The European Banking Federation expects a much higher markdown on sovereign bonds in planned stress tests on banks than predicted so far, but their results should be generally positive, two top EBF officials said.
EBF secretary-general Guido Ravoet said in an interview on Friday that the bank health checks, due to be published on July 23, would boost confidence in the financial sector and lead to quick recapitalization of weaker banks.
The tests will include hypothetical losses from sovereign bonds, and German industry sources said the writedowns would range from zero on German bonds, deemed the safest, to 16 to 17 per cent on the bonds of crisis-hit Greece.
But Mr. Ravoet said he expected the haircut to range from 5 per cent to 30 per cent. He declined to disclose the source of the information.
"If we understand well, they [stress tests]apply quite important haircuts on sovereign bonds, 17 per cent on average. That means going from 5 per cent to 30 per cent, depending on the country," he said.
The EBF's head of banking supervision, Robert Priester, also present, added: "It may be an indication of the extreme nature of the stress tests, that the German bonds are weighted at 5 per cent, not zero, which is the assumption currently."
The EBF represents the interests of some 4,000 banks from EU member states as well as Iceland, Norway and Switzerland.
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The test results should still be positive for most banks, which would boost confidence in the financial sector of the 16-country euro zone and 27-nation European Union, Mr. Ravoet said.
"The result will be generally positive, I am convinced of that, but there will be certainly some financial institutions showing that they are not passing the test," he said.
"There will be several institutions within this 91 that have not too good results," he said, referring to the number of banks due to be assessed.
Germany's Landesbank regional lenders and Spain's Caja savings banks may show vulnerability.
"It will probably trigger faster consolidation of the German Landesbanken and … the Spanish savings banks," he said.
Mr. Ravoet warned that European financial centres could lose jobs because of planned restrictions on bank bonuses.
The European Parliament approved the curbs on Wednesday as part of wider efforts to limit risk in a sector shored up by taxpayers. The law takes to the extreme general guidelines agreed to by the Group of 20 group of developed and developing countries.
EU finance ministers are set to endorse them on Tuesday with the curbs taking effect from the start of next year so that only 30 per cent of a bonus can be paid up front, with the rest deferred by up to five years.
"Our concern is … about financial centres outside the G20 framework, like Singapore or Dubai," Mr. Ravoet said.
"Banks or individuals themselves are mobile. Going from London to Singapore is for many traders not such a big step - it is certainly a matter of concern."
He added that there was still no clarity, for example, on whether U.S. banks operating in London would give bonuses according to American or local rules or whether bonuses for this year would be paid according to the new regime.