in publishing the test methodology<\/a>.<\/p>\nThe disclosure means that any market analyst will be able to assess the ability of the banks being assessed to withstand an EU government default – something that many analysts expect to happen once current bail-out loans expire in 2013.<\/p>\n
The new regulatory tests will cover lenders that hold over 60% of all EU banking assets.<\/p>\n
They will also include their own “sovereign shock” scenario, as was the case in the previous round held in 2010.<\/p>\n
The scenario will involve cutting the market value of the bonds of countries such as Greece, Portugal and Spain by much more than the lows seen late last year.<\/p>\n
However, by excluding a formal default from its analysis, it means that banks will not need to write down the value of the government bonds they hold for the long term.<\/p>\n
Consistency<\/span><\/p>\nIn the “adverse scenario” of the tests, the current growth forecasts for the EU will be lowered by four percentage points, to 0.4% in 2011 and zero growth in 2012.<\/p>\n
That compares with only a three percentage-point growth shock applied in the previous tests.<\/p>\n
The new test will also apply bigger stresses of unemployment levels and housing prices across the EU.<\/p>\n
Lower house prices would force banks to cut the value of mortgages in their balance sheets.<\/p>\n
The previous round of tests – which was run by the EBA’s predecessor, a supervisory board composed of national regulators – was also accused of being applied inconsistently across different EU members.<\/p>\n
The newly-created banking regulator hopes to address this criticism by imposing a common and more restrictive definition of “core tier one capital” – the cushion that regulators require banks to maintain to absorb losses on their loans and investments.<\/p>\n
The EBA will also insist that the banks use the balance sheets they reported in their accounts at the end of 2010 for the test.<\/p>\n
This will avoid the possibility of banks cheating by temporarily shifting exposures off their balance sheet for the duration of the tests.<\/p>\n<\/p><\/div>\n<\/p>\n
See the original post here:
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