In the aftermath of the credit crunch and the recession, many banks had to be bailed out by central banks and some, such as Northern Rock and RBS, were wholly or partially nationalised. Tougher regulations to ensure greater liquidity and higher proportions of capital to total liabilities have been put in place and further regulation is being planned in many countries.

So are banks now able to withstand future shocks?

In recent months, new threats to banks have emerged. The first is the prospect of a double-dip recession as many countries tighten fiscal policy in order to claw down debts and as consumer and business confidence falls. The second is the concern about banks’ exposure to sovereign debt: i.e. their holding of government bonds and other securities. If there is a risk that countries might default on their debts, then banks would suffer and confidence in the banking system could plummet, triggering a further banking crisis. With worries that countries such as Greece, Spain, Portugal, Italy and Ireland might have problems in servicing their debt, and with the downgrading of these countries by rating agencies, this second problem has become more acute for banks with large exposure to the debt of these and similar countries.

To help get a measure of the extent of the problem and, hopefully, to reassure markets, the Committee of European Banking Supervisors (CEBS) has been conducting ’stress tests’ on European banks. On 24 July, it published its findings. The following articles look at these tests and the findings and assess whether the tests were rigorous enough.

Articles
Bank balance: EU stress tests explained Financial Times, Patrick Jenkins, Emily Cadman and Steve Bernard (13/7/10)
Seven EU banks fail stress test healthchecks BBC News, Robert Peston (23/7/10)
Interactive: EU stress test results by bank Financial Times, Emily Cadman, Steve Bernard, Johanna Kassel and Patrick Jenkin (23/7/10)
Q&A: What are the European bank stress tests for? BBC News (23/7/10)
Europe’s Stress-Free Stress Test Fails to Make the Grade Der Spiegel (26/7/10)
A test cynically calibrated to fix the result Financial Times, Wolfgang Münchau (25/7/10)
Europe confronts banking gremlins Financial Times (23/7/10)
Leading article: Stressful times continue Independent (26/7/10)
Europe’s banking check-up Aljazeera, Samah El-Shahat (26/7/10)
Finance: Stressed but blessed Financial Times, Patrick Jenkins (25/7/10)
Were stress test rigorous enough? BBC Today Programme, Ben Shore (24/7/10)
Banks’ stress test ‘very wooly’ BBC Today Programme, Peter Hahn and Graham Turner(24/7/10)
Stress test whitewash of European banks World Socialist Web Site, Stefan Steinberg (26/7/10)
Stress tests: Not many dead BBC News blogs: Peston’s Picks, Robert Peston (23/7/10)
Not much stress, not much test Reuters, Laurence Copeland (23/7/10)
Stress-testing Europe’s banks won’t stave off a deflationary vortex Telegraph, Ambrose Evans-Pritchard (18/7/10)
European banking shares rise after stress tests BBC News (26/7/10)
Euro banks pass test, gold falls CommodityOnline, Geena Paul (26/7/10)

Report
2010 EU-wide Stress Testing: portal page to documents CEBS

There has been much in the news recently about the attempts of governments around the world to tackle two problems: (a) soaring deficits and debt and (b) a slow recovery and a possible slide back into recession. As the previous news item, Over stimulation? Trying to prevent a double dip as Japan’s debt soars, reported, Japan’s approach has been to tackle the second problem first and to give a massive fiscal boost to the economy. Its debt can be tackled later as the economy, hopefully, recovers.

The Irish government, by contrast, in its Budget on 9 December announced sweeping cuts in government expenditure. This included substantial pay cuts for public-sector employees. Getting the public-sector deficit down (projected to be 11.6% of GDP in 2010) was the government’s major priority.

Greece too is under tremendous pressure to cut its public-sector deficit and debt. Forecast to be 125% of GDP in 2010, its public-sector debt is the highest in the eurozone. There are serious worries as to whether Greece will be able to fund the debt.

Meanwhile in the UK, Alistair Darling presented the government’s pre-Budget report. This took a mid-course between the two objectives. He announced modest increases in tax, including a 1% increase in national insurance contributions from 2010, and modest increases in benefits. The overall effect was pretty neutral, leaving the projected public-sector deficit at around 12.6% of GDP in 2010/11, hopefully falling to around 4.4% by 2014/15 as economic growth increases tax revenues. So was this the best compromise: not too tough so as to stifle recovery and not too expansionary so as to cause a soaring of debt and difficulty in funding the necessary borrowing?

So what is the correct balance? Are the situations very different in the four countries or have they merely chosen to prioritise them differently? Should countries make cuts early in order to get their deficits down and avoid a collapse in confidence, but risk falling back into recession? Or should they get growth firmly established before tightening fiscal policy? The following articles look at the issues.

The UK
Key points: The pre-Budget report at-a-glance BBC News (9/12/09)
Alistair Darling to borrow more this year (including video) BBC News (9/12/09)
Walking the line BBC News, Stephanomics, Stephanie Flanders’ blog (10/12/09)
Larry Elliott’s analysis on the pre-budget report (video) Guardian, Larry Elliott and Mustafa Khalili (9/12/09)
Pre-budget report: All boxed in Guardian (10/12/09)
Tax and mend Economist (9/12/09)
Darling defends economic forecasts (including video) Financial Times, Chris Giles and George Parker (9/12/09)
Prevarication and Newspeak will not fix our finances Financial Times, Willem Buiter (9/12/09)
Is UK government debt really that high? BBC News, Richard Anderson (22/12/09)

The measures announced in the pre-Budget report along with a video of the speech, press releases and the full report as a PDF document can be found at the Treasury’s Pre-Budget Report 2009 site.

The Institute for Fiscal Studies has a part of its site dedicated to the pre-Budget report. This contains briefings and analysis. See Pre-Budget Report 2009

Greece
Why Greece Could Be the Next Dubai Time, Adam Smith (9/12/09)
Greece’s debt crisis signals problems for the European Central Bank Guardian, Nils Pratley (8/12/09)
Greek stocks fall 6% on fears over the country’s debt BBC News (8/12/09)
Greek stocks fall 6% on fears over the country’s debt (video) BBC News (8/12/09)
Greece threatens bankruptcy, and the eurozone The Atlantic, Megan McArdle (8/12/09)
Greece Struggles to Stay Afloat as Debts Pile On New York Times, Rachel Donadio and Niki Kitsantonis (11/12/09)
Greece ‘worthy’ of eurozone place BBC News (14/12/09)
Greek PM to unveil steps to allay deficit fears Forbes, Dina Kyriakidou (14/12/09)
Default lines The Economist (3/12/09)
Greeks denying gifts BBC News blogs, Stephanomics, Stephanie Flanders (29/1/10)
Davos 2010: Greece denies a bail-out is needed BBC News (28/1/10)

Ireland
Ireland suffers harshest budget in decades Financial Times, John Murray Brown (9/12/09)
Strong medicine fails to soothe Irish Financial Times, John Murray Brown (9/12/09)
Irish Wince as a Budget Proposal Cuts to the Bone New York Times, Sarah Lyall (9/12/09)
A time to grin and bear it Irish Times (10/12/09)

Germany
German government heads for record debt BBC News (29/12/09)
German minister warns of fiscal crackdown Financial Times, Bertrand Benoit (17/12/09)
Goverment’s draft budget includes record debt levels Deutsche Welle (16/12/09)

General
The banking crisis: Till debt us do part Times Online, David Smith and Jenny Davey (13/12/09)
Sovereign debt burdens keep traders on red alert Fiinancial Times, David Oakley (12/12/09)