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07/22/2010

Externally, the message is one of calm and tranquillity. With European stress tests set to be released at the end of European trading on Friday, banks and financial oversight authorities are at pains to demonstrate that they have everything under control.

Behind the façade, however, it is a different story. Financial institutions, national oversight authorities and the Committee for European Banking Supervisors (CEBS), which is carrying out the tests, are hectically finalizing their plans for Friday. Exactly when and how the results are to made public was to be the subject of a Thursday conference call among the European Union ministers concerned.

Even the timeline itself, which had seemed set in stone for weeks, was up for debate again this week. The plan to release the results on Friday evening was initially seen as a way to give banks the weekend to react to bad news if they needed to. Suddenly, though, there was talk of already going public on Friday morning. Some were concerned about giving markets in the United States a head start in interpreting the results -- as though nobody had thought of it before. A European Commission spokesperson had to clear the waters -- the original plan remains valid: The results will be released on Friday at 6 p.m.

The last-minute chaos belies the stability the stress tests are supposed to inject into European financial markets. As concerns over sovereign debt have grown in Europe, banks been having an increasingly difficult time raising money. With investors increasingly doubting their durability, Spanish banks, in particular, have complained of trouble. In response, Madrid took the initiative in lobbying for the publication of the stress tests as a way of injecting confidence into European financial markets.

Whether it will work, remains to be seen. Many experts have complained that the tests have not been rigorous enough and worry that the markets won't take them seriously. Some bank managers, meanwhile, worry that too much honesty might harm their institution's image.

But how do the stress tests really work? What is the point? And what effects might they have on European financial markets? SPIEGEL ONLINE takes a look at the most important questions.

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• Next

• Part 1: Europe's Financial Giants Nervous Ahead of Stress Test Release
• Part 2: Who and What Will Be Tested?
• Part 3: Are Any German Banks at Risk of Failing?
• Part 4: What Happens to Banks that Fail or Barely Pass the Test?
• Part 5: Are the Tests Truly Helpful?