Within days of the European Banking Authority's stress-test results being announced, the speed of events in the crisis-hit eurozone seemed to devalue them. However, the depth of information held within the tests is very revealing.

As The Banker went to press, eurozone leaders were preparing to meet in Brussels. They faced a historical responsibility. A failure to find a final solution for the Greek crisis will surely threaten the survival of the eurozone. The day before the summit, Italy and Spain were already facing higher funding costs as fear that they will be sucked into the crisis led to a surge in their bond yields.

Reassuring investors about the exposure of Europe’s banks to eurozone sovereign default was supposed to be a cornerstone of the European Banking Authority’s (EBA) stress-test, published in July. The failure of the test to factor in an all-out default of Greek bonds – which many deem imminent – led a swathe of investors and analysts to dismiss the test results. Certainly, they did little to reassure markets; immediately after the results were published, bank shares suffered their worst trading day in eight months.

However, the hullabaloo over the toughness of the test may be missing an important point. Critics should focus on the level of information now available to investors, regulators and others. Ninety-one banks in 23 countries were forced to give information across 3200 different data points. While the European test may have been unfavourably compared to its successful US predecessor, the latter only required 19 banks (in a single jurisdiction) to provide information on about 24 data points. 

If regulators were prevented by political constraints from rigorously stressing that data to the markets’ satisfaction, independent analysts are not. And they are busy number crunching.

Analysts at Citi, for example, carried out what they called a full sovereign book stress-test, with the result that 31 of the 90 banks fell below the 5% minimum core Tier 1 level. Morgan Stanley extended the haircut assumptions in the trading books and applied them to the banking books, concluding that 41 banks fell into the ‘almost failed’ bucket of between 6% and 7%.

And as a result of the industry stress-testing itself, a new minimum level of 7% core Tier 1 is gaining favour among investors.

Other interesting data have emerged, including the fact that the 72 banks which reported securitisations still have €1400bn of securitised exposures in their banking book.

Crucially for the Brussels summit, the test also revealed that Europe’s most systemically important banks are far more exposed to Italy than to Greece – making decisive action to halt eurozone sovereign contagion all the more important.

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