Cause and Effect in European Politics and Law

The stress test will be good for East European banks

Adelina Marini, May 13, 2009

Last year the IMF organised a stress test of the Bulgarian banking system which proved that it can endure much stronger pressures. Now it is important in pan-European context how the European banking system will do in the middle of the crisis. The economic analyst Georghi Angelov commented for euinside that such stress tests had been organised frequently but now it is important to see whether the banks in Eastern Europe can endure worse than the current situation like, for example, increase of bad credits and increased number of bankrupt companies.

A serious question on European level is that many banks in Western Europe have created their branches in the East. This lead, in the beginning of the crisis, to pressure between "old" and "new" Europe because of the risk of great liquidity flows from East toward the West. According to Georghi Angelov, if there is a common European stress test of the banks, it will help see where exactly is the problem and whether the Easteuropean banks are more vulnerable. He reminded though that it was the Westeuropean banks that have started to announce bankruptcy. It is quite difficult to predict before the test whether the Easteuropean banks are more at risk than the Western banks.

Angelov also explained that part of the test could be creating bank panic, mass cash withdrawal so as to see what could happen if 10-20 % of people withdraw their savings from the banks. Recently there was such a test in the US which showed that some banks would have to find additional capital urgently. Asked whether it would be better if such tests are carried out more in public because the decision of the EU finance ministers was that the results shouldn't be made public, Georghi Angelov said that more publicity together with more interested society would help see the real situation of the banking system and this would also allow politicians to take the necessary measures.