A stress test that can’t fail?

Last week the headlines unveiled ramblings of a new stress test from Europe’s top banking regulator, which it suggests is impossible for the region’s lenders to fail.  True?  Well, the watered-down, stress-free stress tests come at a time of market chaos, according to reports, and also amid investor concerns over the strength and stability of the European banking industry.

Stress tests themselves are designed to discover how well banks would cope with a recessions and traditionally, those found to be not up to the task can be forced by regulators to build up their financial buffers.

But the European Banking Authority believes banks in Europe are now in robust health and have more than enough capital. As a result, fewer banks will be tested this year and there will be no pass or fail threshold

Only 51 banks will take part in this year’s test with many smaller banks exempt.  Stress tests are usually conducted on the biggest banks in the country in which they are based. However, the Eurozone is being treated as if it is only one country. That means than banks from countries such as Portugal, where lenders have failed in recent years, are not taking part in this year’s EBA test.

Only one Greek bank will take part, and none from Cyprus will be tested.  Watch this space.