* EBA gives banks fresh guidance on valuing Greek bonds
* Says needed to “address inconsistencies, excessive optimism” (Adds details, background)
By Steve Slater
LONDON, June 23 (Reuters) - Europe’s top banking watchdog has warned banks to be more realistic about the value of Greek bond holdings, raising the possibility an industry-wide health check will force them to raise more capital.
With only weeks to go before the results of the so-called stress tests, the European Banking Authority (EBA) said on Thursday it was closely monitoring the deteriorating situation in Greece and had given banks additional guidance “to address inconsistencies and excessive optimism” on sovereign exposures.
The regulator is putting 91 banks under the spotlight to see if they are strong enough to withstand a two-year recession. The results are expected to be revealed on July 13.
Greece’s deepening crisis has reignited concern that banks are not taking a big enough “haircut”, or loss, on their Greek and other peripheral euro-zone government bonds.
Until now, any talk of default has been dismissed by politicians and regulators alike, while banks have made assumptions based on historical sovereign debt default probabilities rather than the possibility of countries such as Greece defaulting.
However, with the Greek debt situation worsening, there is a widespread view that if the stress test is seen as too soft, like last year’s, it will be regarded as a flop and fail to restore confidence among investors.
The parameters for haircuts to banks’ trading book assets had been adjusted to reflect current market values for sovereign risk and banks’ cost of funding, the EBA said in a statement.
The EBA said banks also need to assess their banking book assets, which are typically held to maturity and not subject to day-to-day fluctuations, against sovereign debt in the same way as for all credit risks.
Banks had been told to put a figure on potential banking book losses, Reuters reported this week.
The EBA said no haircut is formally applied to these banking book assets and no default is assumed.
But it warned that estimates of the probability of default and so-called “losses given default” did provide a measure of the risk a bank ran and what it must set aside for any future losses.
“With this kind of detail included, more people are likely to believe the results when they are published. Last time a lot of people felt they were some big omissions,” a banker working in the bond markets said. “A default is a possibility and if it does happen, here is an idea of where the banks stand.”
Euro zone leaders want banks and other private bondholders to roll over as much as 30 billion euros of Greek debt as part of a new voluntary package of emergency support for Athens that financial sources say could total 120 billion euros.
No details of how this scheme would work have yet been finalised, but Franco-Belgian banking group Dexia is prepared to voluntarily roll over its Greek debt, joining a growing list of lenders prepared in principle to take part in a rescue, a source said. Banks began running the stress test several months ago, and responses are being more thoroughly tested this year by peers. That process is still underway, with results due back in by the end of this month. (Reporting by Steve Slater; Additional reporting by Matthew Attwood, assistant editor, IFR; Editing by Douwe Miedema, David Hulmes and Alexander Smith)