Stress tests ‘will be tougher’

“It is a fact that the scenario of the 2011 EU-wide stress test is tough, and more severe than last year,” said EBA chairman Andrea Enria.

“You need to look at the whole package of what is in the new stress tests, not just pick on a few points out of context,”

Mr Enria said banks will be tested for their resilience in the face of a four percentage points drop over two years from forecast economic growth, compared with three percentage points in the 2010 test.

Furthermore, the probability that the scenario proposed this year will occur is materially lower than last year, in part because of the current economic situation and because the forecasts are more favourable.

There will also be tougher assumptions to prevent banks from getting around the stress test by shifting assets around their balance sheets, the EBA said.

“In 2011, the EBA will be setting a more stringent capital benchmark,” the EBA said. Last year only seven out of 91 banks failed to meet the six per cent Tier 1 capital pass rate.

The EBA will present its test scenarios to banks tomorrow, saying “further changes are possible”.

It reiterated it will publish the final scenarios on March 18 and the methodology itself in April.

Analysts say the test should include a sovereign debt default so there is a “haircut” or loss on government bonds held on a bank’s main banking book.