Stress Tests on EU Banks Must Assess Sovereign Risk, Draft Says

June 29 (Bloomberg) -- Stress tests on European Union banks should assess sovereign-debt risks when calculating how lenders would perform against shocks to the banking system, according to a draft EU document.

Finance ministers from the 27 EU countries, who will discuss the stress tests at a meeting in two weeks, also will ask the Committee of European Banking Supervisors, which is conducting the EU-wide exercises, to extend them “to a larger set of banking institutions,” according to the draft, which was obtained by Bloomberg News. The paper, dated June 25, was prepared for a July 12-13 meeting of EU ministers in Brussels.

Questions have arisen over whether the tests would take into account risks tied to the sovereign debt of Greece, Portugal and other European nations. Marking down the value of Greek bonds, even for the purposes of a test, might imply that regulators perceive a debt default as a possibility, which could further unsettle investors, according to analysts.

Bill Winters, the former co-chief executive officer of JPMorgan Chase & Co.’s investment bank, said on Bloomberg Television on June 25 that the main issue is whether the stress tests will include restructuring of sovereign-debt holdings in the results.

“The question everybody’s asking is: Are you going to include scenarios that involve the restructuring of Greek or another countries’ debt in these stress tests?” Winters said. “If you do include it, we already know the answer: There are real issues. If you don’t include it, we’re not sure we’re going to take that test very seriously.”

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