Almost three years after the first tremors of the financial crisis, Europe is finally running “stress tests” on its banks. The results, due this week, are supposed to restore the confidence of weary investors by declaring which financial institutions are reliable enough to survive market shocks.
The problem is that these stress tests are hard to trust, especially because of Europe’s poor record on transparency. Unlike the United States, which held fierce trials and public hearings that led to tough new rules, most European countries have avoided a similar crackdown. Take Germany. In a court verdict last week, the former head of IKB, one of Europe’s worst casino banks and one of the earliest crisis casualties in 2007, walked away with just a €100,000 fine and six months on probation for misinforming investors about his bank’s impending collapse. Still, the bank’s Enron-like accounting methods remain uninvestigated. And a German parliamentary inquiry avoided tough questions about the role of German banks in the genesis of the crisis. (It was actually the New York Federal Reserve that explained the crucial way European banks—above all, German ones—helped cause the financial crisis to spin out of control.) There’s no question that now’s the time for confidence, but half measures only fuel more worry.