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Investors Can Toughen Bank Stress Tests: CEBS Head

Friday, 23 Jul 2010 | 4:19 PM ET

The results of pan-European stress tests released by the Committee of European Banking Supervisors (CEBS) are detailed enough for investors to work out for themselves, losses that banks might incur in case of sovereign defaults if they wish, CEBS chairman Giovanni Carosio told CNBC in an interview Friday.

Just 7 out of the 91 banks tested did not meet the 6 percent Tier 1 capital ratio threshold set by the tests.

Some market participants were worried that the stress tests did not go too farin showing how a deep crisis would affect banks in the European Union, because a sovereign default was not taken into consideration.

Specifically, investors were concerned that stress tests do not require any haircut for sovereign debt classified as "hold to maturity" and which is retained on the banking books, assuming only the possibility of losses due to sovereign debt held in trading portfolios.

Some speculated that banks could shift much of their sovereign debt burden into their banking books and thus look healthier than they are.

But Carosio believe the stress tests are providing all the information that is needed.

"The information about the amounts the banks own is revealed in the tests and in the information that we provided on the Web site. Everybody can read these figures and make their own assumption," Carosio said..

The European Debt Crisis - See Complete Coverage
The European Debt Crisis - See Complete Coverage

Some analysts said the tests were tougher than the market had expected them to be, while others said they did not go far enough.

The tests assume an average fall in gross domestic product of 3 percent, an increase of 6 percent in unemployment in a 6 percent hike in market interest rates.

Haircuts on sovereign debt were tougher than most estimates; for example, a 42.2 percent haircut was estimated on a 10-year Greek bond against some expectations for a 40 percent loss in value.

The assumptions mean the tests were much tougher than the ones carried out in the US last year, the CEBS said.

"You should really look at what were the assumptions behind the stress tests," Carosio said. "You can say that the scenarios that we used were very severe, even implausible events."

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