EU Regulators Plan Bank Stress Tests

By MATTHEW DALTON

BRUSSELS—European Union banking regulators agreed to begin so-called stress tests on the region's banks but said that details of how the tests will work are still being discussed.
The results of the tests will be published in June, the European Banking Authority, the new pan-EU banking regulator, said in a statement after a board meeting.
The tests will examine how well Europe's banks could withstand sharply higher loan losses, falling securities prices and other potential results of a sharp macroeconomic slowdown. The scenario for that slowdown will be designed by the European Central Bank and then be applied to the portfolios of the region's banks by national regulators.
A key question is whether the tests will examine what would happen to a bank's capital if a euro-zone sovereign government defaults. Investors have become increasingly worried that Greece and Ireland, despite receiving emergency financing support from euro-zone governments, will ultimately be forced to default on their debt.
The EBA didn't address this issue and said details of the bank stress-test methodology are still being discussed. The banks will receive the stress-test scenarios by the end of this week, and the scenarios will be published March 18, the EBA said.
The EBA is also discussing with EU governments "back-stop measures" that the governments could use to help banks that fail the tests, presumably funds to inject fresh capital into the banks.

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