EU Ministers Pressured to Give More Stress Test Data

EU Economic and Monetary Affairs Commissioner Olli Rehn
European Union Economic and Monetary Affairs Commissioner Olli Rehn speaks during a news conference in Luxembourg. Photographer: Hannelore Foerster/Bloomberg

European finance ministers are under pressure to disclose more about the stress tests being conducted on banks to see whether they could withstand losses if the region’s debt crisis worsens.

Regulators are examining the strength of 91 banks to determine if they can survive potential losses on sovereign-bond holdings. Ministers at a meeting today in Brussels will debate how much of the detail and results to disclose as investors await their publication by the end of July.

“The market is asking for details and for something else: if a bank has difficulties where will it get the funds to recapitalize?” Daniel Gros, director of the Centre for European Policy Studies, said in an interview with Bloomberg Television today. “Stress tests without details don’t make sense.”

Regulators are counting on the tests to reassure investors about the strength 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. 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. The “important point being tested is the ability and willingness of the official sector to provide capital to firms which fail,” analysts led by Daniel Davies in London said in a note.


The Bloomberg Europe Banks and Financial Services Index rose 9.4 percent last week, its biggest weekly gain in a year. It slipped 0.4 percent as of 1:00 p.m. today.

The meeting of finance ministers from the 16 euro countries is scheduled to begin at 5 p.m. and Luxembourg’s Jean-Claude Juncker, who heads the group, will hold a press conference after the talks. German Finance Minister Wolfgang Schaeuble said before the meeting that the tests will be an “important step” toward easing investors’ concerns about the strength of banks.

Ministers will also discuss proposals to revamp banking supervision, tougher sanctions on countries breaching deficit limits and early monitoring of national budgets. The meetings continue tomorrow when the ministers will be joined by their colleagues from the other EU nations.


Banks globally could lose as much as $900 billion in a worst-case scenario where Greece, Ireland, Italy, Portugal and Spain all have to restructure their debt, Nomura Holdings Inc. estimates. Moody’s Investors Service said June 11 that EU banks can absorb losses on government and private debt in Greece, Portugal, Spain and Ireland without having to raise funds.

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.

One concern is that the tests aren’t rigorous enough and won’t assume large enough potential losses, said James Nixon, co-chief European economist at Societe Generale in London. 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.

“The haircut for Greece looks a little shallow, and the particular concern is that if there is a sovereign default in Europe, it will be significantly bigger,” Nixon said.

‘Moderately Hopeful’

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 results are due to be published July 23.

Marco Annunziata, chief economist at Unicredit Group in London, said he’s “moderately hopeful” the tests will meet investors’ needs, though they may be more effective if managed at a national rather than European level.

“Within Europe, coordination usually reduces everything to the lowest common denominator,” he said.

‘Financial Backstops’

While the tests may help investors determine the capital shortfalls at European banks, the next step for European leaders is to determine how to build up banks’ buffers.

Rehn said “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 European Financial Stability Facility. European Central Bank President Jean-Claude Trichet said he favors “flexibility” on the fund, which was announced in May as part of an EU plan to aid debt-stricken nations.

“There are many national funds available that weren’t used after the big crash of 2008,” Gros said. “Of course the better answer would be to say there’s this huge pot of money, the European Financial Stability Facility, we can recapitalize any bank in Europe with that.”

That fund will be operational “without any doubt” before the end of the month, Juncker told reporters in Brussels. He also predicted that Slovakia, which has held out putting its signature on the EFSF accord, would do so by mid-July. Juncker said he had meetings scheduled later today with Slovakia’s finance minister and tomorrow with the prime minister.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE