Sovereign default a lesser problem than any macro shock

The stress test applied to 91 European banks. It involved modelling macroeconomic and sovereign debt stresses over 2010 and 2011, and starting with end-2009 capital  levels.

The Committee of European Banking Supervisors, in its overview of the test results, said the benchmark macroeconomic scenario assumes a mild recovery from the severe downturn of 2008/2009.

The adverse scenario assumes a "double-dip" recession.

For the euro area, the GDP growth under the benchmark scenario was assumed at 0.7 per cent in 2010 and 1.5 per cent in 2011.

Under the adverse scenario the euro area would see a decrease of GDP of 0.2 per cent in 2010 and a fall of 0.6 per cent in 2011.

The aggregate tier one capital ratio would decrease under the adverse scenario, including sovereign shock, from 10.3 per cent in 2009 to 9.2 per cent by the end of 2011.

The CEBS noted that current tier one capital levels include approximately €170 billion of government-provided capital support.

The CEBS said the downward pressure on capital ratios under the adverse scenario including sovereign shock mostly stemmed from impairment losses (€472.8 billion over the two-year period) and trading losses (€25.9 billion).

Losses associated with the additional sovereign shock would reach €67.2 billion over the two-year period.

The average two-year cumulative loss rates associated with these losses are 3.0 per cent for corporate exposures and 1.5 per cent for retail exposures under the benchmark scenario.

Under the adverse scenario these losses were 4.4 per cent for corporate and 2.1 per cent for retail exposures.