Market Talk

How easy was that?

The hotly anticipated results of the European bank stress tests were released at noon Eastern time. Ninety-one banks were tested, apparently tested very gingerly, and 84 of them came through unscathed. One Greek bank, one German bank, and five Spanish banks. That’s it. Only seven banks on the entire European continent were found wanting.

How credible does that sound?

Let’s be frank: there is no way, no way, these tests were designed to rigorously test the strength of the European banking system. Like their American counterparts, the tests were rigged exercise designed to shore up public confidence. The truth never entered into the calculations, and why should it? Everybody already knows the truth. American banks failed a very real stress test in the fall of 2008, when the government had to come in and save the entire industry. European banks similarly failed their very real stress test this past spring.

First off, the European tests ignored the biggest risk out there, the one that really started this whole downward spiral: a sovereign default. If reality interests you at all, you can stop right there, because if the events of 2010 made one thing clear, it’s that Europe’s banks, on the whole, absolutely were not prepared to suffer through a sovereign default.

Credible or not, these tests will probably go a long way toward fulfilling their real goal: restoring confidence among the populace. It’s amazing to me that last year’s stress tests here get as much credit as they do. I don’t think the tests themselves did anything at all. What would have happened if the feds conducted the stress tests, and did nothing else to rescue the banking system?

If European leaders hadn’t cobbled together that nearly $1 trillion bailout fund, you think anybody’d care about these stress tests? Of course not.

“Regardless of what the stress tests say about a given bank, the real factor driving the willingness of credit markets to do business with a bank in London or Paris is the condition of the government and the probability that the government will support the bank,” Chris Whalen of Institutional Risk Analytics wrote.