Bank stress tests in Europe

So out of 90 or so banks only 9 of them failed the European Stress test which means that only 10 percent of the banks are risky. I don’t think so. The tests were supposedly done on a worst case scenario. But who knows what the next worst case scenario will be. The banks are only sound at the level of the stress level and may or may not be sound under other conditions. Further more if there is a panic in the financial markets and runs on the bank even the soundest of the banks which may have passed the stress test will fail or may need governmental help in dealing with the crisis.

The market took the test result at face value and has moved on. But it should not. I am as skeptical as everybody else regarding these stress tests. If in this crisis the mighty investment banks failed with tremendous power and resources at their hands how can we be sure that the next time, these same banks that have supposedly passed these stress tests will fare any better. Next time maybe it will be something else which can knock down these banks. So all I can say now this is the Stress tests should be done each year with stringent requirements escalated upward so that we may be absolutely sure that the banks can withstand the next financial crisis.