From historical experience we can see again that the real risk for bank capital investors is not coupon deferral or liquidation, but a temporary liquidity crisis that leads to spread widening and mark-to-market losses. Of course, Tier 1 and Upper Tier 2 issues are more likely to suffer a massive spread widening than less subordinated Lower Tier 2 bonds. The examples above show that in crises prices are driven by traders, not by investors. Therefore, in the short term, fundamental arguments do not play any role. The immediate target for a spread widening is set by historic experiences. Hence, stress testing based on historic data does make sense to create worst-case scenarios and estimate the possible loss that is not exceeded with a high probability.
