EU under Pressure to Spell out Stress Tests

Bloomberg | Jul 12, 2010 | 19:35 IST

The European Commission told government officials that failure to publish individual banks’ exposure to sovereign debt could damage investor confidence. “There is considerable opposition to the publication of individual exposures to sovereign debt,” the European Union’s executive arm said in a confidential letter dated July 9 that was obtained by Bloomberg News. “Stepping back” from planned publication of this information “would give the impression that we have something to hide.” EU regulators are examining the strength of 91 banks to determine if they can survive potential losses on sovereign-bond holdings. They are counting on the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal. EU finance officials are currently debating how much detail from the tests to disclose. The results are scheduled to be released on July 23. “We are increasingly worried to note an apparent weakening of the commitment to transparency,” the commission said in the letter to the EU’s Economic and Financial Committee, which comprises senior officials from member states, the commission and the European Central Bank. If the tests aren’t “credible and transparent,” there is a “high risk that it will disappoint the markets.”

‘Important Step’

The EFC prepares the agenda for monthly meetings of euro- region finance ministers, who are gathering in Brussels today to discuss the publication of the tests. German Finance Minister Wolfgang Schaeuble told reporters before the meeting that the tests will be an “important step” toward easing investors’ concerns about the strength of the region’s banks. The commission also said in the letter that regulators should publish data on banks’ Tier 1 capital ratio that excludes government aid. “Some national supervisors have suggested that banks’ Tier 1 ratios without government support should not be published,” it said. “We believe that these data should be published because it constitutes important information for the markets.”  

The Good, the Bad and the Ugly

The banks being tested account for 65 percent of Europe’s banking industry. They include Deutsche Bank AG of Germany, France’s BNP Paribas SA and ING Bank of the Netherlands, according to the Committee of European Banking Supervisors, which is organizing the tests. “The market is skeptical,” Jeroen van den Broek, head of developed markets credit strategy at ING Groep NV in Amsterdam, said in a Bloomberg Television interview today. “The most important thing is that there is a differentiation in these tests and the differentiation should really highlight the good, the bad, and the ugly banks,” Officials have yet to spell out how they would deal with a bank that fails the tests and whether any additional capital will be provided by national governments or the European Union. Credit Suisse Group AG analysts said July 8 the “real test” will be the readiness of governments to respond. EU Economic and Monetary Affairs Commissioner Olli Rehn said the “financial backstops” must be in place when the results are published “in case there are pockets of vulnerability.” The backstops would start with national funds and then involve a “second line” that would include the governments being able to use the European Financial Stability Facility set up in May to aid indebted nations.


Stress tests on Portuguese banks showed they have “good” solvency ratios, confirming the solidity of the banking system, Portugal’s Finance Ministry said today in an e-mailed statement. Austrian Finance Minister Josef Proell said that about half of a 15 billion-euro ($18.9 billion) domestic package for banks was still available, signaling the country could do without European support if the tests show some lenders are vulnerable. “We have enough room for maneuver if it will be necessary,” Proell told reporters in Brussels. One concern is that the tests aren’t rigorous enough and won’t assume large enough potential losses, said ING’s van den Broek. Regulators have told lenders the assessments may assume a loss of about 17 percent on Greek government debt, 3 percent on Spanish bonds and none on German debt, said two people briefed on the matter who declined to be identified. “We have to assume real times of stress, not levels where the market was at the beginning of May,” van den Broek said, adding that he estimated the so-called haircut on Greek debt should be “in excess of 50 percent.”


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