European banks: Don't count on stress tests to reassure the market

OK, I admit it the European Bank stress tests and there likely relevance baffles me as I have yet to read anything that states the rules of engagement.

If we don’t know the questions, how can the answers be relevant unless we are being asked to be away with the fairies and believe in a self-fulfilling prophecy? Ask the wrong questions, you might get the answers you want in terms of compliance but not the assurance that banks balance sheets are truly reflective of the market value of the assets held. We need to address  balance sheet assets or indirectly assets held via off balance sheet exposures to an array of exotic instruments that many bank directors don’t understand.

The tests need to be run under multiple scenarios with liquidity being as important as balance sheet values. If runs on banks occur being asset rich is no substitution for liquidity. Access to debt markets beyond 3 months for European banks is a no go area with the USA and Asia being very suspicious about the true nature of European banks strengths or weaknesses as the case may be. This leaves the central banks and ultimately us the tax payers to bail them out.

So if the tests are to have any credibility the market needs more information and only testing close to doomsday scenarios will be acceptable. The market bounce yesterday is surprising but as investors reflect we expect bank values to sag as at present we have no idea of the content of the tests to be undertaken.

Banking has always been about confidence, re-establishing believe in the market place needs rigor and transparency.