Britain backs the US on stress-testing European banks

In his tour of Europe last week the US Treasury Secretary Tim Geithner was extolling the virtues of a public stress test of Europe’s beleaguered banking system to the continent’s financial and political leaders.

It’s what happened in the US last year, and is part of a package that Americans feel helped reinforce international confidence in its banks’ balance sheets.

Then it was the foul stench of rotting mortgage assets that infected the US banking system. Now it is fears over the exposure of Europe’s banking system to debt from troubled Club Med economies, and their banking system. So the US thinks it can help and will push the plan at this weekend’s G20 finance minister’s meeting.

But the Germans have been less impressed with the plan, with the WSJ quoting one official referring to it as a public relations stunt.

In to this mix walks the UK’s new Chancellor George Osborne, who privately believes that Geithner’s idea has some merit. His new City minister Mark Hoban has just delivered a speech in Brussels that goes much further:

“UK banks have been subjected to rigorous stress tests using transparent assumptions applied in a consistent manner. Now in any exercise such as this you have to be prepared for the fact that you might not like what you find, but in this instance ignorance is far from bliss. If problems exist they must be identified if they are to be solved. To push concerns to the back of your mind risks storing up bigger problems for later and a fundamental undermining of confidence.

“It is clear that doubts remain over the solvency of some European banks. The extraordinary interventions we have seen in recent weeks by Governments and the ECB were in large part due to severe strains in the banking system. A genuine, rigorous stress testing exercise is urgently needed to answer questions around solvency in severe market conditions. The tests should be transparent both with respect to their results, but also the methods used. Urgent action should be taken with respect to any institution failing the stress test. Only this way can we restore true stability and confidence to this sector in the near-term”.

This is really quite strong stuff from the City Minister. At a time when Europe’s multi-headed system of economic governance has contributed to the market confidence issue, it is an important development