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Originally published Wednesday, March 9, 2011 at 9:48 AM

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EU bank supervisor defends stress tests

The European Union's banking supervisor on Wednesday hit back at accusations that economic shock scenarios foreseen for this year's bank stress tests are more lax than those of 2010.

AP Business Writer


The European Union's banking supervisor on Wednesday hit back at accusations that economic shock scenarios foreseen for this year's bank stress tests are more lax than those of 2010.

"The scenario of the 2011 EU-wide stress test is tough, and more severe than last year," Andrea Enria, the chairman of the European Banking Authority said in a statement.

Last summer's stress tests were widely seen as a failure as several banks that passed needed to be bailed out soon after.

A new round of tests this year - whose results are due to be published in June - are central to the EU's efforts to solve the financial crisis that has rattled the continent for more than a year.

Analysts say that concerns over persistent weaknesses in Europe's banking sector are not only creating uncertainty over the fiscal health of countries like Ireland or Spain, but also about the impact trouble in those states would have on banks in stronger countries like Germany and France.

This year's tests include a drop in economic output growth of 4 percentage points over two years, compared with just 3 percentage points in 2010, the EBA said.

"The probability that the scenario proposed this year will occur is materially lower than last year, in part because of the current economic situation and because the forecasts are more favorable," the supervisor said.

The EBA's defensive statement came after papers detailing the testing scenarios were leaked Tuesday. But the supervisor stressed that the leaked documents were not final and that the full scenarios will be presented to banks on Friday.

The EBA was set up in January to succeed the Committee of European Banking Supervisors. Enria has been working hard to present the new supervisor as more powerful than its predecessor, which had a difficult time pushing tough tests past national regulators watching out for their own banks.

In this year's tests, it will be harder for banks to move business off their balance sheets to avoid closer scrutiny and more stringent capital benchmarks will be applied, the EBA said. On top of that, banks will be faced with higher funding costs, which would hurt their profitability and capital levels.

Perhaps most importantly, the EBA said the 2011 tests will be subject to a peer review, in which banking regulators from a different country will make sure the scenarios are implemented consistently and possible risks, such as exposure to the bonds of financially troubled countries like Greece or Ireland, are disclosed accurately.

"The critical process is the measurement not the yardstick," said Nicolas Veron, a banking expert at Brussels-based think tank Bruegel.


Whether peer reviews are enough to ensure a proper implementation of the tests remains to be seen, Veron said.

Stress tests conducted in the United States in 2009 were reinforced by "an army of inspectors that were sent by the Federal Reserve," said Veron. "In Europe, we don't have that."

In contrast to the European tests, the U.S. tests were deemed a success and have been credited with re-establishing confidence in the U.S. financial system.

In Europe's most recent stress tests, only 7 of 91 banks failed; and they were asked to raise a total of euro3.5 billion. In the U.S., 10 out of 19 banks failed and had to boost their capital levels by almost $74.6 billion.

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