The European Banking Authority published on Friday some of the parameters for this year΄s stress tests on the European Union΄s largest banks, according to Dow Jones Newswires.
The baseline scenario, devised by the European Central Bank, reflects official expectations of what is actually likely to happen. The adverse scenarios, which envision a combination of negative shocks, assume the following deviations from the baseline over a two-year period:
Sovereign bonds -but only those held in the trading books of the participating banks- will be subjected to a range of markdowns relative to their price at the end of 2010, while the European Banking Authority stresses that these prices were already sharply marked down as a result of last year΄s turmoil in sovereign debt markets.
The range of haircuts varies according to the sovereign issuer and the maturity of the bonds affected, while they are benchmarked against German sovereign debt, which is marked down by 2.1%, 3.5% and 6.2% in the case of five-, 10- and 15-year debt, respectively.
The haircuts applied to Greek bonds include 5.2% for two-year debt, 12.6% for five-year and 17.1% for 10-year.
For Ireland, they are 5.2% for two-year bonds, 12.6% for five-year and 19.1% for 10-year.
For Portugal, they are 5.5% for two-year, 11.6% for five-year and 19.8% for 10-year debt.
source: CAPITAL
