EU Banks Stress Test In Focus As Mkts Worry About Resilience
By Emma Charlton
BRUSSELS (MNI) - The ability of Europe's banks to withstand market turmoil is in focus this week as investors worry about the solidity of the bloc's financial system and about whether tests currently under way are stringent enough to restore confidence.
In a bid to reassure the markets that the European Union's financial system won't bend under pressure, the bloc is currently assessing whether its largest banks have sufficient capital buffers to withstand financial market turmoil or the onset of another recession.
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The EU hasn't published the results of its stress tests before, but it is widely expected to follow the U.S., which published results of stress tests for 19 financial institutions last year under its Supervisory Capital Assessment Program and decreed that 10 of them needed more capital.
Facing pressure from markets late last month, the EU agreed to publish the details of the stress tests and to significantly raise the number of European banks being tested from 26 to well over 100.
But it's still unclear exactly what the testing parameters will be and which details will be published.
The debate over how much detail to release is likely to be intense, because some EU delegations face national banking sector lobby groups who argue that publication of stress tests could have an adverse impact on the very market turbulence it seeks to mollify. In Germany, the biggest EU country, detailed results cannot be published without the agreement of the individual banks concerned, which could present a considerable hurdle.
"The Ecofin which takes place next week (July 13) will make the decisions for the dates and methodology of the bank stress tests," a European Commission spokesperson said on Monday.
At a meeting in Southern France, French finance minister Christine Largarde told reporters that the results would be published "around July 23."
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The stakes are high, with many market participants beginning to worry -- even before the methodology has been released -- that the tests might not be vigorous enough. Fueling these concerns was a report in the Financial Times today saying that tests would include a scenario of a 3% haircut on sovereign debt -- a far more benign outlook than many market players think possible.
Critics say the tests are largely a public relations exercise and won't price in enough exposure to Eurozone sovereign debt -- or a potential default on Greek or Spanish or Portuguese debt -- because it's too politically sensitive to do so.
"In our view, a proper stress test would have to go for scenarios assuming a default on Greek sovereign bonds and a default of other periphery countries, leading to haircuts for these securities of 50% or so," said Jurgen Michels, an analyst at Citigroup in London.
"Without such real stress testing, we doubt that the results of the stress test would provide much to restore confidence," Michels added. Moreover, he said, "it would be important to have facilities in place to immediately provide sufficient extra capital to banks that do not pass the stress tests."
So far, there are no strong signs that governments are preparing to make such contingency capital available to their national banks. The ECB has said that it will not do so.
The market is likely to focus on the fine print next week, when EU finance ministers agree what information they will publish and when.
"The credibility of the stress test will depend on the underlying assumptions and their transparency," analysts at Nomura said in a note to investors. "We hope regulators will publish these in detail. If the stress scenarios are not painful enough, do not acknowledge the default risk from some European countries, or if the transparency of the assumptions used is poor, publishing the stress test could be counterproductive and raise more questions about solvency."
If the market judges the stress test too lenient, it could punish the very securities the EU is trying to protect.
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