On 10 Oct 2011, Belgium, France and Luxembourg agreed to nationalise Dexia, Belgium’s biggest bank. Ironically, this happened just 3 months after it passed the stress test.

In the press release on July 15,  “2011 EU-wide Stress Test Results: No Need for Dexia to Raise Additional Capital”, it said

“The EU-wide stress test, carried out across 91 banks covering over 65% of the EU banking system total assets, seeks to assess the resilience of European banks to severe shocks and their specific solvency to hypothetical stress events under certain restrictive conditions.

“Dexia’s strong capital base would enable it to weather the set of assumptions of the EBA stress tests, while still maintaining strong capital ratios

“The acceleration of the transformation plan announced on 27 May 2011 has no significant impact on the Group’s solvency, as the Core Tier 1 ratio remains at 10.4% factoring in these measures under the adverse scenario.

Then why on earth Dexia still failed, just as it was a year earlier when Bank of Ireland Plc and Allied Irish Banks Plc passed their tests and collapsed soon after?

As pointed out by Jonathan Weil, bloomberg view columnist, “Dexia was able to show such high regulatory capital because it was allowed to exclude the bulk of its assets from the denominator in the equation, while also excluding billions of dollars of pent-up losses from the ratio’s numerator. Those included losses on such things as soured Greek government bonds.”

It seems that all these stress tests were probably not effective or designed to be passed. The European problems were apparent but the policymakers choose to ignore it and just hope miracle could happen to solve all of them.

In my opinion, the nationalization of European banks could have just begun. However, nationalization of the banks may not be such a big thing.  I will talk about it in another time.