July 12, 2011
The risks to financial stability from analysts using European Union stress-test data to conduct their own exams on banks “should not be underestimated,” according to a confidential document prepared by EU officials.
There is an expectation the European Banking Authority stress-test results will be “challenged by market tests,” according to the draft document obtained by Bloomberg News. Some EU member states with lower-rated sovereign debt may struggle to borrow money to fund their banks, according to the document.
Backstops for banks that fail the exams are “are either ready or in the process of being prepared,” Polish Finance Minister Jacek Rostowski told reporters after a meeting with his EU counterparts in Brussels today. Ministers agreed that they will have measures ready “extremely fast” to assist these lenders, he said.
This year’s exams, which will be published on July 15, will include a review of how lenders 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. The banks will be expected to maintain a core Tier 1 capital ratio of at least 5 percent under the stress-test scenarios, the EBA has said.
Lenders that fail the tests would have to “take action themselves” or obtain public help “within three months,” Rostowski said.
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