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Analysts are warned over the risks of using stress test data

The risks to financial stability from analysts using European Union stress test data to conduct their own exams on banks "should not be underestimated", according to a confidential document prepared by EU officials.

There is an expectation the European Banking Authority (EBA) stress test results will be "challenged by market tests", according to the draft document obtained by Bloomberg News. Some EU member states with lower-rated sovereign debt may struggle to borrow money to fund their banks.

Backstops for banks that fail the exams are "are either ready or in the process of being prepared", Polish Finance Minister Jacek Rostowski said after a meeting with his EU counterparts in Brussels yesterday. Ministers agreed they would have measures ready "extremely fast" to assist these lenders, he said.

This year's exams, which will be published on Friday, will include a review of how lenders would handle a 0.5pc economic contraction in the eurozone in 2011, a 15pc drop in European equity markets as well as trading losses on sovereign debt.

The banks will be expected to maintain a core tier 1 capital ratio of at least 5pc under the stress test scenarios, the EBA has said.


Lenders that fail the tests would have to "take action themselves within three months", Mr Rostowski said.

Since the stress test exercise started "the market environment has changed considerably for the worse in respect of the assessment of the possibility of sovereign default", the draft EU document states. "If this scenario persists, the option of giving the banks some months to strengthen their capital position may no longer be available for all banks."

At yesterday's meeting, finance chiefs hunted for ways to cut Greece's debt burden, floating ideas from bond buybacks to a temporary default in an overhaul of a strategy that has failed to contain the debt panic in the region.

"The conditions in EU financial markets and the economy have deteriorated since the stress scenarios were envisaged," Sony Kapoor, managing director of Re-Define Europe in London, said yesterday.

The EU document warns that banks, national regulators and finance ministries will have to address "contagion effects", which could include liquidity risks and a lack of credibility surrounding recapitalisation plans.

Irish Independent