Watchdog fails even on the basics

Odd” was how one analyst described a set of modelling decisions by the European Banking Authority (EBA) in its latest round of stress tests.

Or, as another summed up: “I’m glad none of the UK banks have failed, but what has it really told me about the risks they face?”

After a weekend that analysts have spent leafing through pages of data, the tests look increasingly like an exercise in futility.

The market needed certainty – data that would allow investors to discriminate between risky lenders that deserve a deep discount, and sound banks caught up in the maelstrom.

Instead, we got an avalanche of interesting, but only moderately useful information, with a bizarre conclusion: the fragility of the entire EU banking system can apparently be solved for the bargain basement price of €2.5bn in extra capital.

That is, provided no one defaults. And provided there are no “second-round” effects from the crisis.

It would be hard to think of a less reassuring conclusion from the EU’s brand new banking super regulator.

But the problem is not just that the EBA turned a blind eye to the market’s most pressing concerns. It also added to analysts’ problems in its own special way by, for example, taking a definition of capital used under neither Basel II nor Basel III rules.

Under the EBA’s peculiar definitions, the average bank’s stock of core tier one capital fell from 10.1 per cent to 7.6 per cent before an “adverse” scenario entered the equation, with RBS alone seeing its ratio fall from 11.1 per cent to 9.7 per cent.

When super-regulators can’t even agree on the basics, what chance do investors have?