Stress-tests have moved centre stage and are now a major driver of sentiment about banks and sovereigns. The annual Europe-wide stress-tests for banks continue to create a raft of headlines and column inches every July. While receiving less global attention, the tests taking place on an individual country basis, such as those in Ireland, Portugal and Greece, are perhaps more significant.
The tests on banks in the eurozone periphery countries are in fact much more stringent than the generic annual tests that are run by the European Banking Authority (EBA). If these same rigorous single-country tests were applied to banks in the core eurozone states of Germany, France, Spain and Italy, they would almost certainly reveal markedly higher losses on balance sheets than the EBA tests. The truth is that countries need to own the regulation of their individual banking systems while operating within a common European framework.
