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.
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