Tuesday, 21 February 2017

Stress Tests don’t work

By Gordon Kerr

Criticisms of bank stress tests continue to mount, particularly as banks continue to struggle. A new problem recently emerged: the marked shortfall between the market capitalisation of most European banks and their book values.

This should soon lead to a new stress test methodology. This will be a direct response to pressure applied to the Bank of England by Steve Baker MP and other members of the relevant Parliamentary scrutiny committee. Baker and colleagues have forced the Bank of England (the “Bank”) to respond to criticisms led by Sir John Vickers and Professor Kevin Dowd that since the current stress tests are based only on book numbers, they are unreliable.

If the Bank changes its methodology, it will surely encourage Europe to follow. Given the credibility threats facing European bank regulators, and as Unicredit’s rights issue causes further jitters in Italian bank share prices, we expect Europe to welcome such recommendations.

Continue reading the article here.

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