lenders in Spain and Germany but “keep their cool and continue with the structural work.”

Member comments

Log in here to leave a comment.
Become a Member to leave a comment.


The Euro celebrates its 20th anniversary

The euro on Saturday marked 20 years since people began to use the single European currency, overcoming initial doubts, price concerns and a debt crisis to spread across the region.

The Euro celebrates its 20th anniversary
The Euro is projected onto the walls of the European Central Bank in Brussels. Photo: Daniel Rolund/AFP

European Commission chief Ursula von der Leyen called the euro “a true symbol for the strength of Europe” while European Central Bank President Christine Lagarde described it as “a beacon of stability and solidity around the world”.

Euro banknotes and coins came into circulation in 12 countries on January 1, 2002, greeted by a mix of enthusiasm and scepticism from citizens who had to trade in their Deutsche marks, French francs, pesetas and liras.

The euro is now used by 340 million people in 19 nations, from Ireland to Germany to Slovakia. Bulgaria, Croatia and Romania are next in line to join the eurozone — though people are divided over the benefits of abandoning their national currencies.

European Council President Charles Michel argued it was necessary to leverage the euro to back up the EU’s goals of fighting climate change and leading on digital innovation. He added that it was “vital” work on a banking union and a capital markets
union be completed.

The idea of creating the euro first emerged in the 1970s as a way to deepen European integration, make trade simpler between member nations and give the continent a currency to compete with the mighty US dollar.

Officials credit the euro with helping Europe avoid economic catastrophe during the coronavirus pandemic.

“Clearly, Europe and the euro have become inseparable,” Lagarde wrote in a blog post. “For young Europeans… it must be almost impossible to imagine Europe without it.”

In the euro’s initial days, consumers were concerned it caused prices to rise as countries converted to the new currency. Though some products — such as coffee at cafes — slightly increased as businesses rounded up their conversions, official statistics have shown that the euro has brought more stable inflation.

Dearer goods have not increased in price, and even dropped in some cases. Nevertheless, the belief that the euro has made everything more expensive persists.

New look

The red, blue and orange banknotes were designed to look the same everywhere, with illustrations of generic Gothic, Romanesque and Renaissance architecture to ensure no country was represented over the others.

In December, the ECB said the bills were ready for a makeover, announcing a design and consultation process with help from the public. A decision is expected in 2024.

“After 20 years, it’s time to review the look of our banknotes to make them more relatable to Europeans of all ages and backgrounds,” Lagarde said.

Euro banknotes are “here to stay”, she said, although the ECB is also considering creating a digital euro in step with other central banks around the globe.

While the dollar still reigns supreme across the globe, the euro is now the world’s second most-used currency, accounting for 20 percent of global foreign exchange reserves compared to 60 percent for the US greenback.

Von der Leyen, in a video statement, said: “We are the biggest player in the world trade and nearly half of this trade takes place in euros.”

‘Valuable lessons’

The eurozone faced an existential threat a decade ago when it was rocked by a debt crisis that began in Greece and spread to other countries. Greece, Ireland, Portugal, Spain and Cyprus were saved through bailouts in return for austerity measures, and the euro stepped back from the brink.

Members of the Eurogroup of finance ministers said in a joint article they learned “valuable lessons” from that experience that enabled their euro-using nations to swiftly respond to fall-out from the coronavirus pandemic.

As the Covid crisis savaged economies, EU countries rolled out huge stimulus programmes while the ECB deployed a huge bond-buying scheme to keep borrowing costs low.

Yanis Varoufakis, now leader of the DiEM 25 party who resigned as Greek finance minister during the debt crisis, remains a sharp critic of the euro. Varoufakis told the Democracy in Europe Movement 25 website that the euro may seem to make sense in calm periods because borrowing costs are lower and there are no exchange rates.

But retaining a nation’s currency is like “automobile assurance,” he said, as people do not know its value until there is a road accident. In fact, he charged, the euro increases the risk of having an accident.