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From Times Online

May 12, 2009

EU plans stress tests for banks in Europe

Gary Duncan, Economics Editor

Europe signalled today that it will to take new steps to try to bolster confidence in its badly tainted banks after the International Monetary Fund (IMF) urged it to take bolder steps to underpin the battered sector.

Officials in Brussels and among European banking supervisors indicated that the EU is set to follow the lead set by Washington and carry out new “stress tests” to establish the resilience of its banks by September.

The tests are expected to be carried out by individual country’s national regulators, according to common guidelines to be set by the EU’s Committee of European Banking Supervisors. “The decision was taken by EU finance ministers,” one government official in Brussels said.

However, there were immediate question marks over how worthwhile the exercise will be, and how much it will boost confidence, after those familiar with the plans said that the tests would not be of individual institutions but of banking sectors as a whole. Individual banks will not be “named and shamed” through public results, nor will even the collective results of the tests be made public.

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“It would show if there are additional capital requirements or if banks are adequately capitalised for the present situation,” one of those close to the discussions said.

The shape of the stress plan risks inflaming criticism that Europe is not doing enough to buoy the credibility of its banking system.

The IMF called for the EU to take more aggressive steps to fix its banks, starting with stress tests of vulnerability.

“Europe is facing the economic storm of a lifetime and it urgently needs to weatherproof its institutions,” Marek Belka, head of the IMF’s European department, said in Paris.

In its report the fund said that Europe’s crisis measures to cope with the vulnerability of banks across the region, and particularly in Eastern Europe, had been “unhelpfully diverse”.

“Trust in the financial system has yet to be restored,” Mr Belka said. This should mean bolder, coordinated efforts by governments and regulators to ensure that banks recognised their full losses from the crisis and ring fenced their “toxic assets”.

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