The European Central Bank (ECB) has just released its finds from the latest round of so-called stress tests carried out on banks to ensure that there is sufficient backing in terms of liquidity and assets. The tests, based on their balance sheets at the end of 2013, were necessary to try and prevent a banking crisis as the one that had occurred five years ago at the height of the financial meltdown. Then, lax oversight, poor governance, poor asset quality and a reliance on over-priced real estate portfolios that suddenly crashed — along with a lack of actual liquidity — led to governments being forced to bail out banks and prop up the asset-based financial system. It caused shock waves globally, destroyed economies nationally and undermined the fledgling euro as a currency. And it is a scenario that the ECB, financial regulators, national governments, the European Union (EU) as a whole and the International Monetary Fund are naturally eager to avoid.

The good news is that the stress tests showed that overall, European banks are doing reasonably well, with 25 of Europe’s top 130 banks failing in December to meet the capital threshold required by the ECB, collectively falling 25 billion euros (Dh116.45 billion) short. Since then, however, 122 of the banks have already addressed their shortfalls, raising 15 billion euros over the past nine months. Nor surprisingly, the worst-performing banks were those in nations that have struggled with high sovereign debt loads.

So what does exercise tell us? Firstly, the ECB, EU and fiscal regulators have learnt the lessons of poor liquidity and poor assets to prop up poorly-regulated banks. That has changed and there is now a maturity and a level of responsibility in the system not seen before. That is good news for customers, bondholders, investors and governments. But the improved quality of liquidity now shows that it is perhaps time to ease off on the need for strict austerity measures, opening government purse-strings and trying to get more liquidity into the economies. With interest rates across Europe at all-time lows and the risk of deflation looming, Europe’s banks can now be encouraged to lend to businesses and consumers to fuel economic activity, job creation, construction and manufacturing.