The results of the EU bank stress tests are still a couple weeks away. Remember that the purpose of the US bank stress tests was to restore confidence in the banks. This was crucial because the main purpose of our banks is to engage in confidence games. The tests were bogus, but they actually had the intended effect. This was partially due to the fact that a large number of people are gullible morons, but also because the US made it clear that banks failing the stress tests would get a fat bailout. The stress tests were released along with recapitalization plans, just in case. The EU has backed away from similar recapitalization plans. Instead, bogus stress tests, which have a worst case scenario that is better than calculated market risk now, will show that EU banks are adequately capitalized, and if they aren’t, everything will fall apart. Because I am a pessimist, I have some reservations about this approach restoring confidence.

Despite not having released the bank stress test results yet, the EU is doing what it can to restore confidence. First, they are reminding everyone that the failing banks will have to get capital from the panicked private markets instead of getting a big fat bailout. Again, this is a little different from the US stress tests. We announced that all banks would pass before administering the tests. Then we said that the government would pour money into an insatiable money pit if any bank needed it.

The banks in the EU are doing their part to go along with the confidence game by trying to change the capital rules. Don’t worry, they’ll be adequately capitalized if the capitalization rules are suspended. Nothing bad could possibly come from that. It’s not like the banks need to refinance a trillion dollars in debt or anything. Nothing like making an overleveraged system more fragile.

I can’t wait.