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Test puts banks' Euro zone debt in spotlight
Further to the announcement by the European Banking Authority (EBA) on Friday that 8 banks within the euro zone had failed the European Union’s stress test (total capital shortfall of €2.5 billion), banks with substantial peripheral euro zone bond holdings, and those that only scraped through the European Union's stress test of 90 lenders, started to feel pressure from investors to ‘beef up’ their capital buffers.
Given the euro zone’s sovereign debit crisis, there have been further accusations that the stress tests were again unrealistic. In addition, the banks that failed were small, nearly all untraded and mainly in Spain, where banking problems have long been known.
The major shortcoming of the test was the lack of real stress applied to euro zone bonds held in long-term banking books. Adding in a realistic stress on peripheral euro zone bonds would add at least €20 billion to capital needs and maybe more than double that, analysts said. Current market prices imply a much more severe loss than the EBA's assumption of a 15% loss on Greek bonds and a 1-2% "haircut" on Irish and Portuguese debt.
Banks warned that too much transparency, such as news of BNP Paribas' €24 billion exposure to Italy, may make markets even more jittery.
Euro zone leaders meet on Thursday in a bid to agree a second bailout for Greece and a package to address the broader fiscal woes of the euro zone that last week moved beyond Greece, Portugal and Ireland to Italy and Spain.
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Further to the announcement by the European Banking Authority (EBA) on Friday that 8 banks within the euro zone had failed the European Union’s stress test (total capital shortfall of €2.5 billion), banks with substantial peripheral euro zone bond holdings, and those that only scraped through the European Union's stress test of 90 lenders, started to feel pressure from investors to ‘beef up’ their capital buffers.
