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European Banking Authority was hobbled over stress tests
17 July 2011 @ 16:27

The European Banking Authority has attempted to quell City complaints over Friday's widely-criticised industry stress tests, telling analysts they would have liked to have made them harsher but were unable to do so.

Andrea Enria, chairman of the EBA and other officials of the London-based organisation, fielded questions from analysts angered at what were quickly described as an "inadequate" set of tests.

Mr Enria is understood to have outlined the difficulties the EBA faced in conducting the stress tests on the 91 European banks that took part. He was asked why just nine banks failed, requiring total new capital of €2.5bn (£2.2bn).

The EBA was clear in methodology papers it released on Friday that it had faced great difficulties getting different national regulators and banks to provide accurate data.

Describing the process as "constrained", the EBA admitted that figures given by the banks in some cases "materially" changed after being challenged. "It is clear the EBA is telling us it was unable to perform the type of tests it wanted to and considering the difficulties it faced it didn't do a half bad job," said one market professional.

Criticism of the tests was largely on the loss assumptions it used for banks' sovereign exposures.

For instance, the EBA required banks only to take a 15pc loss on holdings of Greek government debt, even though the bonds are currently trading in the market at about half their face value.

"There may be doubts over the credibility of the EBA's ability to conduct a thorough stress test since it appears to have avoided tackling the thorny issue of banks' exposures to sovereign debt," said Syed Kamall, a Conservative MEP and a member of the economic and monetary affairs committee.

"The exposure of banks to sovereign debt is the giant elephant in the room and ignoring this issue could undermine the credibility of these tests," he added.

However, the EBA's document makes it clear that it wants national regulators to force the banks to prepare for the eventuality of a severe worsening in the crisis, even a sovereign default.

"A further deterioration in the sovereign crisis might raise significant challenges, both on the valuation of banks' holdings of sovereign debt and through sharp changes in investors' risk appetite," it said.

It also warned that "funding pressures" could "further affect market confidence in these banks" if not dealt with quickly.

Analysts at Credit Suisse said on Friday they calculated that, using figures published by the banks taking part in the tests, 14 should have failed with a total capital shortfall of €45bn – some 18 times the amount that the EBA said the banks that failed needed to raise.

Tomorrow is the first chance for investors to give their view on the tests. Many observers are expecting a volatile trading session as the markets assess the findings of the exercise.

Source: The Telegraph

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Anne said:
17 July 2011 @ 17:32

Are the Banks not audited externally on a regular basis from which information should have been available? If not, why not? Does the EU not recognise the need for this to be made standard practice and thereby deny them any opportunity to "massage" the figures?

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