The results of the second batch of bank stress tests were revealed on Friday and not only were they not very stressful, they exposed another threat to the European banking system – this time in the form of commercial and retail loans.
Not Very Stressful
Although the European Banking Authority (EBA) have pointed out that these latest stress tests are more stringent than the first, they still don’t consider the scenario of a European sovereign debt default. And as Ernst & Young points out “the methodology overlooks the potential for damaging feedback loops to develop between banks and the broader economy at times of financial stress”.
An article in today’s Wall Street Journal delves into this subject further. It’s author, David Enrich, states that “The stress-test figures actually understate some banks’ holdings of loans in certain troubled countries. That is because the European Banking Authority required banks to disclose their loan holdings in countries only if they represent more than 5% of the bank’s total loan exposures. As a result, some banks opted not to disclose details of their loan portfolios.”
The stress tests provide details of the loans banks have made to institutions and individuals in troubled eurozone countries. They consist of huge piles of residential mortgages, small-business loans, corporate debt and commercial real-estate loans.
Worryingly the figures reveal that these banks are far more exposed to these commercial and retail loans than they are to sovereign debt.
Far from achieving its aim of restoring market confidence, the EBA has done the opposite. I think it’s safe to say we’ve not heard the last of this.