EU Stress Tests Only Consider Trading Book Bond Loss (Update2)
2010-07-23 13:53:13.878 GMT
(Adds analyst comment in fourth paragraph.)
By Meera Louis
July 23 (Bloomberg) -- European stress tests on 91 banks
will take into account bank losses only on government bonds they
trade rather than those they hold to maturity, according to a
draft European Central Bank document.
"The haircuts are applied to the trading book portfolios
only, as no default assumption was considered," according to a
confidential document dated July 22 and titled "EU Stress Test
Exercise: Key Messages on Methodological Issues."
The tests will assume a loss of 23.1 percent on Greek debt,
14 percent of Portuguese bonds, 12.3 percent on Spanish debt,
and 4.7 percent on German state debt, according to the document
obtained by Bloomberg News. U.K. government bonds will be
subject to a 10 percent haircut, and France 5.9 percent.
The decision "allows banks to basically underestimate
their exposure to distressed peripheral debt," Brown Brothers
Harriman, the New York private bank founded almost 200 years
ago, said in a note to clients today. "By leaving out stress
tests on the banking book, then a true picture of bank balance
sheets will clearly not be obtained."
The tests assume the weighted average yield on euro-area
five-year government bonds will rise to 4.6 percent in 2011 from
2.7 percent at the end of 2009. The tests also include an
increase in the yield on five-year Greek government bonds to as
much as 13.9 percent after "interest rate shocks," the
document shows.
"The haircuts on government debt in the trading book
increase according to the introduction of sovereign risk, which
is modeled as an increase in government bond spreads in line
with market developments since the beginning of May 2010,"
according to the document.
Euro Weakens
European Union regulators are examining the strength of
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.
The 54-member Bloomberg Europe Banks and Financial Services
Index traded down 1.1 percent at 2:38 p.m. London time. The euro
weakened against the dollar, sliding 0.6 percent to $1.2817.
The Committee of European Banking Supervisors, which is
overseeing the tests, is scheduled to release the criteria and
the results from 5 p.m. London time today. CEBS deputy secretary
general Patrick Amis declined to comment on the document,
referring questions to the ECB. The ECB declined to comment.
Related News and Information: Legal Functions and Filings: {BLAW
<GO>} More on European Regulators: {TNI MKTREG EUROPE <GO>}
Economic indicator watch: {ECOW EU <GO>} European economic
coverage: {TNI ECO EU <GO>}
--Editors: Edward Evans, Francis Harris
To contact the reporters on this story:
Meera Louis in Brussels at +32-2-237-4328 or
mlouis1@bloomberg.net;
To contact the editor responsible for this story:
Edward Evans at +44-207-073-3190 or eevans3@bloomberg.net.
2010-07-23 13:53:13.878 GMT
(Adds analyst comment in fourth paragraph.)
By Meera Louis
July 23 (Bloomberg) -- European stress tests on 91 banks
will take into account bank losses only on government bonds they
trade rather than those they hold to maturity, according to a
draft European Central Bank document.
"The haircuts are applied to the trading book portfolios
only, as no default assumption was considered," according to a
confidential document dated July 22 and titled "EU Stress Test
Exercise: Key Messages on Methodological Issues."
The tests will assume a loss of 23.1 percent on Greek debt,
14 percent of Portuguese bonds, 12.3 percent on Spanish debt,
and 4.7 percent on German state debt, according to the document
obtained by Bloomberg News. U.K. government bonds will be
subject to a 10 percent haircut, and France 5.9 percent.
The decision "allows banks to basically underestimate
their exposure to distressed peripheral debt," Brown Brothers
Harriman, the New York private bank founded almost 200 years
ago, said in a note to clients today. "By leaving out stress
tests on the banking book, then a true picture of bank balance
sheets will clearly not be obtained."
The tests assume the weighted average yield on euro-area
five-year government bonds will rise to 4.6 percent in 2011 from
2.7 percent at the end of 2009. The tests also include an
increase in the yield on five-year Greek government bonds to as
much as 13.9 percent after "interest rate shocks," the
document shows.
"The haircuts on government debt in the trading book
increase according to the introduction of sovereign risk, which
is modeled as an increase in government bond spreads in line
with market developments since the beginning of May 2010,"
according to the document.
Euro Weakens
European Union regulators are examining the strength of
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.
The 54-member Bloomberg Europe Banks and Financial Services
Index traded down 1.1 percent at 2:38 p.m. London time. The euro
weakened against the dollar, sliding 0.6 percent to $1.2817.
The Committee of European Banking Supervisors, which is
overseeing the tests, is scheduled to release the criteria and
the results from 5 p.m. London time today. CEBS deputy secretary
general Patrick Amis declined to comment on the document,
referring questions to the ECB. The ECB declined to comment.
Related News and Information: Legal Functions and Filings: {BLAW
<GO>} More on European Regulators: {TNI MKTREG EUROPE <GO>}
Economic indicator watch: {ECOW EU <GO>} European economic
coverage: {TNI ECO EU <GO>}
--Editors: Edward Evans, Francis Harris
To contact the reporters on this story:
Meera Louis in Brussels at +32-2-237-4328 or
mlouis1@bloomberg.net;
To contact the editor responsible for this story:
Edward Evans at +44-207-073-3190 or eevans3@bloomberg.net.
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