Paul Goldschmidt: Toughen - not weaken - EBA stress tests and make them check for contagion from failed banks

11 March 2011

If recognised as "objective", the new stress tests will represent a major step forwards.

The new stress tests constitute a major improvement over the 2010 version. It is to be hoped that the publication of the methodology will remove any doubts so as to avoid the type of controversy that plagued the earlier exercise, making them in the end counterproductive.

The EBA should consider, in addition to collecting the individual results, evaluating the results of each test in light of the exposure of a bank to others that might have failed the test in one or another respect. This could provide a useful measure of the "contagion risk", and bring additional transparency to the counterparty risk in the interbank market.

Paul N. Goldschmidt
Director, European Commission (ret); Member of the Thomas More Institute.

 

© Paul Goldschmidt