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Stress Tests Cheat on Reality

July 30, (EIRNS)—The European Banking Authority (ECA/ECB) stress tests consisted in calculating how much capital banks would lose in an "adverse scenario" of "falls in real EU gross domestic product of 1.2% in 2016, 1.3% in 2017 and 0.7% in 2018," on average, according to the Financial Times. However, individual countries’ scenarios seem to be different. For instance, the adverse scenario for Italy anticipates a real GDP fall of almost 6% in the three years from 2016-2018. In 2018 the output would be 10% lower than in 2007, the lowest since World War II. Also, an increase of 100 basis points in sovereign bond yields is presumed, which means a 12% depreciation of bonds.

Also, apparently the EBA did not consider a "credit event" and a global financial crisis.

The ten banks that performed worst are: Monte dei Paschi di Siena, Reiffeisen (Austria), Banco Popular (Spain), UniCredit, Barclays, Allied Irish Banks, Commerzbank, Bank of Ireland, Deutsche Bank, Société Générale. However, only Monte dei Paschi had a negative CT1 (i.e. under the "adverse scenario" a capital ratio lower than 7%).

Critics of the stress tests emphasize the lack of an adequate estimation of the assets side of bank balance sheets, which are filled up with derivatives. However, even the fraudulent estimations of the EBA/ECB are enough to unleash fears of an earthquake on financial markets, so that stress test results were released after the closure of all markets.

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