EU bank stress tests looks at 'sovereign debt shock'

EU bank stress tests looks at 'sovereign debt shock' scenario

European banks have had to provide the authorities with information on how they would perform under two "adverse" scenarios as part of the region's stress tests.

By Harry Wilson
Telegraph, 22 Jul 2010

EU bank stress tests looks at 'sovereign debt shock' scenario Photo: AFP

Ninety-one banks across the European Union (EU) have been asked to show how much additional capital they would need should economic conditions worsen over the next two years or in the event of a “sovereign shock”.

Banks have handed EU officials details of the amount of money they would need to raise in stressful instances to boost their Tier 1 capital ratios, their main buffer against losses, to a minimum level of 6pc.

The results of the EU’s stress tests are due to be published tomorrow. The authorities in several member countries have dropped heavy hints to the markets that their banks have been given a clean bill of health.

Analysts have criticised the process, claiming that, despite the upheaval, the stress tests have not been rigorous enough. In particular there are concerns that the tests will not reveal the full exposure of individual banks to Greek, Spanish and other eurozone sovereign debt.

Yesterday, the International Monetary Fund (IMF) called on the EU to make its stress testing more transparent. The powerful fund also said that the tests should be extended and applied to a wider range of financial institutions.

In its annual assessment of the economic policies of the eurozone, the IMF said that governments needed to commit to fiscal sustainability through structural reforms as well as strengthening the banking system.

The IMF said that while the markets seemed to have taken a positive view of the process so far, “some uncertainty regarding the stringency of the tests is likely to remain”.

The fund said that some European authorities were resistant to the idea of more transparency. “Supervisors felt that disclosure of individual bank results could prove too market sensitive and some national authorities noted legal impediments to publication.”

However, the IMF argued that more probing tests were necessary to “reduce aggregate uncertainty and induce a greater willingness to tackle troubled banks”.

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