The European Union should conduct regular stress tests on its biggest banks to sustain transparency, Finland’s Finance Minister Jyrki Katainen said.
“I’m trying to push for the idea that it should be at regular intervals, at least twice a year,” Katainen said in an interview in Helsinki today. “Transparency is the best medicine to improve confidence on the financial markets.”
EU leaders have struggled to restore investor confidence in the region and its banks after Greece’s fiscal crisis sparked concerns about debt levels. Regulators measured the capital adequacy of 91 of the biggest banks in a July test passed by 84 lenders. That calmed markets by giving information financial institutions could use to test each other, Katainen said.
Previously, the London-based European Committee of Banking Supervisors in 2009 stress-tested 26 of the biggest banks operating across national borders.
The July tests showed the banks needed only 3.5 billion euros ($4.7 billion) of new capital, about a 10th of the lowest analyst estimate.
The value of the exercise “was wider than the result the test really gave,” Katainen said. “Openness gave market forces more information, which they can test by themselves.”
The proposed European Banking Authority, the new organization that will be formed from the European Committee of Banking Supervisors on Jan. 1, has been mandated “to initiate and coordinate Union-wide stress tests” on a periodic basis so as to constantly test the resilience of the EU banking sector, said Franca Rosa Congiu from the CEBS in an e-mail today.
Katainen said he has found “quite a lot” of support for regular testing. He’s also pushing for strict and automatic sanctions for countries breaching the rules set out in the EU Stability and Growth Pact. The agreement requires euro members to keep government debt below 60 percent of gross domestic product and budget deficits below 3 percent of GDP.
Economic and Monetary Affairs Commissioner Olli Rehn proposed today that members breaching the deficit target would be required to post a deposit of 0.2 percent of GDP and said benchmarks should be set for countries to reach the 60 percent of GDP debt level.
Rehn’s proposals are “exactly what I’d like to see,” Katainen said. “I’m sure they will get support.”
European countries may also shift some of the burden of preparing for future banking crises on to the banks themselves.
“If I should bet on something, I’d say sometime next year we will have a harmonized way to organize the bank levy,” Katainen said. The levy won’t help prevent a future crisis, only pay for one, he said.
“Regulations such as Basel III, capital buffers and more transparency are the best ways to avoid future banking crises,” Katainen said.
The European economy is on a more stable footing than at the beginning of the summer, having emerged from the “deepest point” of the recession and facing “moderate” growth in the coming years, Katainen said. “The biggest risk is the economic development in the U.S.”
There is “no default risk” in the euro area, Katainen said. Greece, Spain, Portugal and Ireland have done “a good job” in reducing deficits. “They are all on a good track.”