Bloomberg News

EU Regulators Battle Crisis With More Stress-Test Disclosure

July 08, 2011

(Updates with Draghi comment in 11th paragraph.)

July 8 (Bloomberg) -- European regulators will try to end the region’s banking crisis by forcing firms to publish details of capital shortfalls in a more stringent and detailed set of stress tests that will give firms six months to plug any gaps.

Lenders will be made to disclose capital levels, estimates for profitability in 2011 and 2012 as well as their holdings of sovereign debt in the July 15 tests, the London-based European Banking Authority said in a statement today.

European regulators are seeking to assuage investor concern that banks in the region are inadequately capitalized with a second round of stress tests. The EBA toughened this year’s review by tightening its definition of bank capital and forcing firms to disclose more about their holdings of government bonds. This year’s assessments included a peer review by the EBA that forced firms to “address shortcomings and over-optimism of some banks’ preliminary estimates,” the regulator said today.

“The market is just getting stressed about stress tests,” said Mike Trippitt, an analyst at Oriel Securities Ltd., said before the information was released. “I don’t think equity investors will be tripping over themselves to write a check to protect bond investors and that’s really what the regulators are asking the equity markets to do.”

Bank Stocks Drop

European bank stocks fell, with Italy’s UniCredit SpA and Banco Popolare SC leading the declines. The 49-member Bloomberg Europe Banks and Financial Services Index was down 1.8 percent at 2:30 p.m. in London trading.

The 91 banks being tested will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent in the tests’ baseline and adverse scenarios, the EBA said. The exams will assess how banks would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets as well as possible trading losses on sovereign debt.

Banks will list their exposures to commercial real estate, residential property, corporate lending and sovereign debt by country, according to the template for the results published today. The tests won’t include a sovereign default.

The data “will allow us to do our own modeling with regards to a full default,” said Neil Smith, a banking analyst at WestLB AG in London.

Plugging Shortfalls

Banks that fail the tests may need to present plans for making up their capital shortfall by the end of September, according to an internal EU document dated July 7. Firms may be given a further three months to implement these plans and raise the additional capital they need, according to the preliminary document obtained by Bloomberg News.

“The market wants to see failures for banks which have large exposure to peripheral sovereign debt, such as Commerzbank AG and Dexia SA, but that’s not going to happen,” said Simon Maughan, head of sales and distribution at MF Global Ltd. in London. “The most likely bank failures from this will come from countries where the economies are tough already; there will be failures, but they’re going to be in the wrong place.”

Bank of Italy Governor Mario Draghi said today he’s certain that the country’s lenders will pass by a “significant” margin. All 13 German lenders being assessed expect to pass, based on the data they plan to submit to the EBA this week, according to people familiar with the process who declined to be identified because the data are yet to be published. Spokesmen for the firms declined to comment or couldn’t be reached.

Lenders will be pushed to raise capital from private sources, according to a statement from EU finance ministers released by the EBA today. Government money will be available “as a last resort” and “subject to strict conditionality,” the document said.

The euro weakened against all but two of 16 major counterparts monitored by Bloomberg, sliding as much as 0.95 percent to $1.4229 and depreciating 0.6 percent versus the yen to 116. The Dollar Index, which tracks the U.S. currency against those of six trading partners, jumped 0.4 percent.

European regulators will publish the test results at about 6 p.m. Central European Summer Time on July 15. EU finance ministers will discuss the tests at a meeting in Brussels on July 12, according to an agenda posted on the EU’s website.

--With assistance from Gavin Finch in London, Boris Groendahl in Vienna and Aaron Kirchfeld and Nicholas Comfort in Frankfurt. Editors: Edward Evans, Francis Harris.

To contact the reporter on this story: Howard Mustoe in London at; Jim Brunsden in Brussels at

To contact the editor responsible for this story: Anthony Aarons at; Edward Evans at

The Aging of Abercrombie & Fitch
blog comments powered by Disqus