The autocomplaisance could again lead us into a negative spiral

After several disastrous months this spring is experienced with a certain relief in the financial markets. But, with backdrop of the decline of the crisis, the risk is now that policy makers and market participants indulge in a false sense of security. The auto-complaisance could again lead us into a negative spiral. To prevent such an outcome, it must implement rapid and decisive actions. In particular, it remains in Europe to consolidate the foundations of the financial system, which requires ongoing remediation efforts.

The history of the macro-financières crisis is very informative about it. Under the Japanese experience, these last two decades, are three lessons. First, it is clear that a weak banking system, polluted by zombie banks, constitutes a major obstacle to economic recovery. Then, the banking system drawn generate dysfunctions, as long as the losses are not fully recognized and disclosed. Finally, always postponing increases in the end the cost to the taxpayer. The Swedish experience shows, on the contrary, the benefits that there is to accelerate and facilitate the cleaning of the banking system.

A failing banking system would be particularly damaging for Europe, where economies are much more dependent on bank financing and the United States. But serious concerns remain about the State of the European banking system: information available are not satisfactory and the financial markets, as public opinion, give little credit accounting documents published by the banks. Recent estimates from the IMF to potential impairments and recapitalization needs have maintained these fears and suggest that the European Union following the same path as the United States. And if the European authorities contest these estimates, they have until then provided no alternative encoding.

In the United States, the authorities have chosen to implement the "stress tests". These instruments are certainly imperfect, but nevertheless useful. They have helped to improve knowledge by the public of the results of the major banks and past areas of shadow where actions are still needed. Although the procedure of production and disclosure of the results has been planted with obstacles, this is ultimately a significant improvement over the previous situation.

Conversely, in Europe, the "stress tests" received for the time being a home for the less warm of supervisory authorities. They argue that the assessment of banks must be true under the aegis of the European Union, but on a national scale. However, this would result in a low level of harmonization achieved by adopting similar macroeconomic assumptions. In addition, the results would be available before September, published only in aggregate form (and non-bank Bank), at the discretion of national authorities.

This compromise is designed to preserve the functions of each supervisor, and their wide variety of articles. But this has a high cost in terms of informational content of the results. There is no guarantee that the results be consistent between countries and between financial institutions. As long as the test procedure is left to the discretion of the national examiner, it is unlikely that same asset is assessed in the same way for all financial institutions, while they are under the supervision of different authorities. In such a framework, the temptation is strong to each supervisor national to claim that the banks of which it is responsible are in good health. Accordingly, the procedure, as it is seen today, is not able to generate the confidence that European economies need of emergency.

We cannot wait for four additional months to discover that we do not know the true state of health of the European banking system. Instead, a systematic approach is needed. The tests should be based on the same macroeconomic scenarios, the same valuation rules and the same assumptions about shocks. These tests should be conducted simultaneously for all major European banks and the results must be published Bank by Bank. In addition, contagion effects must be taken into account as far as possible, in order to assess the consequences of a possible deterioration of the situation. The supervision of the tests and the aggregation of the results must be centralized.

Our proposal, of course, some difficulty. As the American experience has shown, a genuine "stress test" requires that the authorities are ready to announce without delay, how they intend to do with the institutions insolvent including in Europe, those engaged in major cross-border operations. But it should be noted that such an approach requires no formal transfer of authority from national to European level. This work could be carried out by an ad hoc temporary Committee, which would ensure the coherence of the whole.

For later has a high cost and parochial wars that may exist in the EU must not prevent us from advancing on the road to recovery. We urge European Governments to act now.