FRANKFURT (MNI) – Following is the full text of the statement
issued Thursday by the European Banking Authority on the treatment of
sovereign exposures in the 2011 EU-wide stress test:

“The European Banking Authority is closely monitoring the situation
and the difficult financing circumstances in Greece. The stress test
results will allow an assessment of potential systemic impacts stemming
from the current market conditions on sovereign risk and banks’ cost of
funding.

In early June, the EBA provided banks with additional guidance in a
number of areas to address inconsistencies and excessive optimism,
including the treatment of sovereign exposures.

The parameters for haircuts to assets held in the trading book have
been adjusted, in some cases, to reflect market developments. These
haircuts reflect actual losses that are related to market values.

In the banking book, the EBA expects all banks to assess risks
against sovereign debt in the same way that all credit risks in the
banking book are assessed. That is through estimates of the
probabilities of default (PDs) and losses given default (LGDs). No
haircut is applied to these holdings and no default is assumed. However,
PDs and LGDs do provide an assessment of the risk associated with an
exposure and therefore of the money that a bank must set aside for any
future losses.

To improve consistency in the stress test the EBA provided a simple
benchmark to be used by banks in the stress test when assessing the
appropriate risk parameters of sovereign risk.

This benchmark referred to external ratings to ensure consistency
and banks were asked to assess the risk of an hypothetical stressed
scenario of rating agency downgrades. A restriction was set on rating
movements so that at no point would a default be considered but
provisions against future losses should be made.

Banks will also provide full disclosure on the size of the
sovereign exposures of all banks in the sample, broken down by book,
country and maturity.”

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