As financial markets anxiously await the results of stress tests on Europe’s largest banks, questions are being asked about the level of detail that will be provided on lenders’ exposure to troubled sovereign debt. After all, a key aspect of the test is the ability of Europe’s banks to withstand a “sovereign risk shock”.
New data from the Bank for International Settlements (BIS) provides some new, if vague, clues on banks’ exposure to the countries most at risk under the stress test’s sovereign-shock scenario. The BIS data, updated through the end of March, gives the total exposure of a country’s banks to borrowers abroad. It does not break out the types of debt—personal, commercial, sovereign—but instead gives a general indication of which banks might be the most exposed to Europe’s trouble spots.
Not surprisingly, most banks trimmed their exposure to Greece, Portugal and Spain in the three months to March. The top creditors to Greece and Spain—French and German banks, respectively—cut their lending in the countries by double-digit percentages in the first three months of the year. Meanwhile, in a show of southern European solidarity, Portuguese banks increased their exposure to Greek borrowers by 20%.