Global Agenda: Stress-test mess

There is a gradual erosion of confidence in the banking institutions, in the people who run them and in the governments and agencies who are supposed to regulate them.

Money [illustrative] (photo credit: REUTERS)
Money [illustrative]
(photo credit: REUTERS)
Last Sunday, the European Central Bank (ECB) published the results of the “stress tests” it conducted over the preceding months at most of Europe’s biggest banks. The concept of stress tests, a term clearly borrowed from the medical field, is to see whether a banking institution that encounters a situation in which it is placed under great pressure is capable of surviving it.
However, much depends on the degree of stress. Just as the great majority of humans will not die of chest pains but will probably not survive a massive heart attack, so, too, banks will generally get through a mild setback in the economy, but a market rout or a severe recession may well be sufficient to crush them.
Since the global crisis of 2008 and, more specifically, since the European crisis began in late 2009, there have been several stress tests conducted on European banks. In these, most of the banks passed with flying colors. But that did not prevent several major banks from collapsing subsequently.
Dexia (Belgium) is an outstanding example of a large institution that received high marks in a stress test only to abruptly drop dead a few months later. The most recent such example was Portugal’s Banco Espirito Santo, part of a larger group that crumbled earlier this year, with the bank itself giving up the ghost in August.
These disasters highlighted how unsatisfactory, and hence useless and counterproductive, the preceding stress tests had been. Nevertheless, as part of the process of implementing EU decisions to create a banking union within the euro zone, as an essential complement to the monetary union, the ECB instituted a further round of stress tests, prior to its assuming direct supervisory powers over the large banks of the euro-zone member states. These tests, it was asserted, would be different – because they would be unprecedentedly tough, deep, comprehensive, etc.
The results of the tests must be seen and judged against that background. Thus the fact that 25 out of 130 banks failed the tests can be seen either as proof of their thoroughness (good news), or as evidence of the continued fragility of the European banking system (bad news).
Even the mainstream media response was confusingly varied: Compare the Reuters report on the results, which saw them “Painting a brighter picture than had been expected...,” to the Economist’s, which noted that “the number... of failures is slightly worse than expected.” In other words, everything is relative – including expectations and outcomes, on top of which even these conclusions were heavily doused with caveats.
In the blogosphere, by contrast, there is no need for “however” and “whereas,” and the response to the report was characteristically unbridled, if somewhat contradictory.
The stress tests themselves were widely ridiculed as a sham, but the fact that so many banks failed was nevertheless highlighted to show how bad the state of European banks remains. That many of the failures were relatively marginal and that many had been addressed and had been or were being corrected, which was prominent in the more balanced assessments in the mainstream media, cut no ice with the openly unbalanced blogs.
Yet, tempting though it may be, it is increasingly difficult to dismiss the blogs and their analyses on the grounds that their authors are often weirdos, cranks and extremists of different hues. Those unflattering titles may even be true, but is that what matters, or is it merely a method of avoiding the substantive points by indulging in ad hominem insults? If we look back at the last 15 years of repeated booms and busts, which were the result of financial bubbles created by central-bank distortions of the major economies, we find that these distortions were ignored or denied by TPTB (the powers that be – a favorite antiestablishment blog acronym). When the inevitable denouement came and the bubbles burst, the result was a series of extremely damaging crashes, to which the response in each case was a larger-scale intervention and an even larger bubble (in a different sector).
Over this period, the record of the cranks and weirdos in identifying the bubbles, tracking the distortions and warning about the impending crashes has been vastly superior to that of the mainstream savants. A key reason for this discrepancy is that the antiestablishment writers are convinced that the system itself is rotten, that the people running it are corrupt and self-serving, with no compunction about ripping off their customers.
More and more people are being pushed to these awful conclusions by the ongoing revelations of how major banks shamelessly and systematically rigged many of the financial markets and yet how, when their activities were exposed, no senior bankers were jailed. Furthermore, when banks collapsed because of incompetence or criminality, they were bailed out by governments and taxpayers were saddled with the huge bills.
In other words, there is a gradual erosion of confidence in the banking institutions, in the people who run them and in the governments and agencies who are supposed to regulate them. How can you relate to stress test results if you don’t trust the doctors who administer them and the hospitals in which they work?