Publish or be damned

Stress tests: Europe's banks must come clean on their sovereign debt exposures. The 91 lenders that are sitting Europe's stress tests have been asked for detailed information on their government bond holdings, according to a document obtained by Reuters. The Committee of European Banking Supervisors, which is overseeing the exercise, has promised not to publish the data. But if some banks come clean, others will face pressure to follow suit.

Worries about exposure to euro zone sovereign debt - especially Greek, Spanish and Portuguese bonds - are at the heart of Europe's banking woes. The stress tests must therefore address these concerns. Regulators have already wimped out by not explicitly asking banks to imagine a sovereign default. This may allow some lenders with large government bond portfolios - like the Greek banks - to pass. But if banks were forced to spell out their sovereign holdings, investors could at least make up their own minds.

Regulators already have the information. CEBS has asked banks to list their holdings of the debt of 30 different governments. It has also asked for a breakdown of bonds held in the trading book, which are valued according to market prices, and the banking book, where lenders do not have to recognise losses unless there is a default.

CEBS says it will not publish this information. That means it is up to national regulators and banks to decide whether to come clean. If some banks take the lead and publish the CEBS template - known as Annex 3 - on Friday afternoon, others will come under intense pressure to follow suit. Publishing sovereign bond holdings will not guarantee that the stress tests succeed. Most banks will probably still pass without being forced to raise additional capital, raising serious doubts about the whole exercise. Disclosure of other information, like the performance of banks' loan portfolios under stressed scenarios, is still likely to remain poor.

Nevertheless, publishing each bank's sovereign bond portfolio in a common template would be a start. It could even create a race to the top, where banks and regulators compete to offer the most detailed disclosure. Then the stress tests could truly be considered a success.