Jon Davies, euronews : “I am joined from London by Simon Tilford who is the Chief Economist at the Centre for European Reform.
Simon, There has been a lot debate about the efficiency of these tests, what is your opinion, have they asked the rights questions, do you think?
Simon Tilford, Chief Economist of the Centre for European Reform: “There is no doubt that stress tests are part of the answer to the problems of the European banking sector. Stress tests can reassure investors that the banks are strong enough to cope with the unforeseen. The problem is that investors are unconvinced that the test would be rigorous enough or that governments in which the relevant institutions are based have plans in place to recapitalise institutions that need it.”
Jon Davies, euronews: “In other words, these particular tests don’t sound as though they have been any good?
Simon Tilford: “One thing that is exercising the minds of investors is how the banks across the euro zone, across the EU could cope with say Greece defaulting and investors only getting 40-50% of their money back. Or Spain restructuring its debt, and investors only getting 75-80 % of their money back…unless these stress tests have tested for those kinds of eventualities, then they probably won’t do much to reassure investors.
Jon Davies, euronews: “And another thing to reassure investors, one would assume, is that as much information is made available as possible, and yet there is a contradiction there, because banks which perhaps consider that information commercially sensitive or perhaps they even have skeletons in their closet they simply don’t want people to see, that’s one of the problems with these stress tests, isn’t it?
Simon Tilford: “If its skeletons that people are concerned about, there is nothing to stop a bank issuing the kind of information needed to conduct an open transparent stress test. By refusing to be more open, they are sewing the seeds of doubt in the investors mind, the investors think that institutions really must have skeletons, because there is nothing really commercially sensitive about the kind of information they need to make open in order to ensure these tests are meaningful.
Jon Davies, euronews: “Simon, they have been carrying stress tests in the US as well, based on the experience of what has been learned from that model, do you think this will prove to be a success?
Simon Tilford: “I fear that the tests won’t be rigorous enough, that not all the institutions will go ahead and publish the results, or it won’t be quite clear which institutions have failed and for what reasons, and that investors will continue to suspect that banks in various countries have insufficient capital to weather a long downturn or debt restructuring/default. I think unless governments come clean and acknowledge that particular financial institutions are going to need injections of new capital, and agree to provide that capital themselves in the absence of a willingness of the private investors to inject the necessary money, then these problems will continue to fester and they would drag on the economic recovery, because without a pick up in bank lending across the European economy it will be very hard to sustain an ongoing economic recovery.”
Simon, thank you very much indeed.
Stress tests: A worry for banks