European Bank Stress Test Results Should Not Be A Surprise

Over the course of the past few days, I have heard numerous market commentators note that the forthcoming stress tests in Europe could be a positive or negative catalyst for global markets. I would only agree if one assumes that market participants are silly enough not to predict the results of those test in advance (i.e. the result should already be built into asset prices if the market is forward looking). The results of the US bank stress test served to provide confidence and enable banks to privately raise capital and improve their balance sheets. This was ultimately successful to the tune of tens of billions of dollars. If one thinks for a moment, what central body (e.g. Treasury in the US) would go forward with a stress test designed in such a way that "too big to fail banks" would be defined as doomed to fail and, subsequently, discourage private rather than public capital support to these institutions? One should expect that the results of the European stress tests will provide a similar boost to private support of banks there because they have already seen the ultimate template from Tim Geithner. If European finance leaders are silly enough to release data that further destabilizes European banking sector, then the EU deserves to be too big to fail also.