October 19th, 2012 - Speculations about the true health of the European banking sector do not stop: Jim Flaherty's statement on banks' financial health adds to the long list of commentaries about the immense work the EU still has to do to get back on their feet.
"Banks still need to shore up their capital levels in order to combat the crisis", Canada Finance Minister Jim Flaherty
Patrick Leblond agrees with the Canadian Finance Minister Jim Flaherty and thinks that progress has been made in Europe but there remains much to be done. It is a fact that many European banks remain fragile and need to improve their capitalization. For example, it has been estimated that Spanish banks need capital contribution in the amount of 40-60 billion euros to restore their financial health. These sums will now come from the newly-established European Stability Mechanism, which is the permanent bailout fund created by European member states.
Given that it has now been more than one year since the European Banking Authority (EBA) last stresstested European banks, Minister Flaherty is therefore correct to talk about "black boxes" in terms of what is the true health of European banks in his interview with Bloomberg Television in Tokyo last week, after a meeting of the Group of Seven Finance ministers.
A new stress test is now overdue (except for Spain, which was forced to stress test its banks); unfortunately, the EBA has not indicated when the next stress test would take place. In the meantime, investors and depositors can only speculate about the true health of the European banking sector, which ends up making the situation worse than necessary.
Dr. Patrick Leblond is an expert in the field of European and North American Economic Integration at the University of Ottawa. He is part of a cross-Canada network of experts working on European policy issues, the Strategic Knowledge Cluster Canada-Europe Transatlantic Dialogue.