* Sees little scope for bad surprises in asset quality
* Says must tackle problem of sovereign-bank loop
* Says must move trading onto supervised exchanges
(Adds Koenig comments on government bonds, benchmarks)
FRANKFURT, Jan 16 German banks may face a
capital shortfall in stress tests on the sector over the coming
months, the head of the country's financial market watchdog
Bafin said on Thursday.
"Depending on how the scenarios and assumptions are set up,
the (stress) test could unearth additional capital needs at some
banks," the financial regulator's President Elke Koenig said in
the text of a speech.
She added, however, she was confident the European Central
Bank's asset quality review, which will precede the stress
tests, held little scope for unpleasant surprises.
Both assessments of banks' health were essential to allow a
proper start to the ECB's takeover of banking supervision in the
euro area from November, she said.
"Both must be stringent but we have to proceed with a sense
of proportion," she said.
Koenig also said regulators needed to change the
preferential treatment given to government bonds, which was
encouraging banks to invest in them and strengthening the
inter-twining of banks and sovereigns, also known as the "doom
Turning to efforts to reform financial benchmarks in
interest rates, money markets, precious metals and foreign
exchange markets following rigging scandals, Koenig said a
proposal made by the European Commission was a step in the right
direction but relied too heavily on self-policing.
"Market transparency and market control are only possible if
huge streams of data can be centralised," she said.
"You therefore have to move as much trading as possible on
these markets to transparent, directly or indirectly supervised
exchanges," she said.
(Reporting by Jonathan Gould, Eva Taylor and Thomas Atkins;
Editing by Ludwig Burger and David Evans)