by Mark Whitehouse
Wall Street Journal
September 11, 2010
1.9 trillion euros: European banks’ exposure to EU government debt
With each passing day, it’s getting harder to believe Europe’s banks are in as good shape as their regulators say. That could be a problem for a global economy still struggling to recover from a deep recession.
Less than two months ago, an outfit called the Committee of European Banking Supervisors published stress tests aimed at easing investor concerns that the financial troubles of Greece and other countries would spread to Europe’s banking system. The reassuring result: Only seven out of the 91 banks tested would need to raise added capital in the event of a modest double-dip recession and a sharp drop in the value of Greek, Irish, Portuguese, Spanish and Italian government bonds.
It’s becoming increasingly apparent, though, that the stress tests didn’t provide a comprehensive picture. Earlier this week, for example, The Wall Street Journal published an analysis demonstrating that some of the participating banks didn’t provide a full accounting of their exposure to the debt of financially troubled European governments.
A new paper from two Organization for Economic Cooperation and Development economists highlights another key flaw of the stress tests: They looked only at the government bonds that the banks were holding in so-called trading books, which contain short-term investments that must be valued at market prices.
Read the Paper