The European Banking Authority said late on Thursday that it had updated its stress tests for banks to take account of worsening market conditions for sovereign debt, citing the ?difficult financial circumstances in Greece? and «excessive optimism» in the way some banks had been treating their sovereign exposure in the tests.
“The European Banking Authority is closely monitoring the situation and the difficult financial circumstances in Greece,» the regulator said in a statement. It said the haircuts that banks must take on sovereign debt in their trading books have been adjusted to reflect current market conditions. The European regulator added that banks will have to provide full disclosure of their sovereign debt holdings when the stress test results are released, most probably in July.
The EBA’s stress tests, which were launched in March, aim to restore confidence in the bloc?s banking system, which has been shaken by many banks? holdings of debt issued by governments in debt-ridden countries such as Greece, Portugal and Ireland. Those fears have intensified over the past month amid mounting expectations that Greece will need to restructure its debts.
An EBA spokeswoman told the Wall Street Journal that the agency’s ongoing stress tests of 91 banks across the European Union will now require lenders to take stiffer «haircuts» on their holdings of certain countries’ sovereign debt. The EBA spokeswoman, Franca Rosa Congiu, said this was «in line with recent market movements for those countries most adversely affected.”