Saturday, June 9, 2012

Bankia, Spain and the Euro Zone

Bankia in Spain has become the next institution to require a bailout in the euro zone, and as is now a familiar pattern, Bankia has been declared too big to fail. 40 billion are needed immediately, and 80 billion eventually. The IMF has already suggested that the money simply has to be spent, and reassured markets that a bailout will be coming. European finance ministers meet next. This is the last in a series of moves to use the money reserved for public bailouts for private institutions.

What Bankia does, beyond costing the EU a great deal of money, is call into question the quality of stress testing at the European Banking Authority. as the EBA says itself, the information is provided by the banks themselves:

"We have to remind you that this is a bottom up exercise, conducted by the banks in most cases using their own internal models. The estimates of risk parameters by banks are sometimes very diverse, also for exposures in the same portfolio and against counterparties in the same country. Although the EBA took action to achieve greater consistency and more rigorous estimates. More work on this issue is needed in the future."

Although the last round of stress testing revealed a high concentration of undercapitalisation at Spanish banks, Bankia was not considered one of the banks worthy of regular review (which you would expect of  banks that are too big to fail). The banks reviewed can be seen at the end of the EBA's last stress test review for 2011.

1 comment:

  1. I fully agree with your point of view: the stress tests and those who conducted them, allowing the banks to use their internal models and parameters, are called into question. Two additional points though: 1) in a statement on the stress test results, Bankia indicated that it was taking additional measures and that its situation was thus better than that shown by the stress tests (calls the tests and testers more into question); 2) couldn't those who participated in Bankia's IPO (held at the time of the stress tests) turn against the bank and EBA and ask for compensation ?

    Main question this raises is: when and by whom will REAL and CONVINCING tests be undertaken ?