The EU’s heads of state and government agreed today (17 June) to publish the results of stress-tests that they conduct on their banking sectors and also on the need to strengthen sanctions on countries that fail to keep control of their public finances.
The EU leaders, who met in Brussels, focused their discussions on stress-tests, agreeing that publication of the results would boost market confidence, which has been severely dented by the eurozone debt crisis.
Member states have traditionally been reluctant to publish the results of stress-testing exercises, for fear that investors and depositors would rush to remove their money from a bank that was found to lack capital to cope with losses it would incur from a sudden downturn. This could lead to the bank’s failure, or worse, a financial crisis.
Leaders said today, however, that the measure was necessary to address market fears that banks are in worse shape than governments have so far admitted.
José Manuel Barroso, the president of the European Commission, said that publication “should reassure investors by either lifting unfounded suspicion or by dealing with the remaining problems that may exist”.
“If state intervention is needed, this will be examined in a timely manner under the [European] Community rules,” he said.
“I have made a strong plea to make the results public, this should reassure investors,” said Herman Van Rompuy, the president of the European Council.
The leaders’ agreement covers stress-tests carried out by the Committee of European Banking Supervisors (CEBS), an advisory body that brings together national financial regulators.
CEBS carried out a stress-test exercise last year of 22 financial institutions that the committee deemed to be of “systemic” importance to the EU’s economy. The banks collectively represented 60% of the EU’s banking assets. CEBS concluded that the banks were sufficiently capitalised but refused to release the results for individual financial institutions.
CEBS is currently carrying out a second, similar, stress-testing exercise of 25 financial institutions, which will be completed this month or in early July. Leaders agreed that the results of these tests will be made public by the end of July.
The leaders’ decision follows announcements yesterday by the Spanish government that it will publish the results of its national stress-testing exercises, while Germany dropped its resistance to publication of results of tests conducted by CEBS.
Spain took its decision because of mounting concerns that the problems in the country’s savings-bank sector were threatening the wider economy. “The best way of gaining the highest level of confidence is transparency,” José Luis Rodríguez Zapatero, Spain’s prime minister, said.
Tim Geithner, the US treasury secretary, has urged the EU to publish the results of CEBS stress tests. The US carried out a public stress-testing exercise last year that has been widely credited as having improved market sentiment and aided the US recovery from the financial crisis.
Large parts of the banking sector, however, are opposed to the publication of stress-test results. The British Bankers’ Association said in a statement yesterday that publication could lead to a “run on a perfectly sound bank”. Germany’s banking association is also opposed.
Josef Ackermann, the chief executive of Deutsche Bank, said last week that publication should only take place if money is immediately available to support banks that get into financial difficulties as a result.
“Its not dangerous [to publish]. It’s transparent and what we need is transparency,” Jean-Claude Juncker, the prime minister of Luxembourg and president of the Eurogroup of eurozone finance ministers, said.
“There would be a terrible lack of credibility if we would not publish,” he said.
Leaders also agreed on principles for reforming economic governance in the EU. They agreed on the need to strengthen the sanctions that can be applied to member states that have excessively high deficits or levels of public debt.
Nicolas Sarkozy, France’s president, said that there was “a quite large consensus” at the meeting on need to reinforce the EU’s stability and growth pact, which requires member states to keep their budget deficits within 3% of their gross domestic product.
Leaders agreed that, from 2011, they will submit details of their budgetary plans to the Commission and the EU’s finance ministers each spring for review. Currently, budget details are sent in the autumn, something the Commission considers unsatisfactory because it is too late in the year to influence government policies. Leaders agreed that the Commission should develop a scoreboard to monitor competitiveness divergences between member states.
The UK claimed to have secured guarantees that it will continue to be exempt from sanctions related to its debt or deficit levels. It also claimed to have secured an agreement that it will not have to submit budgetary details to the Commission and finance ministers that are not already in the public domain.
Sarkozy said after the summit that he supported the idea of tougher sanctions on eurozone than non-eurozone members. He said he believed that a distinction had to be made for the UK and Denmark, which both have a formal opt-out from joining the single currency.
The leaders’ decisions will be taken into account by the Commission, which is preparing proposals on governance reform, and by a ministerial taskforce that is also working on the subject. The taskforce, which is chaired by Van Rompuy, met for the first time in May and will submit a report to EU leaders on possible governance reforms by October.
The Commission said that it would present a policy paper on economic governance reform on 30 June, with a first set of draft legislative proposals to follow in mid-September.
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Leaders gave strong support to Spain’s efforts to restore market confidence in its economy and in the quality of its finances. Van Rompuy publicly congratulated Zapatero for measures he had recently taken, including the announcement this week of sweeping reforms to Spain’s labour law.
Zapatero, whose country currently holds the rotating presidency of the Council of Ministers, emphasised that Spain was “one of the few countries that didn’t need to inject capital” into its banking sector during the crisis that followed the collapse of Lehman Brothers in September 2008.
“We have confidence in the Spanish authorities. We do not think there is a problem. That is an analysis shared by the ECB [European Central Bank] and the European Commission,” Sarkozy said.