European regulators can’t seem to make up its mind what to do about its zombie banks. Should we be honest about how deep in shit they are, bail in the creditors and get on with life? Or should we just lie and how that the banks can somehow magically raise equity and fix things themselves (or at least be someone else’s problem)?
Perhaps part of the conundrum is that the politicians want to win the next election (being Europe, there are important elections all the time, especially in Germany) and thus want to keep the status quo. Newly (unelected) ECB regulators probably want things to get fixed sooner rather than later, so better put out the dirty laundry now before they can get blamed for it.
The problem with the semi-honest approach is that it has all the downsides of a real stress test, but none of the upsides of just covering things up.
Once you separate the weak banks from the herd, the wolves will be out and governments will be forced to bail them out. Essentially information from ECB gives a playbook to hedge fund to get this process started.
Then we’re back to 2012, and everyone will be shocked that no one bothered to fix anything when we had the chance.