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EU banks required to disclose sovereign exposure EU banks required to disclose sovereign exposure
(40 minutes later)
Europe's biggest banks must fully disclose exposures to sovereign debts.Europe's biggest banks must fully disclose exposures to sovereign debts.
The requirement has been stipulated by the European Banking Authority (EBA) as part of a new round of stress tests.The requirement has been stipulated by the European Banking Authority (EBA) as part of a new round of stress tests.
However, banks will not have to consider the impact of a formal default by a European government - a key criticism of the previous tests that failed to anticipate the collapse of Irish banks last year.However, banks will not have to consider the impact of a formal default by a European government - a key criticism of the previous tests that failed to anticipate the collapse of Irish banks last year.
But in other respects, the latest tests will be much stricter, the EBA said. Nonetheless, the EBA said the latest tests will be much stricter.
The new tests will run for the next three months, with the results to be published in June this year.The new tests will run for the next three months, with the results to be published in June this year.
Sovereign shockSovereign shock
Banks will be "expected to disclose their exposures to sovereigns broken down by accounting portfolios, maturities and countries," said the newly created banking regulator for the European Union (EU) in publishing the test methodology.Banks will be "expected to disclose their exposures to sovereigns broken down by accounting portfolios, maturities and countries," said the newly created banking regulator for the European Union (EU) in publishing the test methodology.
The disclosure means that any market analyst will be able to assess the ability of the banks being assessed to withstand an EU government debt restructuring - something that many analysts expect to happen once current bail-out loans expire in 2013. The disclosure will make it easier for market analysts to assess the ability of the banks being reviewed to withstand an EU government debt restructuring - something that many analysts expect to happen once current bail-out loans expire in 2013.
Greece and the Republic of Ireland have already received financial rescue packages from European peers and the International Monetary Fund, with Portugal widely expected to join their ranks in the coming months.Greece and the Republic of Ireland have already received financial rescue packages from European peers and the International Monetary Fund, with Portugal widely expected to join their ranks in the coming months.
Investors have also expressed doubts about Spain's finances, after the country suffered a property market collapse and its unemployment rate rose to over 20%.Investors have also expressed doubts about Spain's finances, after the country suffered a property market collapse and its unemployment rate rose to over 20%.
On Thursday, the Spanish central bank revealed that the proportion of bad loans in the country's banking sector hit a 16-year high in January.On Thursday, the Spanish central bank revealed that the proportion of bad loans in the country's banking sector hit a 16-year high in January.
Spanish lenders were sitting on 110.7bn euros (£bn, $bn) of bad debts, equal to 6.1% of all banking assets, and 11% of Spain's annual economic output.Spanish lenders were sitting on 110.7bn euros (£bn, $bn) of bad debts, equal to 6.1% of all banking assets, and 11% of Spain's annual economic output.
ConsistencyConsistency
The new regulatory tests will cover lenders that hold over 60% of all EU banking assets.The new regulatory tests will cover lenders that hold over 60% of all EU banking assets.
They will also include their own "sovereign shock" scenario, as was the case in the previous round held in 2010.They will also include their own "sovereign shock" scenario, as was the case in the previous round held in 2010.
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.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.
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.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.
In the "adverse scenario" of the tests, the current growth forecasts for the EU will be lowered by four percentage points, meaning the economy would shrink by 0.4% in 2011 and experience zero growth in 2012.In the "adverse scenario" of the tests, the current growth forecasts for the EU will be lowered by four percentage points, meaning the economy would shrink by 0.4% in 2011 and experience zero growth in 2012.
That compares with only a three percentage-point growth shock applied in the previous tests.That compares with only a three percentage-point growth shock applied in the previous tests.
The new test will also apply bigger stresses of unemployment levels and housing prices across the EU.The new test will also apply bigger stresses of unemployment levels and housing prices across the EU.
Lower house prices would force banks to cut the value of mortgages in their balance sheets.Lower house prices would force banks to cut the value of mortgages in their balance sheets.
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.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.
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.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.
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.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.
This will avoid the possibility of banks cheating by temporarily shifting exposures off their balance sheet for the duration of the tests.This will avoid the possibility of banks cheating by temporarily shifting exposures off their balance sheet for the duration of the tests.