ECB’s Stress Test Failed to Restore Trust in Banks, Poll Shows

By Yalman Onaran  

Photographer: Ralph Orlowski/Bloomberg

The European Central Bank headquarters in Frankfurt, Germany.

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• Poll Results

Europe still hasn’t regained investor confidence in its banks.
The European Central Bank’s stress tests of the region’s lenders failed to provide an accurate gauge of their financial stability, according to 51 percent of respondents to the latest quarterly poll of investors, traders and analysts who are Bloomberg subscribers. The results were viewed as accurate by 32 percent of the people who responded, while 17 percent said they weren’t sure.
The tests followed three previous efforts by another European regulator that were deemed unreliable after some banks that passed collapsed a few months later. Investors expected the ECB to take a tougher approach before it took over as the single supervisor of euro-zone banks this month. While 25 of the 130 institutions failed the ECB’s test, an even smaller subset was asked to raise $8 billion of capital.
“We’ve improved the banks with some more capital and
more transparency, but it wasn’t good enough,” said Michael Nicoletos, managing director of Athens-based AppleTree Capital GS SA, which oversees about $45 million of investments. He participated in last week’s Bloomberg Global Poll. “I’m sure there are some banks that are in worse shape than they appeared in the test.”

Still Unsafe

Fifty-six percent of poll respondents said regulators haven’t done enough to prevent another financial crisis in Europe, while 30 percent said they had done enough and 14 percent said they weren’t sure.

“Regulators never look forward,” said Florin Bota-Avram, a trader at Cluj-Napoca, Romania-based Banca Transilvania SA who participated in the poll. “They want to prevent the future crisis by looking at the past, but the future is always different than the past.”
The poll of 510 Bloomberg customers was conducted on November 11 and 12 by Selzer & Co., a Des Moines, Iowa-based firm. It has a margin of error of plus or minus 4.3 percentage points.
U.S. regulators used stress tests to restore confidence in the banking system in 2009 after the collapse of Lehman Brothers Holdings Inc. The 10 banks that failed that first test were asked to raise $75 billion. They ended up selling $100 billion of new shares within a few weeks to strengthen their balance sheets. The U.S. has been conducting tests every year since, forcing the weakest banks to cancel plans to increase dividends or buy back shares so they build capital instead.

U.S. Tests

Poll respondents were more positive on the U.S. stress tests. Forty-six percent said the U.S. exams provided an accurate gauge of banks’ financial stability, versus 36 percent who disagreed. Similarly, 48 percent of the respondents said U.S. regulators had done enough to prevent another crisis while 42 percent said they hadn’t.

Authorities on both sides of the Atlantic have passed new laws since Lehman Brothers’s collapse to strengthen the financial system. The U.S. has gone further than the European Union in some instances, such as in restricting the leverage of the biggest lenders. Those efforts haven’t convinced everyone that banks will survive the next meltdown.
“When the next debt crisis hits, and it will soon, all banks won’t survive that,” said James Shugg, a senior economist based in London for Australia’s Westpac Banking Corp. “Depending on how deep and severe the next crisis is, you will see more banks fail.”