New stress test to cover banks’ bond holdings

EUROPE’S banking regulator began to look again at its tests of the strength of the region’s banks yesterday in two-day crisis talks over the collapse of Franco-Belgian lender Dexia.

Eurozone finance ministers asked the European Banking Authority to reassess how well the banks would survive a write-down in the value of their holdings of Eurozone sovereign debt based on current market value.

The EBA drew stinging criticism for its stress tests in July, which showed 90 per cent of Eurozone banks strongly capitalised in a number of crisis scenarios, but did not test them for a collapse in the value of government debt.

It is now scrambling to rectify that, and will model a writedown in the value of the debt from all peripheral Eurozone states to show how far banks are really short of capital. It will produce a country-by-country breakdown of the level of new capital banks would need if Greek bonds were written down to current market values, the Financial Times reported.

The EBA’s move came as Allianz set out economic forecasts for 2012 based on the Eurozone shrinking as indebted nations left the union. It said the shock could wipe three per cent off German GDP and cost it a million jobs.