The bad news is that banking regulators say the eight test flunkers will need to raise a mere 2.5 billion euros ($3.5 billion) in fresh capital by year-end. How can that be bad news? Because the number lacks credibility. Almost no one believes that’s all it will take to shore up Europe’s troubled institutions, especially if Greece or another of Europe’s fragile economies defaults on its debt, which looks increasingly likely.
By contrast, Standard & Poor’s conducted its own analysis of European banks and concluded in March that they needed as much as 250 billion euros ($350 billion) -- or much, much more than the EU’s figure -- to withstand a sharp increase in yields and a severe economic downturn. The U.S. required nine banks to raise $75 billion in new equity after stress tests were conducted in the spring of 2009.
Instead, European authorities looked at the ability of banks to endure an economic contraction of 0.5 percent -- in other words, a mild recession -- as well as a 15 percent stock-market decline, rising unemployment, a drop in housing prices and trading losses on government debt.
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