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The eurozone has decided to keep its banks running via government insured liabilities without regard to capital levels. The new ‘tests’ are most likely for show only.
All governments with non convertible currency and floating FX policy have this option, which allows banks to continue indefinitely with or without capital, however defined.
The only reason to shut a bank down due to capital concerns is to protect ‘taxpayer money.’
Moral hazard is less of an issue as all bank assets are regulated and supervised in any case.
Japan’s recovery was not dampened by its banking system which was there to make loans and service deposits with our without bank capital.
It was dampened by a lack of aggregate demand due to insufficient deficit spending- taxes too high or spending too low.
Every time the economy started recovering they slapped on a consumption tax, in the name of fiscal responsibility.
Taken at its word, the Obama administration seems intent on doing much the same.
by Jan Strupczewski
May 12 (Reuters) — The European Union will stress test its banking system to determine its resilience to the economic downturn and find out if it is adequately capitalised by September, EU sources said on Tuesday.
The stress tests will be conducted by national supervisors according to common guidelines and methodology issued by the Committee of European Banking Supervisors (CEBS), the sources
“The decision was taken by the EU finance ministers. They decided to ask the Committee of European Banking Supervisors to organise a stress test,” one source familiar with the ministers’ deliberations said.
“But it is not a stress test of individual institutions like the Americans are doing. It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector,” the source said.
“It would show if there are additional capital requirements or if banks are adequately capitalised for the present situation,” the source said.
A second source close to the EU finance ministers’ deliberations confirmed the stress test of the EU banking system was to be ready by September.