The results were hardly unexpected. The much talked about stress tests were seen a measure to restore confidence in the European banking system. Conducted by the Committee of European Banking Supervisors, one isn surprised much.
Similar to war exercises in the military, risk managers at banks play out "what if" scenarios to test the solvency of the bank, if adverse times come charging head on. Variables such as GDP growth or declines, unemployment levels, credit and market shocks and risk of sovereign defaults are accounted for.
But, media around the world has joined the analyst community in offering tepid support. Some 91 banks were tested and only 7 failed the test. Combined they have to raise funds to the tune of $4.5 billion; chump change in the banking world.
"If you do a test and everyone in the class passes, you know there is a problem with the test," said a risk management company closely following the tests. 73 percent of respondents were not reassured by the stress test, according to an opinion poll conducted by the Wall Street Journal.
While the health of the domestic banking sector has not been in question in recent months, there are still valuable lessons to be drawn from the European check up.
Scenario testing with adverse macroeconomic variables could prove to be an effective exercise for local banks. If nothing else, it could help lenders be better prepared for future challenges.
Interestingly, public debt-to-GDP ratios of the three European nations that have emerged as culprits in the wake of the tests resemble Pakistans dependence on debt. Spain stands at 53 percent, Greece at 113 percent and Germany at 72 percent.
Pakistans debt-to-GDP ratio is in the vicinity of 46 percent. Given the heavy borrowing of the public sector, and increase in investments of scheduled banks in T-bills, the banking sector could find itself in quick sand if the government lands in a debt trap in the years to come.