Markets Worry Stress Tests Too Easy on Sovereign Debt


All but a handful of European banks passed their stress tests but investors remained worried about the methodology, which many viewed as too easy on sovereign debt.

Among those that failed were Germany's HRE, Greece's Atebank and Spain's Banca Civica. But most banks passed, according to the early results.

But what worried investors was that the stress tests exclude the possibility of a sovereign default. They don't require any reduction in value ("haircut" in trader parlance) for sovereign debt classified as “hold to maturity,” assuming only the possibility of losses due to sovereign debt held in trading portfolios.