What me, worry?

Europe's "stress tests" were intended to gauge the ability of large banks to weather an economic storm. But the exams relied on some surprisingly docile economic assumptions.

In some of the 20 countries that conducted the tests, regulators figured that property values would keep rising or hold steady in a worst-case economic scenario.

In other cases, unemployment rates in a double-dip recession crept up by as little as 0.1 percentage point from the tests' so-called benchmark scenario, which is based on current economic conditions.

In Austria, for instance, the recession scenario involved house prices rising two percent the first year and rising 2.7 percent the year after.  Here is further information.  What would a rational Bayesian say?  What would Will Wilkinson say? – "My kingdom for a futarchy!"

Here is further comment.

Comments

Hmm... time for casual attempts at ridicule.

What-a-Jest Tests?
Never-Confess Tests?
Express Mess Tests?
Finesse Largesse Tests?
Transgress and Molest Tests?
Suppress-Success Tests?
Obsess to Impress Tests?
Request Excess Tests?
Dress to Regress Tests?
Acquiesce and Convalesce Tests?

I don't understand why these tests need to be of a single scenario. Why not just say what the threshold conditions are for each bank?

'the recession scenario involved house prices rising two percent the first year and rising 2.7 percent the year after'

Maybe because in many European countries, land is considered to be a much better store of value than money? At least in Germany, the rush into buying/improving property has been almost surreal (though in no sense a bubble) - but then, who wants to go against centuries of historical experience?

Europe is not the U.S. - look at how many Austrians are property owners (circa 40%), and then realize that the people who own the majority of property that the other 60% rent are not exactly your typical middle class job holder. And they are people who do seriously worry about the value of the currency - seeing as how in Austria, a typical 75 year old owner of apartment buildings would have already had experience of how four currencies were created, and three abolished. The property, of course, would have remained completely unaffected by these changes, its value still measured by what the renters were providing in terms of income to the owner - a measurement which tends to be conveniently measured in whatever currency one is using today, of course.

This is not a defense of any EU stress test scenario, but simply a reminder that using American standards to judge a non-American situation is generally fraught with problems.

"Maybe because in many European countries, land is considered to be a much better store of value than money?"

Excellent.

The stress test did not e.g. include one scary and quite possible scenario: Greece defaulting. This "stress-test" is somewhat of a joke, that probably only decreases trust in the European banks.

This is the ideal post for someone who desires to be familiar with this subject. You certainly place a new turn on a topic that’s been on paper about for years. Fabulous material, your post is absolutely impact a read if somebody comes across it. I didn’t grasp that this subject was so vital. You undeniably place it in perception for me.

Comments for this post are closed