EUROPE - Bank stress test data to be released by the European Banking Authority (EBA) at 18.00 CET today will reveal not only whether banks have enough capital to withstand stress scenarios but also the scale of exposure to euro-zone debt and - for the first time - national information on credit exposures to domestic borrowers.
The result, according to the German central credit committee, the ZKA, could be to trigger speculation against some banks by carpet-bagging distressed debt specialists. Germany's Helaba has already pulled out after the EBA told the bank it had failed.
Banks, to pass the EBA's test, will need to demonstrate an above-5% core tier one capital ratio under stress scenarios including significant downgrading of weak sovereigns.
The data release is significant because it comes amid concern over sovereign defaults and the potential for a vicious circle as ratings fall and funding costs rise. At issue are banks' credit exposures to high-debt sovereigns such as Greece and Italy. Earlier this week, European Central Bank Lorenzo Bini Smaghi described the link between sovereign and lenders in Italy as "explosive".
In a report issued this morning, foreign-exchange broker Clear Currency identified the risk of political events impacting the European debt crisis as the "most obvious potential source" of volatility. The report pointed to "debt contagion" spreading to structurally significant EU economies. The broker suggested institutions holding "big chunks" of eurozone debt "have good reason to be feeling nervous".
According to the report, the euro will likely take a hit if any of the 5-10 banks (out of 91) forecast to fail turn out to be Italian. Italy's banking sector holds government bonds worth €900bn due to mature over the next five years. Yields on Italian and Spanish government bonds have surged in recent days.
"The banks thought most likely to be named and shamed include three Greek banks - no, really? - and a clutch of Spanish savings banks," said the note.
"Those which do not pass will have to call on investors to re-capitalise, a request which will not be made easier by the fact that they will just have failed a stress test."
Meanwhile, a research note published by Deutsche Bank forecast 35% fall in global stock markets if euro-zone debt results in a financial crisis as European governments fail to agree a collective policy. The bank pointed out that the failure of measures taken to date had already pushed up equity risk premia.