Regular readers know that the reason that market participants have to ask these questions is the unwillingness of regulators to give up their information monopoly.
European regulators have effectively been gambling with financial stability by maintaining their monopoly and trying to substitute regulatory credibility and stress tests. One year ago, the regulators ran stress tests and announced that virtually every bank tested had passed. This included Irish banks that within two months had to be nationalized.
This year, the regulators ran stress tests and again announced that virtually every bank tested had passed. Unlike last year, the regulators provided disclosure into the individual bank's exposures. The idea being to let market participants to run their own stress tests.
Less than two months later, even with the benefit of some disclosure, the combination of regulatory credibility and stress tests has come up short. Without full current asset and liability-level detail, market participants are still do not know who is solvent and who is insolvent. As a result, inter-bank lending markets are freezing and stock investors are reacting to rumors.
Fear gripped Europe's banks yesterday as shares in French and Italian lenders dived on concerns they would be crippled by the eurozone crisis.
Société Générale led French banks down as market rumours about its financial position sent its shares tumbling more than 20 per cent during the trading session. SocGen, France's second-biggest bank, was forced to issue a statement denying speculation that it was in trouble.
Shares in Unicredit and Intesa, two of Italy's biggest banks, were suspended because of volatile trading. Fears about Italy's sovereign debt burden sent the banks down 9.4 per cent and 13.7 per cent respectively.
French banks were hit by rumours that France was about to follow the US and lose its top AAA credit rating. SocGen shares closed down almost 15 per cent and have nearly halved in the last four weeks. BNP Paribas, France's biggest bank, fell 9.5 per cent.
SocGen also suffered after a typographical error in a Reuters chart sparked concerns that the bank, a big bullion trader, was trying to raise cash by selling gold futures cheaper for 12 months than for one month.
Later, rumours swept the market that an unlisted French insurer was in financial difficulty and had sold its big holding of SocGen shares.
SocGen last week revealed a slump in second-quarter profit as the bank was hit by its big exposure to Greece. The bank also admitted it was unlikely to meet its 2012 profit forecast.
A SocGen spokesman said there had been no change since the profit warning, adding: "SocGen categorically denies all the market rumours."
The eurozone crisis is in danger of spreading from peripheral countries such as Greece and Portugal to major economies such as Italy, Spain or even France. Fears about which banks might be hit by holdings of bonds issued by troubled countries have caused inter-bank lending costs to rocket. Simon Maughan, an analyst at MF Global, said: "Basically, the banks have stopped lending to each other again because of stories that one or another of them has gone under and that has created a liquidity problem."
The situation is reminiscent of market turmoil following the bankruptcy of Lehman Brothers in September 2008, when plunging share prices and soaring costs of funding and debt sent the sector into meltdown.
Last week the European Central Bank started to buy Italian and Spanish government bonds to stem the crisis but markets doubt its willingness or ability to do enough to stop the rot.
Mr Maughan said central banks' attempts to ease fears were in fact "red flags" to the market. "All they have done is say, 'We are extremely concerned about the situation', and that has given an excuse for people to start selling."
British banks were also casualties of the sell-off. Barclays dropped 8.7 per cent, followed by Standard Chartered and Royal Bank of Scotland, which both shed more than 7 per cent. Santander, Spain's biggest bank, fell 8.3 per cent. The US banking sector saw similar falls in early trading.
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