LONDON — European banking regulators moved Wednesday to downplay reports that some of the new “stress tests” on banks due later this year would be less strict than the much-criticised tests carried out in 2010.
The Financial Times (FT) reported that the European Banking Authority would soften parts of the tests, but the EBA chief later retorted that this was not the case.
“It is a fact that the scenario of the 2011 EU-wide stress test is tough, and more severe than last year,” EBA chief Andrea Enria said in a statement.
“You need to look at the whole package of what is in the new stress tests, not just pick on a few points out of context.”
The EBA was set up to replace the much-criticised Committee of European Banking Supervisors, which lost credibility after Ireland was forced to seek a bailout to save its two main banks despite them passing the 2010 stress tests.
Of the 91 European banks tested, only seven failed — five Spanish, one German and one Greek.
Citing EBA documents, the FT reported Wednesday that the new tests would simulate the impact of a drop of 15 percent in equity markets, compared with the more stringent 20 percent worse-case figure used in last year’s test.
The tests would not include a spike in commodities prices which is already underway.
It would simulate losses of 20 percent on the value of Portuguese sovereign debt and 15 percent on Spanish bonds, which is less than what some analysts are forecasting is possible if eurozone members are forced to restructure debt, the FT reported.
But an EBA spokesperson said that regulators were still carrying out a consultation process and that the FT had put its interpretation on documents sent to banks for feedback.
“There is still a debate going on and important technical aspects have still to be sorted out,” an EBA spokesperson told AFP.
The EBA said that tests should be evaluated on four key issues.
One is the issue of the magnitude of economic shock, and it said the 2011 tests are planned to use a four percent contractions over two years, compared to three percent in 2010.
Second, it said the tests will this year limit the ability of banks to shift their business during the exercise.
Third, the capital adequacy ratios will be tightened.
Finally, the tests will assume increased borrowing costs, which will impact on their profitability and capital adequacy.
However, the Wall Street Journal Europe reported that individual countries will be able to use their own definitions of Tier 1 capital — rock-solid assets such as shareholder equity — which will make the stress tests less transparent.
A senior London-based bank analyst told Wednesday’s FT: “There is nothing in what has emerged to change the market’s views about this process. It was a joke last time. Why is it not going to be a fudge this time?”
The reports come two days after EBA chairman Andrea Enria told the FT he was in fact preparing a ‘near fail’ category to make the tests more credible and to use it as a trigger for a thorough recapitalisation of Europe?s weakest banks.