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Will Europe Flunk Stress Tests?

By Kermit Schoenholtz, Professor of Management Practice and Director of the Center for Global Economy and Business, Anil Kashyap & Hyun Song Shin

schoenholtz article

When the EBA gets a fourth turn at bat this year, the authority can -- and should -- make use of a growing body of knowledge and experience regarding stress tests.

The Federal Reserve’s 2012 stress tests of U.S. banks suffered from some of the same weaknesses as the ones it conducted last year.

We hope the same won’t hold true of the European Banking Authority, which has delayed another round of exams of the region’s banks until 2013, after failing to credibly carry out its supervisory mandate in 2011.

The EBA’s swing-and-a-miss followed similar disappointing performances in 2009 and 2010 by its predecessor in this role, the Committee of European Banking Supervisors. Now, euro-area banks are deleveraging, deepening the recession by starving European companies of financing. They also lack the capital to support an eventual recovery in the region. Until the capital shortfall is measured and addressed, there will be no end to the twin sovereign and banking crises in the euro area.

Read full article as published in Bloomberg.