Stress tests cover more EU banks

Tests of how European banks can face up to critical danger have been expanded to cover 91 banks, four times as many as last year, accounting for 65 per cent of EU banking, regulators now say.

The committee of European banking supervisors, CEBS, revealed the enlarged extent of the danger tests, known as "stress tests", overnight.

It said that among the dangers it had considered were a sharp unexpected fall in EU economic output, or rise in interest rates driven by sudden strains on sovereign debt markets.

It also said that the outcome of its assessment of the ability of banks to withstand sudden strains on their balance sheets will be published on July 23, as Germany and France had already said.

Stress tests carried out last year, echoing similar tests in the United States in a lesson from the financial crisis which nearly broke the banking system there, had covered only 22 EU financial institutions.

"The scope of the stress testing exercise has been extended to include not only the major EU cross-border banking groups but also key domestic credit institutions in Europe," the CEBS said.

"The objective of the extended stress test exercise is to assess the overall resilience of the EU banking sector and the banks' ability to absorb further possible shocks on credit and market risks, including sovereign risks, and to assess the current dependence on public support measures."

In each EU country it had examined samples of banks by size "so as to cover at least 50 per cent of the national banking sector, as expressed in terms of total assets."

For the whole of the European Union, "the 91 banks represent 65 per cent of the EU banking sector."

A breakdown of the numbers of banks assessed showed, for example, that 27 banks in Spain were examined to cover 50 per cent of the national market, an indication of the fragmentation of Spanish banking, 14 in Germany, but only four in Britain, in France and in the Netherlands.

Concerns about the health of balance sheets at EU banks, and their ability to withstand another shock of the sort which rippled out from the sub-prime loan crisis or collapse of Lehman Brothers investment bank, has caused volatility on financial markets for weeks.

Managers of international investment and savings funds are worried for various reasons.

These range from perceived specific weaknesses in some banks, to the exposure of European banks to debt bonds which they hold, issued by governments now cutting back budgets quickly to reduce overspending.

Some EU countries have been hit by heavy falls in the market value of their debt bonds, and consequent rise in the rate they must pay to borrow.

There is also some concern that if the cutbacks crimp economic recovery from the downturn, banks will suffer in terms of business.

Publication of the stress tests is also set against a background of work at international and national level to require financial institutions to strengthen the capital in their balance sheets and to tighten risk management.

The CEBS said that one of the criteria for its tests was what would happen if economic growth were to fall 3.0 percentage points below forecasts by the EU Commission over two years.

Another criterion related to stress on government debt markets.

The CEBS expressed this in the following terms: "The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to a deterioration in the EU government bond markets".

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