Courtesy of Mish.
Bloomberg reports ECB Said to Favor 6% Capital Requirement in Stress Test when it puts them through a simulated recession later this year, said two euro-area officials.
Strict Rules Revisited
With a hat tip to ZeroHedge, let’s flash back to an October 23 Bloomberg report: ECB Capital Definition Tougher in Stress Test Than Review
The European Central Bank said it will use stricter rules when stress testing banks’ balance sheets next year than it will to study their assets, as it seeks to prove its credentials as the region’s financial supervisor.
While the ECB confirmed that it will require lenders to have a capital ratio of 8 percent, what qualifies as capital will change over the course of the three-part assessment, the central bank said in an e-mailed statement.
Ignazio Angeloni, who is head of the ECB’s financial stability directorate, said in Frankfurt “We’ve got a feasible but safe capital cushion of 8 percent. We want the exercise to encompass all the main sources of risk.”
What About Sovereign Bonds?
Are Sovereign bonds a major source of risk? One would think so. At least one should think so.
Yet, just today, the ECB whitewashed sovereign bonds as a no risk item.
Via translation from El Economista please consider Most of the public debt held by banks not penalized in the stress test.
What looked like was going to be a strict stance of the European Central Bank (ECB) regarding sovereign debt portfolios of financial institutions, is not so.
Until now it was expected that institution had to rate all sovereign bonds “according to the risk they pose to the banks’ capital.” Given that requirement, banks could be forced to provision capital against potential risks from the exposure.
But now ECB president Mario Draghi, says debt that banks hold to maturity will not have to be set at market value or penalized.
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