Stress Tests Compromised by Greek Non-Default

European regulators’ attempts to bolster confidence in the region’s banking industry today are being undermined by their unwillingness to test for a Greek default and a mutiny by Germany’s Landesbank Hessen-Thueringen.
The European Banking Authority will release the results of the stress tests for 91 banks as part of an effort to reassure investors the region’s banks have sufficient capital. Helaba, as the landesbank is known, refused to allow the EBA to publish its results in full, saying the EBA’s data “would lead to a halving of the core capital without legal grounds.” German regulator Bafin has also attacked the London-based EBA. Bafin Chairman Jochen Sanio said last month the watchdog lacks “legitimacy.”
The assessments are the first by the EBA since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros ($5 billion) more capital, a 10th of the lowest analyst estimate. The EBA can’t force banks to take part, and can’t test for a sovereign default, which policy makers are struggling to avoid. Greece has about a one in 10 chance of avoiding default, credit default swaps show.
“The EBA has no teeth,” Bob Penn, financial-services partner at Allen & Overy LLP, said in a telephone interview in London. It can’t “make requirements from any individual bank because the framework was set up to allow national regulators to keep supervisory powers,” he said. “This isn’t Helaba poking a stick in the eye of the EBA, it’s Bafin.”

Results Released

To pass the stress test, the banks being scrutinized will need to maintain a core Tier 1 capital ratio of more than 5 percent in a stress test. The criteria include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets, as well as trading losses on sovereign debt not held to maturity. The results will be published from 5 p.m. U.K. time today.