IMF suggests a similar stress test on Europe

The Financial Times is reporting that the International Monetary Fund is hoping to see a stress test similar to what was conducted by the US government in its 19 biggest banks, done in Europe.  While there had been some moments in the past when the region was leading on its efforts to meet the challenges of the financial crisis, it still has seen itself lagging behind the US in terms of the policies it is implementing.

Europe should follow the US in conducting stress tests on individual banks, the International Monetary Fund said on Tuesday as it warned that economic recovery in the region next year depended on bolder and more forceful policy action.

“Further actions by policy­makers, particularly in the financial sector, are needed to restore market trust and confidence,” said Marek Belka, director of the IMF’s European department and a former Polish prime minister.

Lamenting the lack of pro-active Europe-wide measures by the region’s institutions, the IMF said it was essential for the stress tests to be co-ordinated.

While the results of the US stress tests still aren’t well embraced by many, I believe whatever the results will be in the EU, if done, would be more credible, albeit not necessarily completely better.  First, as a more socialist country, I’d like to think that there is less fear of governments ruling on the banking industry, not the other way around as is the case in the US.  As such, and the second point, any negotiation would be less merciful towards the banks.  Third, if there would be such things as baseline and ‘more adverse’ scenarios, I hope whichever body sets the measures would be more considerate of the bigger troubles the region is facing, hence (and in Bernanke’s/the Fed’s words) reflecting scenarios that are “severe but plausible”.


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