What the stress tests don’t tell us

By Owen Sanderson
21 Aug 2014

Until you look closely, stress testing sounds great. With the abject failures of the 2011 stress tests fresh in their minds (Dexia has been bailed out twice since passing the test with a 10% capital ratio), the European Banking Authority stress testing teams, and those of national regulators, will pull out all the stops to make the 2014 tests credible.

Indications so far are mostly encouraging. Regulators are being more rigorous, goaded by past failures, and by the European Central Bank’s imminent takeover of supervision for the most complex institutions. Banks are encountering more resistance to their capital models, and are receiving a grilling on the very essence ...

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