How reassured should we be about the Banks passing the EU stress tests?

The BBC and others were keen to reassure us yesterday that all the major EU banks had passed the EU's stress tests. However should we be that reassured as the tests only involved evaluating possible losses on government bonds that the banks trade and not any that they are holding to maturity within the banking books. The trading books positions are marked to market whereas the banking book positions are accrual accounted. In a stressed situation if the banks need to liquidate such positions they may need to incur large losses to reflect the current market value. More importantly, if there is a default in any of the sovereign debts the banks will suffer significant losses and this may lead to more failures amongst the banks.

As Andrea Williams of Royal London Management said: "It does undermine the whole credibility of the tests"; it certainly does.