The following is a guest post by Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics. You can also follow him on twitter. The opinions expressed are his own.
Waiting for the results of the EU stress tests, one is reminded of the many times in the past century when the U.S. has rescued the Europeans from their tendency to wage war against one another and go broke in the process. Having now helped to sell the EU banks much of the subprime garbage that sank the likes of Bear Stearns and Lehman Brothers, now the U.S. is offering a solution, namely to mimic the U.S. stress tests of 2009.
The U.S. stress tests, keep in mind, were about restoring confidence, not measuring financial soundness. The assumptions in the U.S. stress tests were soft and virtually all of the banks passed. The U.S. government had already guaranteed the liabilities of most U.S. banks, General Electric and General Motors, and a variety of other formerly non-bank companies. Thus the stress tests are properly seen as an exercise in managing expectations of the bond vigilantes.
The U.S. process was reasonably credible to investors because, despite their many failings, American regulators have a cohesive, if fragmented, approach to gathering data from regulated banks and disclosing same to investors. The data used in the stress tests actually bore some resemblance to public data available on these institutions.
In the EU, on the other hand, there is virtually no transparency on bank financial statements and thus no visibility for investors in terms of making the stress tests credible. There is no SEC in Europe, no EDGAR or FDIC portals on the internet with extensive financial data on banks. There is not even a common template for gathering financial data on European banks or even credit statistics for many EU consumers.