By Paolo von Schirach
October 29, 2013
WASHINGTON – What is truly troubling about the news of a more serious “stress test” for European banks is that it is coming only now, at the end of 2013 –that is years after the onset of the 2008-2009 financial crisis. In the US the Department of the Treasury administered similar tests early on, in part to find out how weak US banks really were, and in part in the hope that clarity and transparency about the actual conditions of America’s main financial institutions would recreate confidence in a truly battered system. Indeed, better to give the facts, even if they may be upsetting, then to know nothing for sure, this way allowing dangerous speculations to determine future financial markets’ behavior.
Stress test anybody?
Well, Europe prefers guess work. There were a few stress tests. But they did not go deep enough and therefore they were essentially meaningless. And so Europe went through its worst financial and economic crisis in recent memory without any real understanding of the actual conditions of its banks. How many bad loans were they carrying? How big? This is extraordinary. Well, we know that the European Central Bank, ECB, flooded the system with cheap liquidity, this way minimizing the chances of sudden insolvency crises. That was not a long-term solution; but it calmed things a bit.
Now we mean it
But now, so many years into this crisis, finally there will be a serious exercise that will really tell the ECB who is healthy and who is sick. In the meantime, as banks feel that “this time” the ECB really means it, not surprisingly we see growth in the number of declared non performing loans. In part this is due to bad or deteriorating economic conditions in many southern European countries. But in part this is about real disclosure.
The most up to date estimate is that the 17 members Eurozone banks collectively are carrying about 1.2 trillion Euro of non performing loans. This is a large figure. But this is only an estimate; and it is likely that the numbers will go higher.
An additional problem is lack of a shared definition and accompanying measuring criteria to determine what is a non performing loan. Banking regulators in different Eurozone countries use different metrics. This makes getting to real numbers more difficult, as it will be hard for the ECB to create Eurozone-wide criteria in order to determine which is which.
How many sick banks?
Hopefully, at the end of this complicated process ECB regulators will have, at last, a picture of the real conditions of the Eurozone’s banks. As to the toxic assets and what impact they will have on the banks that carry them, at least in some cases this may be a serious matter, depending on how large a share of the overall loan portfolio of any individual bank is represented by bad loans.
This stress test exercise is absolutely necessary. However, it is truly amazing that the Eurozone got this far without forcing its banks to fully disclose their conditions. But this is Europe, the Union of tentative steps and half measures.