Regulators fear the world could plunge into chaos if a new crisis – be it war, protectionism, or an economic downturn – shocks the financial system and causes liquidity to dry up.
They want to ensure there is enough money in the bank to withstand the financial trauma of a worst-case-scenario banking crisis in the Eurozone.
Bank of France governor Francois Villeroy de Galhau told a conference at the French central bank: “To measure the global impact of shocks, we need in particular to have macro stress tests of liquidity, including for investment funds.
“These actors are potentially vulnerable to runs in case of a market shock if they are open and don’t have a way of capping buybacks.”
The US has been resistant to conduct broad-based, macro stress tests on its leading financial institutions. The head of the French financial markets regulator, Robert Ophele, said without a US commitment to the stress-testing of asset managers, it would be difficult to get a clear picture of the contagion risk to the Eurozone.
Against that backdrop, he said that rather than system-wide macro stress tests, it would be better to concentrate on more focussed stress tests.
The UK regularly stress tests its leading financial institutions. Last November the the Bank of England confirmed its seven-largest lenders – HSBC, Barclays, Lloyds Banking Group, Standard Chartered, Royal Bank of Scotland, Santander and Nationwide – would be able to continue lending even if Britain was to leave the European Union (EU) in 2019 on the terms of a ‘hard’ Brexit.
The BoE said in its half-yearly Financial Stability Report: “The FPC judges the UK banking system could continue to support the real economy through a disorderly Brexit.”
The stress tests are primarily calculated on the basis of the amount of capital banks hold at the start of 2017.
In short, banks are told to provide evidence that there enough money in the bank to withstand the financial trauma of a worst-case-scenario banking crisis.
The BofE has been “stress-testing” banks since 2014, but this year – despite Brexit – none of Britain’s major lenders would need to raise extra capital, the BoE said.
However in the Eurozone, another economic crisis could have huge political ramifications for Europhile President Macron and the ruling EU elite in Brussels. Acting on political concerns, regulators want to be sure that, while the sun shines, the roof is repaired.
According to findings from the influential Pew Research Center in 2013, the last Eurozone financial crisis in 2012 led French voters to believe that, “European economic integration has made things worse for France”.
Pew reported that in 2013, 91 percent of French people were, “negative about the economy” and this in turn triggered doubt in “their commitment to the European project.”
President Macron and EU leaders will be wary that in 2013 “58 percent” of the 7,646 respondents claimed to have a “bad impression of the European Union as an institution”.
The research didn’t hold back in describing the European Union as “the new sick man of Europe” – a label originally used by Russian Czar Nicholas I in his description of the Ottoman Empire in the mid-19th century.
The report claimed that the economic crisis had triggered an “erosion of Europeans’ faith in the animating principles that have driven so much of what they have accomplished internally.”