18.3.2011
By Simon Miller
The European bank stress test 2011 will include a specific sovereign stress test, the European Banking Authority (EBA) revealed today.
The EBA has published the scenarios and methodology for its 2011 EU-wide stress test, which will be applied on a wide sample of European banks covering over 60% of total EU banking assets.
The specific sovereign stress evisages further falls in the price of some EU bonds from the already stressed levels seen at end 2010. The sovereign haircuts will apply to positions in the trading book where losses would materialise and will be accompanied by full disclosure of all relevant sovereign holdings.
The adverse scenario, is more severe than the 2010 CEBS’ exercise in terms of deviation from the baseline forecast and probability that it materialises.
It also includes a marked deterioration in the main macro-economic variables, such as GDP (which falls four percentage points from the baseline compared to three in the 2010 exercise), unemployment, and house prices. The adverse scenario also includes a specific sovereign stress in the EU leading to further falls in the price of some EU bonds from the already stressed levels seen at end 2010.
The tests will run until June 2011 with results published in mid June.
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