Stress tests leave cloud of uncertainty

UK BANKS would see €92.8bn wiped off the value of their loan books under the stress scenario devised by the European Banking Authority (EBA) – but the tests do not give a clear indication of how much of that would be due to sovereign debt problems and did not test the effect of a default scenario.

The test results, published on Friday evening, also predict that Britain’s big four lenders – RBS, HSBC, Lloyds and Barclays – would suffer another €17.5bn in losses in their trading books, €2.9bn of which would be related to “sovereign shock”.

But they do not reveal how much of the €92.8bn in losses from impairments on their banking books – their loan-based, mostly retail-focused activities – is related to sovereign debt.

And the losses modelled in the UK alone dwarf the capital-raising that the EBA says is required to fix Europe’s banks, which it puts at a paltry €2.5bn.

The inconsistency in the tests’ disclosure has added to a sense that sovereign debt has been treated far too optimistically by the EBA while other assets have been treated too harshly.

In aggregate, the EBA claims that sovereign issues will be responsible for just three per cent of loss provisions made by banks over the next two years – equivalent to €11.5bn in the Eurozone overall – but given that banks’ exposure to peripheral nations’ debt alone runs into the hundreds of billions, the estimate is viewed as overly rosy.

The overall effect, according to some analysts, is to perpetuate the damaging uncertainty that has haunted financial markets throughout the sovereign debt crisis.

BGC Partners’ David Buik said: “It is still impossible to calculate how accurate they are with so many banks’ sovereign debt portfolios looking vulnerable, were there to be any defaults.”

Overall, UK banks are estimated to have €23bn in direct exposure to European national debt.