Have the European stress tests been a game-changer? Before the assessment, the view at PIMCO was that there was a set of criteria to use in judging the stress test. These included the question of whether the scenarios and loan loss assumptions used to stress bank balance sheets would be severe enough to make the exercise worthwhile, whether there would be plans to deal with failing banks and whether there would be sufficient information disclosure to allow the private sector to do its own tests. Looking at each of these factors in turn, the stress tests were not very credible in terms of the scenarios and assumptions. Rather, the tests look to have been designed to ensure that as few banks as possible fail (as it was, 7 out of 91). As a result, the results were not accompanied by a plan for recapitalization or consolidation, beyond what some countries had already announced. And there was no mention of potential cross-border support for banks, if needed, or how that might be achieved. For an in-depth look at the state of the European market, subscribe to receive the upcoming edition of HousingWire magazine.
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