Today the stress tests will undergo their own stress tests. The financial markets will respond to the European Union's health check of the Continent's 91 largest banks, whose results were published last Friday night. Of the two, this is the examination that matters more. If investors do not believe the analysis the Committee of European Banking Supervisors (CEBS) has produced is credible, the whole exercise will have failed.
Some have suggested that the CEBS process was not rigorous enough. The economic scenarios used were relatively benign. They modelled a slowdown in growth, not a severe, double-dip recession. And the estimated potential sovereign debt writedown losses seem to apply to the banks' trading books, rather than their bank books (on which they hold securities to maturity). And, even then, those sovereign debt losses also look suspiciously mild. The worst-case scenario is for a 23 per cent haircut for investors in Greek bonds. But it could be significantly higher in the event that Athens defaults.
Others counter that the stress tests by US authorities on America's banks last February were also seen as relatively kind, but were successful in calming jittery financial markets. While that is true, the American process did require banks such as Citigroup and Bank of America to raise significant amounts of new capital. Yet the European process has no such requirement. There is another important difference. There was no prospect of the US government defaulting on its debt and leaving banks' holdings of Treasury bills devalued. But the prospect of a default on certain types of eurozone sovereign debt is all too real.
We shall see how the markets react from today. The purpose of these tests is to restore confidence, so the proof of the pudding will be in the eating. But even if these pass the test of the market, the benefits to the European economy of a more stable banking system are likely to be meagre. Even if investors no longer believe banks are about to fall over, there is no guarantee that those financial institutions will play their part in supporting healthy growth.
Despite the relative success of the US stress tests, the squeeze on credit over there is still ongoing. Bank loans are still contracting and the private sector is suffering as a result. As the chairman of the US Federal Reserve, Ben Bernanke, has argued, this is helping to undermine the outlook for growth. Whatever happens in financial markets this week, there is no reason to suppose that Europe is in line for a more comfortable experience.