EBA: Greek, Irish and Portuguese domestic banks most vulnerable to sovereign default

Greek, Irish and Portuguese domestic banks are most vulnerable in the event of their sovereigns defaulting, the results of this year’s stress tests on Europe’s banking sector found.

Eight banks failed the stress tests, sixteen more were close to the minimum core capital ratio requirements, while one refused to submit results. Regulators have vowed to clamp down on the banks needing stronger balance sheets within three to eight months.

In an unprecedented move, the European Banking Authority (EBA) this year decided to force banks across the Continent to disclose the extent of their sovereign risk.

The majority of Greek sovereign debt holders are in Greece itself, the results showed, with 67% of that debt held by its domestic banks. Similarly, Greece institutional exposure is held mainly by Greek banks.

But Cyprus holds 6% exposure to Greek sovereign debt, and 12% to Greek institutions. France and Germany had the next largest exposures, confirming fears that a Greek default would hit those country’s banks. German banks have a 9% exposure to Greek sovereign debt and 10% to its institutions, while France’s banking sector has an 8% exposure to Greece and 5% to its institutions.

Of the 90 banks surveyed, a total exposure of €98.2bn to Greek sovereign debt existed at end 2010, although some of that exposure may have since decreased, the EBA said.

Sovereign debt exposure for Ireland and Portugal painted a similar picture to Greece, with most of that debt held domestically. Total exposure to Irish sovereign debt of the 90 banks surveyed is €52.7bn, with 61% of that held domestically. Exposure to Portugal amounts to €43.2bn, with 63% held domestically.

EBA representative Andrea Enria said the results highlighted the “interconnectedness we have now between the sovereign situation and the bank situation”.

Responding to criticism on what signals are being sent to the market about Ireland at a time it is trying to repair its economy, Enria said its stress tests were already being conducted at a higher capital thresholds of 10%. He said the same applied to Portugal, and similar action will be taken in Greece. As per guidelines set out by the European Securities and Markets Authority, banks must meet core capital ratio requirements of 5%.


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