As the countries of the European Union initiate a second round of the Bank stress test, disagreement about whether rife tests should probe liquidity and sovereign debt exposure. Analysts say Ministers "damned if they do and damned if they do not".
Last year, pushed Brussels for banks need State aid to be subjected to stress test in order to assess the viability of the restructuring plan.
The EU has so far made only one stress test for the banking sector as a whole rather than to individual countries or banks. The results, published in the autumn of 2009, indicated that the sector were healthy and able to withstand a much worse economic downturn than the one that took place.
July 2010 stress test was met with a mix of cynicism and facilitation. Tekstombrydningsfunktionen market doubts over their hardness, German banks stood accused of hiding their exposure to sovereign debt.
Six of the 14 German banks tested not to disclose their exposure to public debt, one of a few key benchmarks in an exercise designed to test the banks ' resilience to future economic shocks.
In the second round of negotiations on the retention of the euro-zone from financial ruin, adjust the level of Ministers for a full discussion over Breakfast this morning (18 January) about how rigorous testing of the block from the banking sector should be according to an internal note seen by EurActiv.
Analysts say Ministers stuck between a Rock and a hard place as a predicted poor performance by EU banks in a future set of stress tests would spell either further EU loans to troubled economies or wholesale restructuring of the sector.
According to sources, Ministers disagree on what the outcome would they prefer and have, so far, the note shows hardly agreed how tests should be performed or how failing banks should be saved.
Sovereign debt?
According to the note disagreement between EU countries on how to measure a bank exposure to sovereign debt and whether the test should look at a bank or trade its banking books. Analysts poured scorn on the last round of testing, because they focused on banks ' trading books alone.
Trading books are typically a bank more liquid portfolio of securities, while a banking book assets shows that a bank intends to pay dividends later, IE. they are held to maturity.
Although the note stresses the importance of having credible "backstops", if a bank fails, split the Ministers also on kind of safety net, which should be used.
Analysts argue that Ministers should prepare for the worst and begin to develop plans to restructure economies and banks already, in particular with regard to Greece.
"The only real solution is to prepare the Greek restructuring in parallel with the stress tests," argues Sony Kapoor, a former Lehman brothers banker and founder of Redefine think-tank.
"Regulators are in a bind. A failure stress test for Greek debt restructuring will simply not be credible. Including this option in the stress tests can be interpreted as an official sanction restructuring and spook markets, "continued Kapoor.
Cash Flow?
The inclusion of the banks ' liquidity is also up for discussion, as the note describes the unnamed countries as "is reserved to the outcome of possible liquidity risk stress testing".
A spokesman for the European Banking authority (EBA), umbrella supervisor coordinating test, insisted that cash flow will be tested in a separate exercise for the planned stress test.
Ministers at odds over whether factor in central banks allegedly assumes liquidity assistance and, in particular, support from the European Central Bank (ECB), which has been an unlimited lifeline in support of the block defaulting banks since the crisis began in 2008.
Analysts warn that many Irish, Greek, Portuguese, Spanish and even some German and French banks will fail tests, if they do not include these assumptions about the ECB liquidity.
"Ministers are damned if they do, and damned if they do not. That is why discussions are really fully, "added Kapoor.
Last year a simple seven 91 banks failed O ' trials, including Germany's next lender Hypo Real Estate, agricultural Bank of Greece and Diada savings bank of Spain.
Madrid has lent its banks around € 10.6 billion, while the Irish banks, none of whom failed the final round of tests, has received over € 50bn of liquidity assistance from their Central Bank, in addition to over € 130bn from the ECB.
The EBA plans to publish the results of the test at the beginning of June.
