In his opening speech at the European Banking Congress “The future of Europe” (22 November 2013), Mr. Mario Draghi, the President of the ECB, said about the ongoing ECB’s comprehensive bank assessment:
“It is clear that there needs to be much more confidence in banks within and across countries that are joining the SSM. This is the objective of the ECB’s comprehensive assessment.”
Then he briefly explained how the assessment is ought to boost confidence. The keyword was/is “transparency”: giving all parties more transparency.
As was discussed in Part 1 of this series, more transparency about the banks’ balance sheets is badly needed indeed. So this sounds good as far as it goes. But… wait a minute: is it going to be real transparency for the investors and public in general, or is it rather that the outcome of the exercise is decided already and the key issue for the ECB is to build a credible process around it? (The pre-decided outcome would be something in style: all systemically important banks are fundamentally sound; the banking system as a whole just needs x billion euros of additional capital where “x” is a number that sounds big enough but is still manageable with limited private sector involvement and not too much public money.)
As also implied in Part 1, the amount of fresh capital that is actually needed for plugging the holes in the banks’ balance sheets is fairly big, measured in trillions rather than in billions of euros. I’d even say: none of the systemically important European banks would survive a fair stress test without external support. So in my notes, I’m first of all trying to follow how the credible process is being built – or the illusion of it. I also highlight open issues and “devils in details” should I observe them.