September 21, 2021

DealBook: R.B.S. and Lloyds Bank Plan to Bolster Capital

The Lloyds Banking Group and Royal Bank of Scotland plan to retain earnings and sell assets to increase their capital reserves.Agence France-Presse — Getty ImagesThe Lloyds Banking Group and Royal Bank of Scotland plan to retain earnings and sell assets to increase their capital reserves.

LONDON – Two of Britain’s largest banks outlined plans on Wednesday to increase their capital reserves after local authorities demanded recently that the country’s largest financial institutions raise a combined £25 billion ($38 billion).

Royal Bank of Scotland and the Lloyds Banking Group, which are both owned in part by British taxpayers after receiving multibillion-dollar bailouts during the financial crisis, said they would meet the shortfall by retaining earnings and selling assets.

Both British banks added that they would not have to raise additional capital in the financial markets to meet the regulatory requirements.

The latest announcements come as banks across Europe, including Deutsche Bank and HSBC, are taking steps to bolster their capital reserves in line with new accounting standards known as Basel III.

European authorities are eager to protect the Continent’s firms from instability caused by delinquent assets and exposure to risky trading and have outlined plans that require financial institutions to bolster their capital reserves.

On Wednesday, neither R.B.S. nor Lloyds disclosed the specific amount of capital that British regulators have demand they raise as part of attempts to shore up British banks in case of future financial shocks.

Analysts had raised concerns, though, that the banks were two of the most vulnerable of the country’s largest financial institutions despite years of restructuring to shed so-called noncore assets and return to profitability.

After receiving bailouts in 2008, both banks have struggled to jettison legacy assets, including billions of dollars of underperforming loans, that have weighed on their financial performances.

R.B.S., in which the British government holds an 81 percent stake, said on Wednesday that it would meet its increased capital needs by continuing to reduce its exposure to risky assets and shrinking its investment banking unit, while also selling more assets.

Since the financial crisis began, the bank has reduced its balance sheet by more than £600 billion of noncore assets and has eliminated more than 30,000 jobs.

The bank, which is based in Edinburgh, also said it would raise additional money through the initial public offering of a stake in its American division, the Citizens Financial Group, which is planned for 2015.

“R.B.S. remains committed to a prudent approach to capital,” the bank said in a statement on Wednesday.

Shares in R.B.S. rose about 1 percent in morning trading in London on Wednesday, while those of Lloyds fell less than 1 percent.

Lloyds, in which the government holds a 39 percent stake, also said it would meet its capital needs by shedding noncore assets and refocusing on its main retail business.

The bank added that it planned to have a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial shocks, of 10 percent by the end of 2014, under accounting rules outlined by the European Union.

Lloyds has announced a series of divestments, including the £400 million sale of its stake in the wealth manager St. James’s Place, in a bid to raise capital.

The British government is moving closer to starting the process of reducing its stakes in R.B.S. and Lloyds.

After years of lackluster financial performance, the share prices of the two banks have rebounded over the last 12 months as restructuring plans have taken root.

The chairman of R.B.S., Phillip Hampton, gave the latest indication of the bank’s return to private ownership this month after he said the government’s stake could start to be sold in the middle of 2014.

“It could be earlier, that’s a matter for the government,” he added at the time.

The Prudential Regulatory Authority, the regulator in charge of Britain’s largest banks, said on Wednesday that it was still in discussions with several institutions about their capital positions.

Recent attention has focused on the Co-operative Bank, a small British lender whose credit rating was recently downgraded to junk status because of its continued exposure to delinquent commercial real estate loans. The bank may have to raise up to £1 billion of additional capital, according to a recent report by Barclays analysts.

“Banks are scraping around to raise funds to mitigate the impact of the capital requirements,” said Ian Gordon, a banking analyst at Investec in London. “The pressure has accelerated.”

Article source: http://dealbook.nytimes.com/2013/05/22/r-b-s-and-lloyds-plan-to-raise-capital/?partner=rss&emc=rss

DealBook: Regulators Find British Banks Must Raise $38 Billion

LONDON – British banks must raise a combined £25 billion, or $38 billion, in new capital by the end of the year to protect against future financial shocks, according to a report from local authorities on Wednesday.

