Stephen Pope Comments: EU Bank Stress Tests Face Their Own Test In Markets

July 25, 2010, ABC News

EU tests of banks' ability to withstand financial shocks, criticized as too easy after only 7 out of 91 failed, face their own stress test in the markets on Monday with early signs pointing to a more positive response.

European Union policymakers and regulators voiced relief at Friday's results but some market analysts and many media commentators derided an exercise in which all listed banks passed as lacking in credibility. "I see nothing stressful about this test. It's like sending the banks away for a weekend of R&R," said Stephen Pope, chief global equity strategist at brokers Cantor Fitzgerald.

There was skepticism about EU regulators' conclusion that banks need only a total of 3.5 billion euros ($4.5 billion) in extra capital. Market expectations had ranged from 30 to 100 billion euros, although many European banks have already raised capital during the financial crisis.

Only five small Spanish banks, Germany's state-rescued Hypo Real Estate and Greece's Atebank failed outright. More than a dozen others scraped through with just over the required 6 percent of Tier 1 capital in the most stressful scenario and are likely to come under market scrutiny.

However, the wealth of data disclosed by banks representing 65 percent of assets, and the commitment of banks, regulators and governments to follow-up action may well outweigh doubts about the stringency of the tests.

In a first market reaction in New York late on Friday, the cost of insuring the debt of large European banks fell further and the euro rose against the dollar despite worries about the tests' credibility.

Better-than-expected economic data and business confidence surveys suggesting the euro zone will avoid a double-dip recession despite fiscal austerity measures are also helping revive investor confidence in Europe.

HAGGLING

Given the haggling among EU governments and regulators about the stress tests right up to the last moment, the degree of transparency was greater than had been expected a few weeks ago.