FRANKFURT (MNI) – The following is the first part of a verbatim
text from the Committee of European Banking Supervisors (CEBS)’s
executive summary on the results of the EU-wide stress tests:

The Committee of European Banking Supervisors (CEBS) was mandated
by the ECOFIN of the European Council to conduct in cooperation with the
European Central Bank (ECB), the European Commission and the EU national
supervisory authorities a second EU-wide stress test exercise.

The overall objective of the 2010 exercise is to provide policy
information for assessing the resilience of the EU banking system to
possible adverse economic developments and to assess the ability of
banks in the exercise to absorb possible shocks on credit and market
risks, including sovereign risks. The stress test has been conducted on
a bank-by-bank basis and using banks specific data and supervisory
information.

CEBS has coordinated the exercise and conducted extensive
cross-checks over the results, which were submitted to a peer review and
challenging process in order to ensure the consistency and comparability
of the results. This report provides details on the scenarios,
methodologies and aggregate results of the stress test exercise. Results
of the individual banks and comments on follow-up actions, where needed,
are provided by the banks participating in the exercise and/or their
national supervisory authorities. The results are re-published by CEBS
on its website.

National supervisory authorities routinely conduct stress testing
exercises in their respective jurisdictions, both at system-wide and
individual institutions levels, in order to assess potential risks
facing the institutions individually and/or collectively. The CEBS
exercise is intended to complement these national analyses by providing
a coordinated assessment of European banks, using common scenarios and
methodologies.

However, as with any stress test exercise, the results are not
forecasts of expected outcomes, since the scenarios are designed as
“what-if” situations reflecting extreme assumptions, which are therefore
not very likely to materialise. Against this background, the aggregate
results discussed in this report as well as the individual results
presented by banks and/or national supervisory authorities, aim at
supporting the supervisory assessment of the adequacy of capital of
European banks, and should be interpreted with caution.

Sample of banks

The 2010 stress test exercise has been conducted on a sample of 91
European banks1. In total national supervisory authorities from 20 EU
Member States participated in the exercise. In each of the 27 Member
States, the sample has been built by including banks, in descending
order of size, so as to cover at least 50% of the respective national
banking sector, as expressed in terms of total assets. As the stress
test has been conducted on the highest level of consolidation for the
bank in question, the exercise also covers subsidiaries and branches of
these EU banks operating in other Member States and in countries outside
Europe. As a result, for the remaining 7 Member States where more than
50% of the local market was already covered through the subsidiaries of
EU banks participating in the exercise, no further bank was added to the
sample. The 91 banks represent 65% of the total assets of the EU banking
sector as a whole.

Given the differences in size and complexity, business models,
scope of operations and risk profiles of the institutions included in
the sample, it should be borne in mind that the aggregate results
presented in this report cannot be directly applied to individual
institutions, nor can be directly extrapolated to other banks in the EU.
This point is of special importance as regards the assessment of banks
continued reliance on government support measures, as the sample of
banks contains both institutions making use of various support measures,
and institutions which did not revert to public support.

Risk factors included in the stress test exercise The stress test
focuses mainly on credit and market risks, including the exposures to
European sovereign debt. The focus of the stress test is on capital
adequacy; liquidity risks were not directly stress tested. The exercise
has been carried out on the basis of the consolidated year-end 2009
figures and the scenarios have been applied over a period of two years –
2010 and 2011.

Scenarios used in the exercise

For the purpose of stress testing the credit risk and simulating
the profit and losses, two sets of macro-economic scenarios (benchmark
and adverse) have been developed, in close cooperation with the ECB and
the EU Commission. The benchmark scenario was based on the EU Commission
Autumn 2009 forecast and the European Commission Interim Forecast in
February 2010, with several adaptations to reflect recent macro-economic
developments in a number of countries. The adverse macro-economic
scenario was based on ECB estimates. Within the adverse scenario, the
exercise also envisages a sovereign risk shock, reflecting adverse
conditions in financial markets.

For each macro-economic scenario, a set of key macro-economic
variables (including GDP, unemployment, interest rate assumptions) was
provided for the domestic situation for each EU Member State, the US,
and the rest of the world collectively. Some of the input parameters and
assumptions have been provided by CEBS, and by the participating
supervisory authorities outside of the narrative of the macro-economic
scenarios as provided by the EU Commission and the ECB, notably the
evolution of the real estate prices.

The benchmark macro-economic scenario assumes a mild recovery from
the severe downturn of 2008-2009, whereas the adverse scenario assumes a
double-dip recession. For the euro area, the GDP growth under the
benchmark scenario is assumed at a level of +0.7 (2010) and +1.5%
(2011), whereas under the adverse scenario the euro area would see a
decrease of GDP by -0.2% in 2010 and -0.6% in 2011. For the whole
European Union (EU27) the benchmark scenario assumes a +1.0% growth of
GDP in 2010 and +1.7% in 2011, whereas under the adverse scenario the
GDP would not grow in 2010 and would decline by -0.4% in 2011. On
aggregate and over the two-year time horizon, the adverse scenario
assumes a three percentage point deviation of GDP for the EU compared to
the benchmark scenario. It should be noted that current macroeconomic
developments remain in line with the assumptions provided in the
benchmark scenario.

In addition to a global confidence shock, that affects demand
worldwide, the adverse scenario envisages an EU-specific shock to the
yield-curve, originating from a postulated aggravation of the sovereign
debt crisis. The latter impact is differentiated across countries,
taking into account their respective situation. In particular, related
to prevailing sovereign debt risks, a common upward shift in the yield
curve was applied for each country in the EU (reaching 125 basis points
for the three-month rates and 75 basis points for the 10-year rates at
end-2011), supplemented with country-specific upward shocks to long-term
government bond yields (overall amounting to 70 basis points at end-2011
for the euro area). The rise in short-term rates reflects an assumption
of tensions in the interbank market as was seen during earlier
financial turmoil episodes. The country-specific bond yield shock in
turn accounts for differentiated fiscal situations and related market
perceptions. This results in a set of haircuts to be applied to all EU
sovereign bond holdings in the trading books of the banks in the sample.

For the purposes of the market risk stress test, a set of stressed
market parameters was applied to the trading book positions. It should
be noted that the parameters developed for the market risk stress test
are in-line with the macroeconomic scenarios, and therefore could be
considered as directional, meaning that depending upon the size and
direction of their exposures, banks were able to make gains on certain
portfolios, thereby reducing the overall amount of stress coming from
the market parameters.

Key common assumptions used in the exercise

The exercise was conducted, using common templates, a common
methodology and under key common assumptions. In particular, the
exercise assumes, both for the benchmark and for the adverse scenarios,
a zero growth assumption for the evolution of exposures for market and
credit risks over the whole stress horizon. However, any regulatory
imposed decisions (e.g. restructuring plans agreed with the EU
Commission under the State Aid reviews) as well as management actions
(e.g. capital raisings or divestment programmes) publicly announced
before 1 July 2010 have also been taken into account. The results do not
include any government support of recapitalisation measures taken after
1 July 2010.

[TOPICS: M$$EC$,M$X$$$,M$$CR$,MT$$$$]