European stress test

Much awaited stress test results of European banks arrived on Friday and as expected the test did fail some of the banks. For the test to be credible, it was expected that some banks had to fail, but the question was which ones? Greek banks were of obvious concern but it turned out that apart from one bank all others did pass the stress test. Spain banks had mammoth share of failed banks with 5 cajas failing. Germany's Hypo Real Estate was the 7th unfortunate one to fail.

It is natural to ask if these stress tests were credible enough to pull up investor confidence on the passed banks? The whole point of stress test was to separate out Akerlof's lemons from the market. The tests practically could not have failed the bigger banks as it would have worsened the European economy already in a dire state, and the whole point of this test was to help revive the economy. In the other end the test could not have passed all the banks, which would definitely question the rigorousness of the tests. Hence the results of the test are pretty much as expected. A small number of banks failed. We can only wait and see if this will have a strong positive impact. But there are already questions on the credibility of these tests.