EU Bank Stress Tests on Sovereigns

EU Bank Stress Tests on Sovereigns

The 2011 European bank stress test results, due Friday July 15, will be closely scrutinised, and most notably on sovereign risk. This year, the EBA hope that tougher guidance and capital criteria, and substantial transparency will go a long way to winning market credibility. We estimate that under the new guidance, sovereign losses in the adverse scenario could amount to €50bn, compared to €28.2bn in 2010. And, adding the tougher capital criteria, the capital shortfall in the 2011 tests is likely to far exceed the very modest €3.5bn identified last year. The real issue is how easily banks, if needed, can raise new capital and whether governments have the necessary strength to offer “backstop measures”. The risk is to see the already frail periphery suffer yet more market aversion.