Eoroarea Bank Stress Tests – Primer

All are awaiting the results of bank stress tests in Euroarea to be released tomorrow (23 July 2010). The results would be announced at 6 PM CEST (Central European Standard Time). There are lots of rumors doing the rounds (thanks to eurointelligence for most news items) and most not in the favor. Most saying all banks will pass the tests which is a joke.

I was wondering who would do these tests? What is the methodology? Which are the banks?

Committee of European Banking Supervisors will be conducting the tests :

The Committee of European Banking Supervisors (CEBS) gives advice to the European Commission on policy and regulatory issues related to banking supervision. It also promotes cooperation and convergence of supervisory practice across the European Union, especially through the development of guidelines and recommendations, addressed both to credit institutions and national supervisors. In addition, CEBS contributes to the consistent implementation of these guidelines and recommendations through trainings etc and promotes a common application of Community legislation through peer reviews and other tools. Since 2009, CEBS has been tasked to provide regular bank sector analysis and perform assessments on risks, vulnerabilities, etc on the banking sector and reports its outcomes periodically to the EU political institutions.

There were three press releases which talked about the Euroarea stress tests:

1. 18 June 2010: In this the stress tests were formally announced.

In 2009 following the mandate received from the ECOFIN, CEBS in cooperation with the European Commission and the European Central Bank (ECB) conducted an EU-wide forward-looking stress test of the banking system, building on common guidelines and scenarios, for a sample of major European cross-border banking groups. The results of that exercise were reported to the October 2009 ECOFIN meeting and taken into consideration by the policy makers in assessing the resilience of the European financial system.

Following the discussion of the 2009 results, ECOFIN mandated CEBS to carry out a second EU-wide exercise aimed at assessing, in addition to the overall resilience of the banking sector to shocks, also “the dependence of EU banks on public support and on the amount of capital available for further lending in the context of exit strategies should be provided”.

The EU-wide stress test exercise is a “bottom-up” exercise, where commonly agreed scenarios and key assumptions have been applied to institutions’ internal risk parameters and portfolios, with the aim at better assessing the specificities of institutions in the sample for the exercise.

2. 7 July 2010: This detailed the process of stress tests and provided the list of 91 banks chosen for the tests. FIrst, the methodology:

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. linked to a deterioration in the EU government bond markets.premia countries and the US. The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk EEAThe macro-economic scenarios include a set of key macro-economic variables (e.g. the evolution of GDP, of unemployment and of the consumer price index), differentiated for EU Member States, the rest of the

The exercise is being conducted on a bank-by-bank basis using commonly agreed macro-economic scenarios (baseline and adverse) for 2010 and 2011, developed in close cooperation with the ECB and the European Commission.

On aggregate, the adverse scenario assumes a 3 percentage point deviation of GDP for the EU compared to the European Commission’s forecasts over the two-year time horizon. The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010.

Hmm. So, it seems there will be only one scenario. I read somewhere that perhaps 2 scenarios should have been there. Which type of banks have been chosen?

 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 banks that have been included in the exercise are listed in the Annex. In each EU Member State, the sample has been built by including banks, in descending order of size, so as to cover at least 50% of the national banking sector, as expressed in terms of total assets. For the EU banking sector as a whole, the 91 banks represent 65% of the EU banking sector. Banking groups have been tested on a consolidated level. This means that subsidiaries and branches of an EU cross-border banking group have been included in the exercise as a part of the test of the group as a whole.

See the appendix for list of 91 banks/FIs

3. 9 July 2010: Tells about the when would the results be released and informs about a limited participation conference to explain the findings.

So, this is how the stress tests would be conducted and the list of banks is there as well.

Let’s see what the results show.


One Response to “Eoroarea Bank Stress Tests – Primer”

  1. FDIC Board Proposes Rule to Improve Public Awareness of Deposit Insurance Limits – LoanSafe | Insurance Quotes For Says:

    […] Eoroarea Bank Stress Tests – Primer « Mostly Economics […]

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