European Banking Authority (EBA) set new requirements for banks in the upcoming stress test that obligates banks to disclose their exposure to sovereign debt, however, banks will not have to consider the impact of formal default set by the EU.
The newly created banking regulatory for the European Union statement said that banks are expected to disclose their exposures to sovereigns broken down by accounting portfolios, maturities and countries.
The test will cover lenders that hold more than 60% of all EU banking assets, where regulators will analysis the bank's ability to sustain a debt crisis by performing sovereign shock tests, which involves cutting market value of bonds.
EBA chairman Andrea Enria said We have learned from last year's exercise. We have strengthened the exercise quite significantly. We want to run a credible test, adding that the tests aredesigned to assess the resilience of the European banks to hypothetical external shocks.
The statement continued that The stress test assesses what might happen to banks if external circumstances deteriorate markedly, and helps to identify vulnerabilities and relevant remedial action, including strengthening capital levels where this is needed, in addition The adverse scenario, designed by the ECB, is more severe than the 2010 CEBS' exercise in terms of deviation from the baseline forecast and probability that it materializes, It includes a marked deterioration in the main macro-economic variables, such as GDP, unemployment and house prices.