The European Central Bank organized a second comprehensive stress test for over 120 most important banks in the EU. The test, announced in January 2014, will be delivering results this Sunday, October 26 (see a detailed timeline).
The European Banking Authority (EBA) compares the stress test to a tactics employed in the construction sector: “when building a bridge, we need to test its resilience to severe weather conditions, when it's raining heavily, when winds are high, or even in case of earthquakes or other severe natural shocks (…)”. It is hoped that this test will, among others, “restore confidence in the banking sector”. It goes without saying: only if one is sure that the bridge is not going to collapse, is one willing to set a foot on it.
However, can the average EU Citizen, i.e. retail investor, pension saver or other end user of financial services, rely on these results when deciding about where to put their savings? It was hardly the case in 2011.
Those who – quite logically – followed the results of the first stress test round lost everything. The newly installed safety bolts – among others bail-in in case of a bankruptcy – increase the risk exposure of bank clients, especially small non-insider investors.
But what else is left there for a client without the means to pay for unbiased advice? The extreme complexity of financial services offered by banks makes it impossible for small end users to make any sense of the available data. One of the solutions would be to separate traditional banking activities (collecting deposits and lending to real economy) from any other undertaking, which is the idea behind the Liikanen report.