Economist Joseph Stiglitz on Tuesday questioned the trustworthiness of a key European Union government test to measure the health of the banking industry.
“There’s a question of whether you can trust stress tests,” Stiglitz said at an event in Dublin, according to Bloomberg. “If you had announced at the end of stress tests” that the banks “would not pass, it would have caused panic.”
Results of “stress tests” carried out over five months were released last week. Authorities determined that that 22 of the largest banks in the EU should keep a Tier 1 capital ration “well above” 9 percent during 2009 and 2010 to withstand a worse than expected economic downturn. The names of the banks were not released.
The EU tests follow after a similar series of probes conducted by the U.S. government earlier this year led to several banks acquiring greater capital buffers.
“You worry that the stress test was designed to make sure that they passed,” Stiglitz said. “Given the high level of leverage and the high levels of default, it provided a little bit more comfort than I would have taken.”