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Commentary: European Stress Tests Remain Unclear

Back when I started as a financial reporter, when there was no Internet, no cell phones or Blackberry’s and in my employer's case, no computers at all ( I used a typewriter), news moved slowly and rarely across oceans.

So it never ceases to surprise me when something as arcane as stress tests for European banks has a pronounced impact on the valuation of stocks here in the United States.

But of course, that is just what is happening—and for good reason. I may miss the days before email, when all I had was a phone, a pad and a pen and some time to actually think, but I also know that if there are big capital holes in some key European financial institutions, it will have significant implications for capital markets the world over.

So, will there be a need for significant capital at European banks? And if the stress tests are deemed worthy, will that allow those banks to raise the necessary capital?

I don’t have the answer, and unfortunately for now, neither do the people I rely on, with true insight into the state of these financial institutions.

Last week on The Strategy Session, H. Rodgin Cohen said he believed that the banks in Europe were not in as bad a shape as the market would have you believe and that a credible stress test would allow fairly easy capital raises.

Investors, however, are a bit less sanguine, saying only that it remains unclear just how the assets on these banks’ balance sheets will be marked down under various stresses, noting that if the haircut applied to Greek debt is only 17 percent (where the market already is) it’s not clear how tough the marks will really be.


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