Europe needs tough bank stress tests – Osborne

Europe needs to “put its house in order” in 2011 by restoring confidence in the euro and sorting out its fragile banking system that is holding back growth and recovery, Chancellor George Osborne said.

Writing in an opinion piece published in the Financial Times’ Thursday edition, Osborne said Europe needed to agree a “comprehensive package” early this year to allay market concern about sovereign debt.

“The sense of crisis may have eased, but wide spreads and high market interest rates still stalk several European economies,” he wrote.

“The euro zone must follow the logic of the single currency and stand more convincingly behind the euro.”

Yields on bonds issued by countries struggling with debt and banking problems have risen sharply in recent months as investors have sought higher returns to compensate for their increased risk.

STRESS TESTS

Osborne, writing ahead of a gathering of European politicians and economists in Paris on Thursday, said a new round of stress tests planned for European banks needed to be far tougher and look at liquidity as well as core tier 1 capital.

He said external bodies such as the International Monetary Fund should be asked to validate the tests to help restore their credibility.

“It is revealing that the tests conducted last July identified a capital shortfall of just 3.5 billion euros (2.97 billion pounds) yet less than six months later Irish banks alone required 10 times that amount,” Osborne said.

EU Finance Ministers have agreed to conduct a new round of more rigorous bank stress tests after just seven out of 91 European banks failed a first examination last July on their ability to withstand financial shocks.

The last round of tests gave Irish banks a clean bill of health, but the EU has since had to put together an 85 billion euro rescue package, with 35 billion earmarked to help restructure Ireland’s shattered banks.

He said policy makers should prioritise a stronger banking system rather than working on other forms of financial regulation, such as curbs on short selling of shares.

Osborne also warned Brussels about “badly thought through regulation” that might harm Britain’s competitiveness as a global financial centre.

Britain, the bloc’s biggest financial hub, has clashed for months with Brussels over EU plans to crack down on hedge funds, saying they could deprive investors of choice.

“No one should doubt that Britain is determined to remain a global financial centre serving Europe and the world,” he wrote.

Source: Reuters