The new round of European stress tests will, yet again, not account for the risk of sovereign default, according to the Financial Times.While some portions of the test are stricter, including rules around core tier 1 capital levels, the absence of a sovereign debt default in the tests is likely to disappoint markets, much like it did the last time around.
It is expected that some of Germany’s Landesbanks, local, government owned banks, will fail the tests due to new, stricter rules. Essentially, these banks consider a certain form of capital they hold to be tier 1 worth, while the European banking authority administering the test does not.
So while we’re likely to get a few more failures this time around, this stress test is likely to still dissapoint.
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