With its plan to take another close look at the health of banks, the European Union could make a big leap ahead in its response to the government debt crisis. But for the tests to be meaningful this time around, governments and regulators will have to swallow their pride and expose some of the region's hidden skeletons.
EU officials hope a second round of stress tests, planned for February, will do what the earlier ones couldn't: restore confidence in the region's banks by checking whether they have the financial cushion to withstand unexpected shocks.
"The problem of the European responses since the start of the year has been that they have always been slightly behind the curve," said Philip Whyte, a senior research fellow at the Centre for European Reform.
Credible stress tests now, followed by a swift recapitalization of banks shown to be vulnerable, could go a long way in taking costly uncertainty out of the markets.
European regulators first tested their banks in Sept. 2009, but the results were never published. Another round of tests, carried out this July, was made public but widely criticized for not being stringent enough.
The EU has now decided to give it another go, after months of turmoil in the government debt markets made it clear that investors are anxious to lift the lid on the interconnections between government debts and banks' health.
The bailout of Ireland and Greece, and worries about Portugal and Spain, have shown that the crisis that has rocked the European continent over the past year isn't only about overspending governments.
It is also about investors fearing what might be at the bottom of a downward spiral fed by highly indebted government, poorly capitalized banks and the cost of bailing them out.
Both Spain and Ireland until recently were model citizens when it came to sticking to the EU's debt and deficit rules, and even this year, Madrid's debts are estimated to stand at 64.4 percent of economic output, below those of Germany, the Netherlands and Austria — the region's fiscal conservatives.
But Ireland was forced to inject almost euro50 billion ($66 billion) into its ailing banks after the country's real-estate boom collapsed. Many economists are warning that something similar might happen in Spain, once the local savings banks, or cajas, are hit by the full impact of the drop in house prices.
But the link between governments and banks goes beyond the direct cost of bank bailouts.
Regulators must untangle a spider's web of potential risks, from banks' exposure to their own economies through loans and mortgages, to their holdings of government bonds of highly indebted countries and those of other banks that might be on the brink of collapse.
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