ECB’s Comprehensive Bank Assessment Finalized
A considerable level of apprehension was noticeable in the financial press in recent days, as the ECB just finished its “stress tests†and its comprehensive assessment of 130 systemically important banks in the euro area. This time, the stress tests are a bit more interesting than previous exercises of this sort were.
Contrary to the whitewash attempts that characterized the laughable stress tests performed during the euro area’s sovereign debt crisis by the EBA (European Banking Authority), the ECB is forced to walk a slightly finer line. The reason is that it will become the regulator of these 130 large banks and will therefore be held responsible if anything goes wrong. On the other hand, the ECB is also eager to avoid a panicky market reaction to the results, and will therefore presumably try not to be too harsh in its assessments. In fact, looking at press reports, it certainly appears as though the criteria have been watered down quite a bit. Some observers argue that the ECB is far too beholden to political and market expectations to make its assessment credible (see also further below).
To this it should be noted that no fractionally reserved bank can be regarded as truly solvent, for the simple reason that such banks cannot actually fulfill their payment obligations to holders of overnight deposits. It works only as long as only a small percentage of depositors attempt to withdraw the money that they have been promised to receive “on demandâ€. Under normal conditions, this doesn’t pose a big problem, as banks continually receive new deposits and most deposit money tends to stay inside the system. Up to a point, a bank threatened by a run on its deposits can also rely on the lender of last resort (i.e., the central bank) to supply it with liquidity by discounting its securities.
Since money is nowadays a mere token signifying nothing, there is also no limit on its production. The ECB seems quite confident with regard to this aspect of the banking system, as its minimum reserve requirement for demand deposits stands at a mere 1%. In theory, the European banking system could multiply every deposit a hundred-fold by creating additional fiduciary media on the back its existing deposit base. In practice, this is highly unlikely to happen, but it shows that it is nowadays not seen as necessary anymore to even pretend that deposits are sufficiently “backed†with standard money (in the fiat money system, standard money = currency and bank reserves with the central bank).
The banks themselves have already received the results of the ECB’s assessment yesterday, but they will only be made public on Sunday – apparently the intention is to avoid roiling the markets. European bank stocks have recently tested an important short term technical support level and rebounded from there over the past few days:
