February 25, 2024

European Bank Stress Tests to Hit German Banks Hard

FRANKFURT — European banks that fail a planned checkup by regulators in June will be required to present a recovery plan that could force some weaker institutions, particularly in Germany, to raise more capital or even wind down their operations, according to documents released Friday.

The European Banking Authority released more details of how it will conduct the so-called stress tests of 90 of Europe’s largest banks. The parameters include more rigorous scrutiny of the capital that banks hold in reserve in case of unexpected losses. That is in response to criticism that a stress test last year was too easy and failed to restore confidence in European banks.

Analysts welcomed what they said is shaping up as a more-thorough examination of the banking system. “The quality of capital has improved dramatically,” said Silvio Peruzzo, euro area economist at Royal Bank of Scotland. “That’s a very welcome step.”

However, the rules appear to create a problem for some German landesbanks by disqualifying a portion of the funds they now use to meet regulations on shock-absorbing reserves.

The stress tests have become a heated political issue in Germany because they threaten to impose unpleasant choices on the state governments and local savings banks that typically share ownership in the landesbanks. The economics minister of the state of Hessen, Dieter Posch, said this week that the state’s landesbank, Helaba, should boycott the stress test, which it is likely to fail.

It is not up to banks, however, whether to participate, officials said. While banks can opt not to disclose the results of their tests to the general public, they must give information to regulators as part of the stress tests and would be required to take action if they failed.

The E.B.A. said in a statement Friday that it expected any bank “showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time.”

While political leaders and representatives of the landesbanks have complained about the stress tests, many economists have said that pressure is needed to force the banks to rebuild their capital reserves and avoid the risk of another financial crisis.

The European Banking Authority, created this year to replace the relatively toothless Committee of European Banking Supervisors, seems determined to conduct a more severe test of banking health, said Nicolas Véron, an economist at Bruegel, a research organization in Brussels.

“It’s really all about the implementation,” Mr. Véron said. “But at this stage they are ticking the right boxes.”

The E.B.A. said that, to pass the stress tests, banks must have a capital cushion equal to 5 percent of assets. The E.B.A. will also narrow its definition of so-called core Tier 1 equity, considered the most durable form of reserves. Only funds that would be immediately available to cover losses will qualify, the E.B.A. said.

The banking authority said that emergency government aid would still qualify as core capital. That is good news for WestLB, one of the most troubled landesbanks. Its capital buffer includes €3 billion, or $4.3 billion, it received from the federal government in a bailout.

Commerzbank, a commercial lender in Frankfurt, is another bank that received billions in capital from the German government. But the bank already said this week that it would issue new shares and take other measures to repay the aid and bolster its capital.

But the stricter definition of capital appears to be bad news for other landesbanks.

The E.B.A. would exclude so-called silent participations by other shareholders, such as the savings banks that provide a significant amount of the funds that many landesbanks use to meet capital requirements. The definition would also exclude silent participations by state governments that were not part of an emergency bailout.

The rules would mean that NordLB, a landesbank in Hanover, would have to exclude about a third of its core capital. The funds are in the form of silent participations by the state of Lower Saxony and local savings banks. The state money predates the financial crisis and so does not qualify as emergency government aid.

“Naturally silent participations are important to banks that do not have access to the market,” said Dominik Lamminger, a spokesman for the Association of German Public Sector Banks, which represents the landesbanks.

The association has maintained that German landesbanks would pass the stress tests, but it argued that it was unfair to hold the banks to a standard not yet required by law.

A spokesman for NordLB, who could not be named because he was not authorized to speak publicly about the matter, declined to comment on the stress test.

But the bank’s main owner is already taking action to strengthen NordLB’s capital, in a sign that pressure from the stress tests as well as looming regulations are in fact prompting change.

The state of Lower Saxony will convert silent participations worth €1.2 billion, or $1.68 billion, in NordLB into ordinary shares, the bank spokesman confirmed. Ordinary shares would count toward core capital for purposes of the stress test as well as for new regulations.

WestLB, based in Düsseldorf, still has other problems even before it undergoes the stress test. Joaquín Almunia, European Union competition commissioner, has said that the bank must present a detailed plan to restructure by April 15, or be forced to repay the state aid it has received.

Banks that fail the stress tests would have to raise more capital or sell some assets to reduce their level of risk. In extreme cases they might have to wind down their operations.

Article source: http://feeds.nytimes.com/click.phdo?i=843f91c632fbadda8eb17ff722a01930

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