IMF to Test British Banks for Solvency; Euribor Rises Again

The International Monetary Fund (IMF) will begin checking data from the largest banks in Britain this week, in a preliminary move before conducting stress tests across the broader banking sector of five nations within the euro zone. Meanwhile, the Euribor rate saw another rise on Wednesday as continued concerns over inflation after last week’s European Central Bank (ECB) warning continued to reverberate.

According to a Reuters report, the IMF is performing routine stress tests, beginning with Britain and continuing on to Sweden, Germany, Luxembourg, and the Netherlands. Previous stress tests in 2010 conducted by the European Union (EU) found just a small capital shortfall; however, that preceded the devastating shortfall at Irish banks that necessitated a bailout.

The EU has discussed toughening its stress tests, also called Financial Sector Assessment Programs (FSAP), but remains deadlocked on just how to do that. While members have agreed to toughen tests of the banks’ ability to survive financial shocks, one issue under dispute is liquidity. These new tests would theoretically include liquidity targets, and be conducted by the end of May. Results, according to EU presidency sources, would be announced in the third quarter. The tests to be conducted on the five nations listed above are to be completed by the end of the first quarter of 2011.

Germany had previously resisted liquidity tests, but, according to an EU source, “The message is that the tests have to be much more stringent and credible.” To that end, the tests will evaluate the same 91 banks previously tested, but this time with a tougher methodology that will cover not only bank trading books but also banking books and searching tests of core tier 1 capital.

The FSAPs became mandatory last September for 25 "systemically important" countries; it was thought that this would avoid a repeat of the credit crisis. They were established in 1999, and according to the website of the IMF, they are "a comprehensive and in-depth analysis of a country's financial sector."