Who's Afraid of a Stress Test?

On Oct. 26 the European Central Bank released the results of new stress tests on European Union banks, hoping to convince financial markets that the banking system is strong enough to weather another crisis. The latest exercise is an improvement over previous ones, which were derided as too soft—but it’s still not good enough.

The test had two parts. The first was a detailed examination of loans, to see whether they were worth what the banks said. This found that most of the 130 banks under review had overvalued their assets—by a total of €47.5 billion ($60 billion) at the end of last year. The second part asked, with assets correctly valued, whether the banks had enough capital to endure another recession and financial-market shock. It found that 25 did not, and eight of those need to raise an additional €6.4 billion in capital.