Photo: PIAZZA del POPOLO
The European banking stress tests will only review bonds traded by banks, not bonds they intend to hold to maturity, according to Bloomberg (via The Guardian).No sovereign defaults will be simulated, according to the Bloomberg story.
“The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to EU documents acquired by Bloomberg.
As we said over a month ago, no serious approach to sovereign debt makes the tests useless.
This adds to concerns brought this morning that 10 banks have failed the tests. If 10 banks have failed, and simultaneously the tests were viewed as weak, that may bring serious pressure on the European banking sector.
Or pressure on the euro, which can be seen already.
Clearly markets are already responding. They now doubt the quality of the test. If banks still fail the weak test now, the ADR’s traded on U.S. exchanges may be in for a late afternoon battering.
This can already be seen in the losses experienced by Deutsche Bank, which fell after this information leaked.