The Bank of England, which takes over the direct supervision of British firms like HSBC and Barclays next week, said the new reserves were needed to protect against losses connected to risky loan portfolios, future regulatory fines and the readjustment of banks’ bloated balance sheets.

The announcement follows a five-month inquiry by British officials into the financial strength of the country’s banking industry. With the world’s largest financial institutions facing new stringent capital requirements, the Bank of England had been concerned that local firms did not have large enough capital reserves to offset instability in the world’s financial industry.

Earlier this month, the Federal Reserve also released the results of so-called stress tests of America’s largest banks, which indicated that most big banks had sufficient capital to survive a severe recession and major downturn in financial markets. Citigroup and Bank of America, after disappointing performance the previous year, now appeared to be among the strongest.

British banks are not so lucky.

The reported released on Wednesday said that local banks had overstated their capital reserves by a combined £50 billion, which authorities said would now be adjusted on the firm’s balance sheets. Many of the country’s banks already have enough money to handle the accounting adjustment, the report said on Wednesday.

The country’s regulators also said that British banks must raise a total of £25 billion in new capital by the end of the year. The Bank of England did not name which firms needed to meet the shortfall.

Local regulators have set a deadline for the end of 2013 for banks to increase their reserves to a core Tier 1 capital ratio, a measure of a bank’s ability to weather financial crises, of at least 7 percent under the accounting rules known as Basel III.

Regulators on Wednesday called on banks to increase their reserves by raising new equity, selling noncore assets or restructuring their balance sheets. British policy makers are concerned that firms will cut lending to the local economy as part of their efforts to increase their capital.

Speaking in November, Mervyn A. King, the outgoing governor of the Bank of England, said firms’ push to raise new capital was “perfectly manageable, but it requires some action now.”

As part of increased oversight of British banks, the Prudential Regulatory Authority, a newly created division of the Bank of England that will have daily regulatory control of the country’s largest firms, will have a direct say in how banks raise the new capital.

The authority’s board is expected to meet over the next couple of weeks to decide which banks will be forced to raise new money. British firms must receive regulatory approval for their capital raising plans.

Attention is likely to focus on both the Royal Bank of Scotland and Lloyds Banking Group, which both received multibillion-dollar bailouts during the financial crisis. The banks, which are part nationalized, have recently announced the sale of some of their divisions, including the Royal Bank of Scotland’s American subsidiary, Citizens Financial Group, in a bid to raise new money.

“We see R.B.S. as most exposed,” Citigroup analysts said in a research note to investors on Wednesday.

As the capital increased was in line with many analysts’ expectations, British banking stocks were relatively flat in late morning trading in London on Wednesday.

Others firms are taking a different route. In November, Barclays issued $3 billion of so-called contingent capital, or CoCo bonds, which converts to equity if a bank’s capital falls below a certain threshold.

The push to increase cash reserves for Britain’s largest banks is part of an effort to prevent future financial crises. Starting in 2014, the Bank of England plans to conduct regular stress tests of the country’s financial institutions to check they have sufficient capital reserves.

Article source: http://dealbook.nytimes.com/2013/03/27/regulators-find-british-banks-must-raise-38-billion/?partner=rss&emc=rss

DealBook: Commerzbank to Raise Capital and Pay Back Bailout

The Frankfurt headquarters of Commerzbank, Germany's second-largest lender.Michael Probst/Associated PressThe Frankfurt headquarters of Commerzbank, Germany’s second-largest lender.

11:41 a.m. | Updated

FRANKFURT – Commerzbank said on Wednesday that it would repay a taxpayer bailout and ask shareholders for more capital, moves that would reduce the German government’s influence over the bank but also dilute current shareholders.

Commerzbank, Germany’s second-largest bank after Deutsche Bank, said it would raise 2.5 billion euros ($3.3 billion) by selling new shares to existing shareholders. The issuance of new shares will reduce the German government’s stake in the bank to less than 20 percent, from 25 percent. As a result, the government would no longer have the right to veto management decisions.

The bank said it would use the money to bolster its capital reserves. Martin Blessing, the chief executive of Commerzbank, said the transaction signaled “the beginning of the end of the Federal Republic’s engagement in Commerzbank.” He said Commerzbank would save on interest by repaying its government loans earlier, and would be able to resume paying shareholder dividends sooner than expected.

Shareholders were disappointed, however, because the new shares would dilute the value of existing equity. Commerzbank shares fell more than 9 percent in Frankfurt trading on a day when German stock prices were otherwise flat.

Commerzbank said it Wednesday that it would pay back the remaining 1.6 billion euros of the 16.4 billion euros it received from the government in 2008 and 2009. That sum does not include an additional 3.7 billion euros in aid that the German government provided to the bank by buying its shares, some of which it will retain. the German federal agency for financial market stabilization, which administers bank bailout funds, said Tuesday that it would gradually sell off the rest of the government’s stake as market conditions allow.

The transaction is the latest effort by Commerzbank, and European banks in general, to move back to a semblance of normality after the turmoil of the last five years. While Germany has a reputation as an industrial powerhouse aloof from the financial crisis, almost all of its large banks are struggling and many would be bankrupt without public support. Moody’s has a negative rating on the German banking sector.

German and European banks still have a long way to go before the financial system can be considered healthy. Many banks remain dependent on the European Central Bank for cash, and credit remains scarce in much of the euro zone. Many banks are barely profitable or not at all. Commerzbank reported a loss of 716 million euros in the fourth quarter of 2012, compared with a profit of 316 million euros in the period a year earlier.

Commerzbank is taking advantage of relatively favorable market conditions for German banks because the country is regarded as a haven from financial turmoil, said Nicolas Véron, a senior fellow at Bruegel, a research organization in Brussels. But whether the transaction leads to a healthier banking system depends on whether current managers do a better job than their predecessors managing risk, he said.

“They might erase losses from previous bad risk management but that doesn’t mean their risk management going forward will be any better,” Mr. Véron said.

Commerzbank will also repay 750 million euros to the German insurer Allianz. The loan, a so-called silent participation, grew out of Commerzbank’s acquisition of Dresdner Bank from Allianz in 2008.

The bank said it would determine the number of new shares to be issued and the price in mid-May. Before that, Commerzbank will also consolidate existing shares, with one new share equaling 10 old shares. Deutsche Bank, Citigroup and HSBC will serve as underwriters.

Shareholders must approve the capital increase at the annual meeting, which is scheduled for April 19, about a month earlier than planned.

Commerzbank will use the cash raised to meet new regulations, known as Basel III, that require banks to increase the amount of capital they hold in reserve. Although the rules do not take full effect until 2019, banks are already under market pressure to comply.

Article source: http://dealbook.nytimes.com/2013/03/13/commerzbank-to-raise-more-capital-and-repay-taxpayer-money/?partner=rss&emc=rss

DealBook: Commerzbank to Raise Capital and Repay Taxpayer Money

The Frankfurt headquarters of Commerzbank, Germany's second-largest lender.Michael Probst/Associated PressThe Frankfurt headquarters of Commerzbank, Germany’s second-largest lender.

FRANKFURT – Commerzbank said on Wednesday that it would repay a taxpayer bailout and ask shareholders for more capital, moves that would reduce the German government’s influence over the bank but also dilute current shareholders.

Commerzbank, Germany’s second-largest bank after Deutsche Bank, said it would raise 2.5 billion euros ($3.3 billion) by selling new shares to existing shareholders. The issuance of new shares will reduce the German government’s stake in the bank to less than 20 percent, from 25 percent. As a result, the government would no longer have the right to veto management decisions.

The bank said it would use the money to bolster its capital reserves. Martin Blessing, the chief executive of Commerzbank, said the transaction signaled “the beginning of the end of the Federal Republic’s engagement in Commerzbank.” He said Commerzbank would save on interest by repaying its government loans earlier, and would be able to resume paying shareholder dividends sooner than expected.

Shareholders were disappointed, however, because the new shares would dilute the value of existing equity. Commerzbank shares fell more than 9 percent in Frankfurt trading on a day when German stock prices were otherwise flat.

The transaction is the latest effort by Commerzbank, and European banks in general, to move back to a semblance of normality after the turmoil of the last five years. While Germany has a reputation as an industrial powerhouse aloof from the financial crisis, almost all of its large banks are struggling and many would be bankrupt without public support. Moody’s has a negative rating on the German banking sector.

German and European banks still have a long way to go before the financial system can be considered healthy. Many banks remain dependent on the European Central Bank for cash, and credit remains scarce in much of the euro zone. Many banks are barely profitable or not at all. Commerzbank reported a loss of 716 million euros in the fourth quarter of 2012, compared with a profit of 316 million euros in the period a year earlier.

Commerzbank said it would pay back the remaining 1.6 billion euros of the 16.4 billion euros it received from the government in 2008 and 2009. That sum does not include an additional 3.7 billion euros in aid that the German government provided to the bank by buying its shares.

Commerzbank will also repay 750 million euros to the German insurer Allianz. The loan, a so-called silent participation, grew out of Commerzbank’s acquisition of Dresdner Bank from Allianz in 2008.

The bank said it would determine the number of new shares to be issued and the price in mid-May. Before that, Commerzbank will also consolidate existing shares, with one new share equaling 10 old shares. Deutsche Bank, Citigroup and HSBC will serve as underwriters.

Shareholders must approve the capital increase at the annual meeting, which is scheduled for April 19, about a month earlier than planned.

Commerzbank will use the cash raised to meet new regulations, known as Basel III, that require banks to increase the amount of capital they hold in reserve. Although the rules do not take full effect until 2019, banks are already under market pressure to comply.

Article source: http://dealbook.nytimes.com/2013/03/13/commerzbank-to-raise-more-capital-and-repay-taxpayer-money/?partner=rss&emc=rss

DealBook: Man Group to Sell Lehman Legal Claims for $456 Million

Peter Clarke, chief of Man Group.Sebastien Nogier/ReutersPeter Clarke, chief executive of the Man Group.

LONDON — The struggling hedge fund giant Man Group agreed on Friday to sell its outstanding legal claims against the bankrupt investment bank Lehman Brothers for $456 million.

The hedge fund, which is based here, acquired the exposure last year through funds owned by its subsidiary GLG Partners, which had made trades with Lehman Brothers before it collapsed in 2008.

Man Group said it would sell the claims to Hutchinson Investors, a unit of the hedge fund Baupost Group, at a 32 percent premium to the legal exposure’s value as of June. 30.

On top of the $456 million sale price, Man Group said it could be in line for an addition future payment of $5 million if the eventual recovery from the legal claims reached a undisclosed threshold, according to a company statement.

The hedge fund, which continues to struggle as investors pull money out of its products because of their recent weak performance, said it would use the influx of cash to bolster its capital reserves.

Last month, the Man Group said net outflows in the third quarter of this year rose 60 percent, to $2.2 billion, compared with $1.4 billion in the three months that ended June 30.

In an effort to improve profitability, the British firm also announced plans to cut costs by almost $200 million by the end of 2013. The Man Group also recently appointed Jonathan Sorrell, a former Goldman Sachs executive, as its new finance director.

Shares in the Man Group fell less than 1 percent in morning trading in London.

Article source: http://dealbook.nytimes.com/2012/11/16/man-group-to-sell-lehman-legal-claims-for-456-million/?partner=rss&emc=rss

DealBook: Europe Bank Shares Rebound After Cuts

A branch of Credit Suisse in Basel, Switzerland. The I.R.S. asked for help in locating information on American account holders.Arnd Wiegmann/ReutersThe Swiss firm Credit Suisse had its credit score cut three notches.

6:48 a.m. | Updated

LONDON — Shares in many of Europe’s banks rebounded in late morning trading on Friday after initially trading lower, as investors reacted to a new round of credit downgrades for the world’s largest financial institutions.

The volatility in trading activity followed the decision late Thursday by the credit agency Moody’s Investors Service to cut the credit scores of major banks to new lows, reflecting new risks the industry has encountered since the financial crisis began.

Despite the widespread downgrades, analysts said the markets had already reacted to much of the pressures that have hit banks’ trading operations and affected their balance sheets.

The Euro Stoxx bank index, which contains the Continent’s largest financial institutions, has fallen 46 percent in the last 12 months.

This was reflected in how investors reacted to European bank stocks on Friday.

The Swiss firm Credit Suisse, which was warned last week by the country’s central bank to increase its capital reserves, faced a three-notch downgrade, the only bank to have such a pronounced reduction in its credit rating.

Credit Suisse’s share price, which fell as much as 1.9 percent in early morning trading in Zurich, rebounded to trade down less than 1 percent by early afternoon. The Swiss firm said it remained one of the best rated banks by Moody’s Investors Service in its peer group.

The credit rating of UBS was cut by two notches, which was slightly less than many analysts had been expecting. The Swiss financial firm’s shares, which dropped by 1.1 percent in early trading, also came back to trade around 0.4 percent higher on early Friday afternoon.

Moody’s said the wholesale downgrades across the banking industry reflected firms’ exposure to global financial markets, which have come under pressure from the European debt crisis and a broader slowdown in the global economy.

‘‘All of the banks affected by today’s actions have significant exposure to the volatility and risk of outsized losses inherent to capital markets activities,’’ Moody’s global banking managing director, Greg Bauer, said in a statement.

Several European banks with exposure to capital markets, including Barclays of London, Deutsche Bank of Germany and BNP Paribas of France, all had their credit ratings cut by two notches. Shares of the three firms, which all fell approximately 1 percent early morning trading, all traded up around 1 percent by late morning.

The British bank HSBC, which has major operations in the fast-growing emerging markets in Asia, fared better than many of its European competitors after Moody’s cut its credit rating by only one notch. The bank’s stock rose less than 1 percent in morning trading in London.

Article source: http://dealbook.nytimes.com/2012/06/22/shares-in-european-banks-fall-on-ratings-downgrade/?partner=rss&emc=rss

European Banks Urged to Bolster Reserves Following Stress Tests

European regulators said 8 of 90 banks whose tests were disclosed had failed the so-called stress tests, a vast data-crunching exercise designed to expose risk and restore confidence in the overall health of the European financial system. A ninth bank, Helaba of Germany, would have failed but refused to disclose its data. An additional 16 passed narrowly, and will be asked to take steps to “promptly” increase their resilience, for example by raising more capital, the regulators said.

Of the banks that failed, five were in Spain, two in Greece and one in Austria, said the European Banking Authority, which conducted the tests.

All were relatively small players. But the stress test results could also put pressure on some giant banks that have been regarded as healthy, including Deutsche Bank in Germany, UniCredit in Italy, and Société Générale in France. Capital reserves at all three were uncomfortably close to the level where they would have formally been asked to raise more capital or reduce risk.

The test results arrive amid acute anxiety that Greece is on the verge of defaulting on its debt, an event that could provoke a banking crisis because so much of those bonds are parked on the balance sheets of European financial institutions. As a result, the stress tests have clear implications for the overall health of the euro zone.

“To me the real question is not stress in the institutions but the ability of states to control the sovereign debt” problem, Paolo Bordogna, head of financial services in Europe for the consulting firm Bain Co., said ahead of release of the results.

Analysts have been skeptical that the tests this year were rigorous enough to clear up doubts about the European banking system — and to encourage institutions to begin lending to each other again rather than relying on the European Central Bank for funds.

The European Banking Authority, or E.B.A., did not examine what would happen if Greece defaults, for example, which critics saw as a major flaw.

“This year’s tests still did not include the impact of a formal debt default by a European government, which is the single greatest risk facing the European banking sector at present,” Marie Diron, an economist who advises the consulting firm Ernst Young, wrote in a note. “The publication of these results will not assuage investors’ fears over the resilience of the E.U. banking sector,” she wrote, referring to the European Union.

But European officials argued that, even if people thought the test was too forgiving, they now had a huge amount of data they could use to run their own stress evaluations, including detailed information on bank holdings of government debt.

“We are putting out a lot of information so that investors and analysts can make up their own minds,” Andrea Enria, the chairman of the E.B.A., said by telephone. Mr. Enria defended the integrity of the stress test. It imagined that banks had to absorb a sharp recession and surge in unemployment, which implied banking losses that were twice as high as in 2009, the height of the financial crisis, he said.

The E.B.A. said that at the end of last year, 20 banks would have failed the test. But in the first four months of this year, banks raised about €50 billion, or $71 billion, in new capital.

Seven banks in Greece, Germany and Spain failed the tests last year and several others came close. But unlike the tests this year, there was no requirement for those that squeaked by to raise capital, just market pressure. The regulators argue that, since then, many banks have raised money, gotten rid of risky assets or taken other steps to become stronger, so that the fail rate this year is a sign of a stricter test.

The banks that failed or passed narrowly must now seek more capital from markets or governments. In extreme cases, they may have to be sold to other institutions or wound down.

Article source: http://www.nytimes.com/2011/07/16/business/global/european-banks-urged-to-bolster-reserves-following-stress-tests.html?partner=rss&emc=rss

DealBook: HSBC Aiming to Cut $3.5 Billion in Costs

10:51 a.m. | Updated

HSBC said on Wednesday that it planned to cut jobs, scale back its retail banking operations and possibly sell its bank card business in the United States as part of a strategy to reduce costs by as much as $3.5 billion in the next two to three years.

The bank said it would focus on commercial banking and wealth management, while selling or shutting down some less profitable retail banking operations. HSBC, one of the biggest European banks, said the steps were expected to help it improve returns despite slower economic growth and a stricter regulatory environment.

“This is not about shrinking the business but about creating capacity to reinvest in growth markets and to provide a buffer against regulatory and inflationary headwinds,” said Stuart Gulliver, who took over as chief executive in January. He added that it was too early to say how many jobs would be cut.

Banks are seeking to streamline their business as new financial regulations require them to maintain higher capital reserves, putting pressure on profitability. The Barclays chief executive, Robert E. Diamond Jr., said in February that he would review businesses and close some that did not generate enough return.

Less than a month after taking over as chief executive, Mr. Gulliver held a two-day meeting with his management team at HSBC’s Hong Kong offices to discuss necessary changes. They agreed that HSBC’s branches failed to focus enough on the special demands of local markets and clients.

“We always tried to do everything, everywhere, always, and I’m not going to do that,” said Mr. Gulliver, who previously ran HSBC’s investment banking operation.

Having already decided to withdraw from Russia’s retail banking market, HSBC said it would test all of its operations and businesses for profitability. The bank also set a target of 48 percent to 52 percent for its cost efficiency ratio. Costs as a proportion of income were 55 percent last year, which the bank said was “unacceptable.”

Mr. Gulliver also said he planned to radically change HSBC’s business in the United States, which had been a drag on earnings ever since the subprime mortgage crisis dealt a blow to Household, the American lender HSBC acquired in 2003. HSBC is considering the sale of its American consumer bank card operation and plans to expand its private banking business to Latin America. It also hopes its commercial banking unit will benefit as America’s export industry rebuilds, Mr. Gulliver said.

“We need to get to a situation where the U.S. doesn’t lose us a colossal amount of money,” Mr. Gulliver said. The business was a “significant financial cost to HSBC and a management distraction.”

Despite large losses in the United States, HSBC weathered the financial crisis better than many of its rivals, mainly because it generated about half of its earnings from Asia and had strong deposit inflows on the commercial banking side. HSBC did not have to ask for financial help from the British government.

But this year the bank’s share price started to lag behind that of Deutsche Bank, JPMorgan Chase and Barclays as some investors expressed concerns about rising costs and the pace of growth. The strategy HSBC announced on Wednesday failed to spark enthusiasm among some analysts and the bank’s share price was down 1 percent in London.

“We would have loved to see a little bit more” change, said Pawel Uszko, an analyst at Keefe, Bruyette Woods. “The main thing they said was cost-cutting and that will take two to three years to get there.”10:51 a.m. | Updated

Article source: http://feeds.nytimes.com/click.phdo?i=95600d6bac3b6c4aeea6fc92f413f03f

German Banks Are Critical of Tough Standards for Stress Tests

FRANKFURT — A review of European banks could become a day of reckoning for some troubled German institutions, amid signs that the authorities may impose a tough standard for the funds that can be used to meet reserve requirements.

The European Banking Authority, which is conducting the stress tests, is expected to announce in the coming days how it will define capital reserves, the money that banks are required to set aside for unforeseen shocks.

Representatives of Germany’s public sector banks, while insisting the institutions are healthy, have expressed alarm in recent days that the standard may require them to exclude much of the borrowed capital they use to bolster their reserves. As a result, some German banks could fail the test, analysts said.

The tougher requirement would “create a danger that healthy institutions could be artificially made to appear sick,” Heinrich Haasis, president of the German Savings Banks Association, said in a statement Friday.

If the more severe definition of capital caused some German landesbanks to fail the stress tests, they could be required to raise more money, or in extreme cases even wind down their operations. Because the landesbanks are typically owned by state governments and local thrift institutions, German taxpayers would ultimately bear much of the financial burden. In that case, the landesbanks could become a liability for Chancellor Angela Merkel at a time when her party, the Christian Democratic Union, has lost ground in recent state and municipal elections.

Critics accuse the German government of trying to keep the landesbanks’ problems out of public view. “Germany has not done enough to restore confidence in the landesbanks,” said Jörg Rocholl, a professor at the European School of Management and Technology in Berlin. “The process should have been much faster and more comprehensive.”

The dispute revolves around so-called silent participations, money that the landesbanks have effectively borrowed from their owners, the savings banks and state governments, and counted toward their capital reserves. Regulators have expressed concern that, in a crunch, silent participations might not be very useful as a cushion against losses. New global banking guidelines call for such capital to be phased out as a component of so-called core Tier 1 equity, the most bulletproof form of reserves.

A related issue is how much capital banks must have to pass the European stress tests, which are scheduled for June and will examine whether banks are strong enough to absorb shocks like a sudden economic downturn. Reuters reported Friday that the European Banking Authority would require banks to have core Tier 1 equity equal to 5 percent of assets.

That is still less than new rules endorsed last year by the Group of 20 leading economies, which would require core Tier 1 equity of 7 percent of assets by the end of 2018.

Representatives of the E.B.A. and the European Commission said Sunday that they could not comment on what standards the stress tests would use.

The landesbanks, while insisting that they will pass the tests, have been lobbying the German government and European Commission to apply a less rigorous standard. “We have no indication that landesbanks will have problems with the E.B.A. stress tests and expect that all will pass,” Stephan Rabe, a spokesman for the Association of German Public Sector Banks, said in an e-mail. But he said that the association considers it unfair for the E.B.A. to apply standards that are not yet required by bank regulations, adding, “In our opinion the stress tests should be conducted according to existing rules.”

During the last round of European bank stress tests, in July, all seven landesbanks passed. But those tests were criticized as too lenient and failed to restore investor confidence in the health of the German banking system.

Some analysts have argued that Germany needs to confront the problems at the weakest landesbanks, like WestLB in Düsseldorf, and either supply them with more capital or wind them down. If not, the landesbanks threaten to drag down the German economy. Strong growth in Germany during the past year has helped compensate for weak growth in Southern Europe.

“The robust economic trend in Germany and positive labor market data have diverted attention from the fact that fundamental structural problems in the financial sector have still to be addressed,” a group including two former landesbank chief executives wrote in a study issued by Goethe University in Frankfurt last month. The authors warned that problems in the landesbanks threatened the hundreds of savings banks, or sparkassen, which dominate consumer banking in Germany and are crucial to the economy. The sparkassen, which usually have close ties to local governments, often own stakes in the landesbanks and depend on them for wholesale banking services.

The debate about how to design the stress tests takes place in the context of two decades of conflict between the European Commission and the landesbanks. In 2005, the commission required the landesbanks to give up the government guarantees that allowed them to borrow money more cheaply than commercial banks.

Without that competitive advantage, several landesbanks have been struggling to find a new reason for being. In addition, institutions like WestLB or BayernLB in Munich suffered billions of euros in losses tied to investments in the United States real estate market, and required taxpayer bailouts.

The European Commission has ordered WestLB to drastically scale back its activities and look for a buyer, as a condition for receiving government aid. But attempts to sell WestLB have been moving slowly amid meager interest from investors.

At the same time, political leaders are loath to curtail the activities of the landesbanks, which give them influence in the local economy and account for thousands of jobs.

Article source: http://feeds.nytimes.com/click.phdo?i=91e980d997e74cb71301f5ac5e1a12b7