European bank stress tests have been greeted with an avalanche of cynicism, from Bloomie:
The problem is that the tests, in effect, continue to turn a blind eye. They have to: There’s no clear way to remedy any big shortfalls they might find. Europe’s banking rules — thanks in large part to Germany’s reluctance to share risks — limit regulators’ ability to recapitalize banks, particularly with euro-area taxpayer funds. Flunking too many banks could therefore start a panic.
The new tests’ worst-case scenario imagined a prolonged recession and commodity rout, but included no defaults on sovereign debt. The tests ignored Greek and Portuguese banks, which were among the weakest last time. The new tests didn’t even say which banks passed or failed — or how much capital they’d need to meet their (unduly permissive) regulatory minimums.