That Hole in Your Foot

So, dude, what’s up with that hole in your foot?  Before removing your shoes, please understand this question is not directed to you, dear reader, but to the European Banking Authority (EBA).  These are the folks who must stress out individual banks in Europe as they probe for areas of weakness.  Some would argue that additional stress is the last thing these institutions need but that is moot.  The EBA is there to test for solvency, the ability for individual members of Europe’s financial network to remain standing should something really bad happen.  Good thing, I say.  Don’t look now but some really bad things seem to be happening there right now.

According to The Economic Times of India, the EBA has directed lenders in Europe to increase their reserves substantially as protection against losses from bonds issued by nations rimming the southern edge of that continent.  The intent was to have banks put more cash aside for a rainy day.  The response however, has differed.  In their quarterlies, many of the largest lenders report they have begun dumping their holdings of such sovereign debt onto the market, often at a substantial loss.  The end result of the EBA’s mandate had been to remove one of the major buyers of sovereign debt at a time no alternative is available to fill the vacuum created.

The EBA is fairly new at this business, having been created just in January of this year.  Still, I imagine the European Parliament’s hope was to generate stability.  Instead they seem to have shot themselves in the foot first time out.  How surprising is that really?  A committee of greenhorns can generally be snookered by a pack of pros who have cut their teeth on previous crises and know quite well how to play the game of high finance.