EU Says Withholding Sovereign Risk Will Hurt Banks
EU Economic and Monetary Affairs Commissioner Olli Rehn
Hannelore Foerster/Bloomberg
European Union Economic and Monetary Affairs Commissioner Olli Rehn speaks during a news conference in Luxembourg.
European Union Economic and Monetary Affairs Commissioner Olli Rehn speaks during a news conference in Luxembourg. Photographer: Hannelore Foerster/Bloomberg
July 12 (Bloomberg) -- Jeroen van den Broek, a credit strategist at ING Groep NV, discusses the outlook for stress tests being conducted on European banks to see whether they could withstand losses if the region's debt crisis worsens. Van de Broek talks with Deirdre Bolton on Bloomberg Television's "InsideTrack." (Source: Bloomberg)
July 13 (Bloomberg) -- Netherlands Finance Minister Jan Kees de Jager talks with Bloomberg's Francine Lacqua about the financing of European banks. European Union regulators are examining the strength of 91 banks in an attempt to reassure investors about the institutions’ resilience to potential losses as the debt crisis pummels the bonds of Greece, Spain and Portugal. They spoke in Brussels yesterday. (Source: Bloomberg)
July 12 (Bloomberg) -- Fabian Zuleeg, a senior policy analyst at the European Policy Centre, talks about the outlook for the banks that fail European stress tests. Regulators are examining the strength of 91 banks to determine if they can survive potential losses on sovereign-bond holdings. Zuleeg speaks in Brussels with Francine Lacqua on Bloomberg Television's "The Pulse." (Source: Bloomberg)
July 9 (Bloomberg) -- John Lipsky, first deputy managing editor at the International Monetary Fund, talks about stress tests for European banks. Lipsky, speaking with Francine Lacqua on Bloomberg Television's "InsideTrack," also discusses central bank monetary policies and outlook for financial regulation. (Source: Bloomberg)
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 and how to manage their publication. 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 gathered in Brussels today. German Finance Minister Wolfgang Schaeuble told reporters before the meeting that the tests will be an “important step” toward easing investors’ concerns about banks’ strength.
Bond investors are gaining confidence in the ability of banks to ride out the crisis, and are buying bank bonds at the fastest pace in six months. The Bloomberg Europe Banks and Financial Services Index rose 0.3 percent today, extending its gain this month to 8 percent.
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 how additional capital may be provided. 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 favors “financial backstops” that 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.
‘Responsibility’
“If it proves action is needed in a member state for a specific bank then, at the same time the stress test is published, a remedy has to be announced,” Dutch Finance Minister Jan Kees de Jager said. “That is firstly a responsibility of the country.”
Stress tests on Portuguese banks showed they have “good” solvency ratios, Portugal’s Finance Ministry said today in a statement. Spain’s bank-rescue fund, which has earmarked as much as 99 billion euros ($124 billion), will be “more than enough” to cover losses even in a stressed scenario, Fitch Ratings said.
In Austria, about half of a 15 billion-euro domestic package for banks is still available, Finance Minister Josef Proell said, signaling the country could do without European support.
“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.”
To contact the reporters on this story: Meera Louis in Brussels at mlouis1@bloomberg.net; Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net
To contact the editors responsible for this story: James Hertling at jhertling@bloomberg.net; John Fraher at jfraher@bloomberg.net
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