The CEBS states “The objective of the extended stress exercise is to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks and to assess the current dependence on public support measures.”
Each EU member state has included enough banks in the stress testing to cover >50% national banking assets
91 banks stress tested and comprising 65% of EU banking sector. This compares to just 19 in the US stress tests. The stress test includes 11 unlisted German banks, including the 8 Landesbanken and 40 Cajas ( Spain’s savings banks). This is very important for the credit world as these two sectors have been a main focus of their concerns.
Two stress tests will be conducted:
(i) Base Case Scenario
(ii) Adverse Case Scenario (GDP -300bps lower over 2010-11 time period vs. Base Case. By way of context, the EC's Spring Economic Forecast published GDP forecasts of 1.2 and 1.6% in Germany over the period, GDP of -0.4% and 0.8% in Spain, and GDP of 1.3% and 1.5% in France. The stress tests GDP assumptions, then, are reassuringly negative, and would imply a fall back into recession.
The stress tests will also model a shock in capital markets, and shock on interest rates. Importantly we understand it will use May as a benchmark for sovereign risk. Note at the widest 10 yr Greek debt was trading at 67c/€, Portugal 89c/€, Ireland 91c/€, Spain 93c/€ and Italy 98c/€. Given the EU is determined to see no country default such criteria appears reasonable to us and a good political outcome with Greece seeing a c.33% haircut versus par.
There is a significant possibility that the stress tests will provide a material positive catalyst for the sector, as the US stress tests did in 2009. The important point being tested is the ability and willingness of the official sector to provide capital to firms which fail the stress test - it is this, not the capital position of European banks, which is the subject of severe market uncertainty and in our view it is this assurance of official support which the interbank market is going to rely on if it is to recommence fully functioning.
Press see link below:
