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16th May 2022

US to conduct stress tests against euro collapse scenario

  • Wall Street: US banks have significant exposure to eurozone debt (Photo: EUobserver)

US banks are to be subjected to stress tests on the scenario of a sudden shock to the American economy if the eurozone crisis significantly deteriorates.

The US Federal Reserve on Tuesday (22 November) announced that it would hold the tests, the third round of such trials since the start of the economic crisis, to measure which banks would be able to keep their heads above water if worst comes to worst.

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The tests will assume a rise in US unemployment to 13 percent up from the current nine percent and a fall into recession for the US economy beginning at the end of this year.

The Fed said the tests will involve measurements against similar price and rate movements as happened in the second half of 2008, when the crisis erupted, but also on "potential sharp market price movements in European sovereign and financial sectors."

The trials, which will take place in the next few weeks, will cover 31 banks, up from the 19 that participated in the first round in the spring of 2009.

The results will be published by the end of March.

The move comes amid growing concern at a decline in US bank stocks in recent weeks over worries about the extent of their exposure to eurozone sovereign and private debt.

Additionally, Fitch, the credit rating agency, last week warned that the "broad outlook for US banks will darken" if the eurozone crisis is not resolved soon.

The US ambassador to the EU, William Kennard, in Brussels on Tuesday declined to comment on actions Washington is taking in preparation for a potential collapse of the eurozone.

The growing fears across the Atlantic come as banks in Europe have been making a dash to the European Central Bank (ECB) for emergency funds.

EU commercial banks on Tuesday borrowed sums from the Frankfurt institution at levels not seen since 2009. The ECB said that 178 banks across Europe withdrew some €247 billion in one-week loans.

The development suggests Europe's banks are finding it increasingly difficult to access credit from each other at sustainable rates due to uncertainty on their exposure to weak eurozone governments bonds.

EU agrees to fresh bank bail-outs

The EU's 27 member states have finally agreed to a recapitalisation of the region’s banks. Eastern powers have at the same time managed to win a commitment that they will be protected against capital outflows as a result.

Commission to unveil bank bail-out plan

European Commission President Jose Manuel Barroso has said that the EU executive will put forward plans for a fresh round of bank bail-outs across Europe on Wednesday.

Merkel, Sarkozy will do ‘whatever necessary’ to bail-out banks

Financial markets hoping for the outline of some grand strategy for dealing with the ever-worsening eurozone crisis are likely to be disappointed by the vague announcement offered up by the French president and German chancellor after emergency talks in Berlin on Sunday.

Agenda

This WEEK in the European Union

A summit of EU and US leaders on Monday will likely put more pressure on Europe to get its act together on the euro-crisis risking to bring down the world economy.

Feature

What happens when a currency collapses? Ask Bulgaria

Fifteen years ago, both Bulgaria and Romania went through rampant inflation linked to a financial crisis. Bucharest narrowly avoided the collapse, but Sofia was less fortunate and experienced a meltdown of the sort Greece is currently trying to prevent.

Frustration on eurozone crisis to mark EU-US summit

EU and US leaders will gather for a bilateral meeting on Monday with little of substance likely to be agreed and against a backdrop of exasperation in Washington over the handling of the eurozone crisis.

Lagarde signals summer interest rate hike

European Central Bank president Christine Lagarde signalled an interest rate increase possibly as early as July, but some experts warn for a repeat of the 2011-2012 debt crisis.

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