U.K. Chancellor of the Exchequer George Osborne said tests aimed at reassuring investors about the solvency of Europe’s banks “were not good enough” and called for tougher scrutiny when they are repeated this year.
Irish banks alone needed 35 billion euros ($46 billion) to keep them afloat months after stress tests said the capital requirement for all of the European Union’s major banks was just 3.5 billion euros, Osborne told a conference in Paris today.
“Governments need to “restore confidence in the European banking system,” Osborne said. “This is a major challenge. It is a major drag on the recovery.”
The tests, intended to measure banks’ resilience in the event of a shrinking economy and a drop in government bond values, didn’t consider what would happen if a nation defaulted on its debt. Instead, the scenarios included the downgrading of securitized debt products by credit-rating companies, a 20 percent fall in the value of European equities, declines in real estate prices and 50 other macroeconomic parameters.
While the test required 91 of Europe’s largest banks to provide regulators with the amount of sovereign debt on their books, not all nations and banks interpreted the test’s requests and published the data in the same way.
Preparation for the next round of tests will start in February, EU Economic and Monetary Affairs Commissioner Olli Rehn said last month. Regulators will gather data under the guidance of the European Banking Authority, the European Central Bank and the commission, the 27-nation EU’s executive arm.
With Europe in the grip of a sovereign-debt crisis, countries that use the euro need to reassure investors that they will “stand behind their currency,” Osborne said. He called for early agreement on a “convincing” permanent debt-crisis mechanism, due to begin operating in 2013.
Britain last year agreed to extend a 3.25 billion pound ($5 billion) loan to Ireland as part of an 85 billion-euro EU-led bailout. Osborne repeated that the U.K. won’t be part of the permanent rescue fund.
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