Still in the dark

9 September 2010 By Nicholas Paisner

Europe’s bank health check was designed to improve transparency. Now the body overseeing the test has admitted it may have understated some government bond holdings. The results won’t change. But the episode hardly boosts confidence in Europe’s lenders or its regulators.

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The Committee of European Banking Supervisors on Sept. 8 released a statement providing further detail on banks' disclosure of their holdings of European sovereign debt. CEBS asked banks to provide the disclosure as part of the EUwide stress test published on July 23. The exercise covered 91 banks, with total assets of 28.0 billion euros ($35.7 trillion) as of Dec. 31 2009, representing approximately 65 percent of the EU banking system.

The majority of European banks disclosed gross exposures and net exposures. Net exposures were defined as "net of collateral held and hedging."

CEBS has now admitted that banks were allowed to deduct offsetting short positions when reporting their gross exposures.

A Wall Street Journal Article on Sept. 7 suggested that the stress tests understated some lenders' holdings of potentially risky government debt.

For example, Barclays' stress tests disclosure said its exposure to Italian bonds was about 787 million pounds. But this excluded government bonds the bank was holding for trading purposes, reducing the figure by about 4.7 billion pounds, the WSJ said.

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