European Stress Tests Less Credible Than We Thought -- and That's Saying a Lot!

(MoneyWatch)  The European bank stress tests were always a fat target to shoot at, and markets have not changed their collective mind that they were less than credible.

The WSJ, demonstrating that the story everybody covered can still benefit from some serious digging, decided to look long and hard at what kind of money the European banks had invested in Greek, Spanish and Portuguese bonds. What they found was terrifying:

An examination of the banks' disclosures indicates that some banks didn't provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for "short" positions they held-facts that neither regulators nor most banks disclosed when the test results were published in late July ... Adding to the haziness, the stress tests' reported sovereign-debt levels differed, sometimes widely, from other international tallies and from some banks' own financial statements.

The WSJ's killer finding was less a number than a chart, which demonstrates massive gaps between what stress tests of French banks reported they had on their books and what the Bank of International Settlements, a sort of central bank for central banks, says they had. We knew that banks were hiding their exposure in their loan book instead of their trading book (the trading book being the main focus of stress tests). Now we have a sense of how big it might be.

This makes for a fragile situation, since you really only get one shot at credible stress tests. If you try it a second time, then the race among investors is not to digest the new information that might calm markets but to figure out what information has, yet again, been excluded for political reasons. I'm not saying you can't do them again, but you've blown the best chance at calming markets.

Nor is it very encouraging that the Committee of European Banking Supervisors conceded the WSJ's key point on short positions in a statement today. Or that Michael Barnier, financial services chief of the European Union, is now calling for regular stress tests -- a backhanded way of repeating a process that did not go well the first time.

If the market can sell off on the basis of a carefully reported newspaper story, imagine what it would do if some real bad news came down the pike.

Related:

• European Stress Tests Stress Investors Who Wanted More Information
• European Bank Stress Tests Turning into Dangerous Farce
• Not Making This Up: New European Debt Crisis Is About Hungary
• Europe's Crisis Will Make Markets Unstable for Some Time to Come
• European Rescue Plan, Part Two: What's Missing
• Give It a Rest, Already -- the U.S. is Not Like Greece