Committee of European Banking Supervisors (CEBS), the umbrella body for Europe’s banking regulators, has released a list of 91 banks that will be subject to stress-testing across Europe, as it seeks to reinstate faith in the deteriorating sector. CEBS said that the results of the stress tests will be disclosed on July 23, 2010.
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, said CEBS.
The list of 91 banks represent 65% of the total EU banking sector. It includes major UK-based banks like HSBC, Royal Bank of Scotland, Lloyds, Barclays, France’s BNP Parisbas, Credit Agricole and Societe Generale, and Germany’s Deutsche Bank and Commerzbank.
CEBS added that the exercise will be 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.
The 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 EEA 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 premia linked to a deterioration in the EU government bond markets.
On aggregate, the adverse scenario assumes a three 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.
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.