Tags: Dexia | Europe | Stress | Tests

Globe & Mail: Dexia Proves Europe’s Stress Tests a Joke

Monday, 10 Oct 2011 12:41 AM

By Michael Kling

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The failure of Franco-Belgian bank Dexia shows that eurozone's bank stress tests are a joke, Toronto's Globe and Mail reported.

The bank passed the test with flying colors. Three months later it's a bank in trouble.

"The tests have proved to be meaningless even quicker than they were in 2010 when Ireland's banks were given a clean bill of health, only to be bailed out four months later," The Guardian newspaper in the United Kingdom reported.

The European Banking Authority said Dexia's tier one capital ratio of 12.1 percent fell to 10.4 percent in the test, a superb performance. The EBA said the bank didn't need to raise more capital. Yet now the Franco-Belgium bank, unable to get money on the financial markets, is collapsing.

Dexia was set to be broken up and partly nationalized after being slammed by a funding squeeze in the latest warning sign about the health of Europe's struggling lenders, Reuters reported.

The rescue of Dexia, which has global credit risk exposure of $700 billion — more than twice Greece's GDP — came as the leaders of French and Germany agreed in a joint press conference that European banks needed to be recapitalized, but papered over differences on how that would happen.

Details of the rescue were not revealed while Dexia's board met in Brussels to approve the plan, but it will call for the bank's Belgian retail unit and French municipal finance operations to come under government control, Reuters reported.

Meanwhile, out of 90 banks that were stress tested, eight failed and 16 had borderline capital ratios. Even at that time, the EBA was faulted for not considering scenarios that took into account failure of bonds the banks hold.

The EBA estimated that the banks failing its test had a capital shortfall of $2.5 billion euros. The markets, according to The Guardian, now think that figure is closer to $300 billion euros.

Dexia's collapse has raised the question of who will trust the EU's stress tests now?

"The inadequacies have shocked the market because no one knows what to believe about the other 'safe' banks," The Globe and Mail reported.

European governments are pressing the EBA to redo the stress tests with tougher criteria, taking into account new financial conditions that have worsened since July.

Even if the results new stress tests were trustworthy, The Guardian notes, the markets may believe there's not enough time to complete them before next year.

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