We’re sure things are very – err, stressful right now at the London headquarters of the Committee for European Banking Supervisors, ahead of the Friday publication of stress test results for 91 financial institutions across Europe.
Ahead of “S Day”, leaks and rumours abound, not least that the test results could include more information than earlier thought.
As Bloomberg reports on Thursday, the European banks may divulge breakdowns of their sovereign-debt holdings in their stress-test results, as well as other information demanded by regulators in their assessment of how the banks might fare under bouts of renewed economic weakness and bankruptcies in the household, corporate and sovereign sectors.
Right now, no one has a clear idea of the extent and composition of these sovereign bond holdings, what potential losses the banks might have to absorb on those holdings and, as CNBC notes on Thursday, what discounts will be applied to those debts, which markets have already deeply discounted.
Citing a confidential CEBS draft template (known as the “template for disclosure of sovereign exposures”), Bloomberg says that European regulators have asked the banks to publish a list of each lender’s gross and net exposure to central and local governments in 30 countries in the region, including Greece, Spain, Ireland, Italy and Portugal.
The banks are also being asked to provide details of whether they booked their sovereign-debt holdings in the banking or trading book, according to the template, which Bloomberg says will show debt holdings for the 27 EU members as well as Liechtenstein, Norway and Iceland.
Extra data aside, big questions remain, as the FT noted on Thursday, about how rigorous the tests will be, particularly regarding European banks’ exposure to Greek, Spanish and other eurozone sovereign debt.
Such scepticism – and suspicion that the stress tests are being engineered to produce a favourable outcome – will no doubt be fuelled on Thursday by a report in Le Monde that the four major French banks subjected to the tests (BNP Paribas, Société générale, Crédit Agricole and BPCE) as well as Dexia have all passed with flying colours.
And now, as FT Alphaville noted a bit earlier, CNBC is reporting on Thursday that EU regulators are likely to release the results earlier than planned, which would mean during European trading hours. European markets will be closed when the CEBS releases results on Friday, according to the last published schedule. That, we noted, would leave just the stress-test reaction to the US and FX markets.
Meanwhile, the IMF is adding to the regulators’ “stress-test stress”, urging Europe to ensure its stress tests are transparent to guarantee their credibility, as the FT reports on Thursday.
Ultimately, however, Europe may already have passed its biggest stress test, notes Bloomberg in a separate report on Thursday:
The euro has rallied 8 percent from a four-year low last month. Greece, Spain and Portugal have managed to sell 50 billion euros ($64 billion) of debt since May 10 when the need to save the single currency forced finance ministers to create a nearly $1 trillion rescue fund and European Central Bank President Jean-Claude Trichet to begin buying bonds.
It continues:
The extra costs investors demand to buy Spanish and Portuguese bonds instead of comparable German securities declined after debt sales this week and those spreads have narrowed 24 percent and 19 percent respectively from euro-era highs in May. The cost of insuring against sovereign default has also slid and the Frankfurt-based ECB last week bought the lowest amount of bonds since its asset-purchase program began.
“The recent evolutions on the markets show we are in the process of winning back the confidence that we’ve lost, but the path will be long,” German Finance Minister Wolfgang Schaeuble said yesterday in Paris. “To advance on this path and to avoid a repeat of this sort of crisis, we cannot sit on our laurels.”
Still, as Marco Annunziata, chief economist at UniCredit in London warned in the report, the stress tests are a “crucial reality check”. He concludes: If they prompt a negative market reaction, the ECB may face greater demand for liquidity from banks and have to extend the timeframe it lends unlimited amounts of cash to six or even 12 months, potentially delaying interest rate increases.
Stressful for the ECB, too, then.
Related links:
Committee of European Banking Supervisors – CEBS homepage
Fed (still) positive on stress-tested banks – FT Alphaville
Stress test capital shortfall could have been $68bn bigger - FT Alphaville
Friday’s stress test Shakespeare – TheSource