Updated with report on number of banks subject to stress tests.

Some reports suggest that the stress that European banks may be tested for include a 17% loss on Greek bonds and a 3% loss on Spanish bonds.

German bonds and possibly French bonds will not be stressed -- that is to say, the stress test will not include a long on bonds from those two.

While these details have yet to be confirmed, the stress on Greek and Spanish bonds seem too modest. Greece pays 750 bp more than Germany on 10-year bonds today.

If one were to assume a 17% haircut, the pricing would suggest a ball park odds of that haircut at about 44% (750/17)-- on the idea that the premium over the risk free assets is a function of the size of a haircut and the odds of a haircut.

The 3% haircut in Spain, given the premium of 205 bp would suggest almost 70% chance of that side haircut (205/3).

Moreover because the ECB has bought about 59 billion euros worth of sovereign bonds, mostly believed to be Greek, the price discovery process in the periphery bond markets may be skewed.

The credit default market seems to be pricing in the odds of a larger haircut.

This is only preliminary reports and a quick back-of the envelope calculation, but these kind of numbers do not seem particularly robust that would ease market anxiety. If more people conclude this, the euro may come off.

The Committee for European Bank Supervisors has revealed some details about the pending stress tests. A total of 91 banks in the EU will be tested. It appears the stress being tested for is twofold: A 3-percentage point deviation of GDP for 2010 and 2011 from the EU's economic forecasts and a deterioration of sovereign risks beyond what was experienced in early May. The tests would assume for their "adverse scenario" economic output that is 3 percentage points less than European Union estimates over a two-year time period.

"The sovereign risk shock in the EU represents a deterioration of market conditions as compared to the situation observed in early May 2010," the statement said.

The results, which are to be published July 23, and the 91 banks covered in Europe represent 65% of the European banking sector.

The purpose of the test is to determine just how resilient the EU banking sector is and whether it can absorb future possibble shocks on credit and market risks, the statement said. It also assess dependence of the banks on public funding.

The banks being tested represent almost two-thirds of the EU banking sector and at least 50% of the national banking sector in terms of assets. The German Landesbank sector and Spanish savings banks will be included. The results will be reported on both the aggregate level and on a bank-by-bank basis.

The list includes the regional banks in Spain, which are under serious pressure, as well as in Germany, and other large banks such as France's BNP Parisbas, Credit Agricole and Societe Generale and Germany's Deutsche Bank AG and Commerzbank AG.

Banks in the troubled Mediterranean countries that have been hard hit by the global economic crisis are included but so are those from Scandinavia and the United Kingdom.

There has been little market impact from the news. The main consideration today is the elevated risk appetite of the rising equity market.

The Associated Press contributed to this report.
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