Friday's European bank stress tests revealed that all securitization positions in European banking and trading books were stressed, according to market reports.
The stress tests covered 90 European banks and tested the adequacy of bank capital under both baseline and adverse scenarios, the latter assuming various macroeconomic and asset shocks.
According to a report by the Royal Bank of Scotland, 72 banks reported securitization exposures in their banking books and 29 banks reported securitization exposures on their trading books. Securitized positions held in bank trading books were stressed by pre-defined shocks applied to spreads on the bonds.
Securitization stresses were also used to compute risk weighted assets (RWA) in the trading book as it will be required under CRD III at the end of the year.
The published results showed that banking book securitization RWAs increased by 222% and 455% under the baseline and adverse scenarios, respectively, by the end of 2012 for all the banks that were part of the study.
Stresses on securitization positions held in banking books were cited as primarily responsible for overall RWA increases under the adverse scenario.
"Unlike last year’s exercise, the latest test applied stresses to hold-to-maturity (banking book) sovereign exposures based on an expected loss approach centered on rating migration assumptions, however the end results drew widespread criticism for being too relaxed compared to current market expectations," analysts said.
Bank of America Merrill Lynch analysts said that the stress tests by themselves will likely have little direct impact on the European ABS market.
However, the indirect impact, in terms of investor attitude to bank paper and the reaction of the broader fixed-income markets to the bank tests, will have a more material effect on the European structured finance markets in the near term.
