Europe's banks have been told to put a figure on potential losses from holdings in Greek and other sovereign debt to ensure a health check of lenders realistically reflects the deepening euro zone crisis, Reuters reported. Sources involved in the European Union stress test of 91 banks said regulators are "tightening the thumb screws" on lenders to spell out the impact of a government debt default -- but without having to make the politically unacceptable assumption in the test that a default can happen. Test results will be published on July 13, the sources added. Until now fallout from the sovereign debt crisis was focused on a bank's day-to-day trading book but most government bonds are held on a bank's core banking book. The disconnect has become even starker as sovereign woes get worse, giving regulators a bigger headache as they try to avoid another stress test flop. "Banking books are being stressed much more harshly than last year and than in the original draft of this year's stress test. That will help increase the credibility of the tests," an official in charge of the stress test at his bank said. "That will result in factually putting countries like Greece on default status," the official added. The test is aimed at shoring up investor confidence in the sector which is already being hit by the prospect of tougher regulation eating away into profitability. After last year's test flopped -- Irish banks had to be bailed out after passing -- the fledgling European Banking Authority (EBA) which is conducting the health check, is staking its reputation on delivering a credible exercise this time round. Europe has raised the bar for banks this year, demanding they hold more, better-quality capital to withstand a possible 2-year recession. They have to hold more than 5 percent of core Tier 1 capital to pass the exam, or raise capital. -- SPA
