The results coming out of Europe�s bank stress test are less important than the accessibility of the inputs to investors. That is why the country with most �failures� � Spain � is emerging as the biggest winner.
In a financial crisis sprung by new-fangled securities, Spain went down the old-fashioned way. A Spanish property bust and soaring unemployment can even break the back of banks in compliance with the country�s wise dynamic provisioning rules. When the sovereign debt panic swept across the eurozone�s periphery, wholesale lenders increasingly saw Spanish banks as dead men walking.
But skirting the precipice of a banking collapse shook Madrid out of its initial complacency. It understood that any rot in its banks had to be cleaned out lest it contaminate the whole system and the wider economy. Even the most solid of Spanish banks was experiencing funding problems. The government commendably, if imperfectly, set about to force the cajas to consolidate, provided a mechanism for recapitalising banks and, crucially, threw its weight behind the EU stress test.
In truth it had few alternatives. But by actively embracing transparency � Spanish banks were by far the most numerous participants in the test, and Madrid has ladled out information on top of that provided at the European level � Spain has shown that leadership in a financial crisis is not beyond Europe�s capacity.
The test makes it easier for markets to discriminate between the virile and the weak among Spanish banks. Madrid�s ability to bail out those that fail is less in doubt now that the amounts needed seem likely to be manageable. Forcing creditors to take a hit through forced debt-for-equity swaps, however, would be braver and better.
The charge that the stress test were not harsh enough � which is true � is not a fatal flaw. The US exercise also used an adverse scenario that soon did not look all that different from the actual situation. But it released enough information for investors to make up their own mind. The European test must achieve the same.
That is why the secrecy on German banks� sovereign holdings is so damaging. Bafin, the German regulator, has been at best lukewarm at encouraging disclosure, despite a pan-European agreement to do so. If German law makes this difficult, Berlin must change it.
Not only individual banks but banking as a whole is systemically significant. The opacity of the sector�s balance sheets made the crisis possible. It cannot be sustained.
Story from Financial Times