Bloomberg News

Bafin’s Sanio Criticizes EU Regulator Over Bank Stress Tests

June 06, 2011

(Updates with further Sanio comment in ninth paragraph.)

June 6 (Bloomberg) -- Germany’s top financial regulator lashed out at the European Union’s bank stress tests, saying the standards adopted by the agency carrying them out lack “legitimacy.”

The European Banking Authority used a definition of capital that deviates from global rules “with consequences no-one can gauge,” Bafin Chairman Jochen Sanio said in the introduction to the German regulator’s annual report today. The EBA lacks “clear, defined corporate-governance structures, which alone could guarantee process legitimacy,” he said.

“This gives cause for concern in the future,” said Sanio, who will turn 65 in January. “It would be regretful if the European banking supervisor would be discredited right at the beginning of its work.”

An association of German public sector banks criticized the tests in April, saying they would put them at a disadvantage and convey false signals to the market. Under the EBA tests, lenders won’t be allowed to count in their results some types of non- voting capital, known as silent participations, which are permitted by German bank supervisors.

The EBA created its capital definition for the stress tests without “legal, defined competence, let alone legitimacy,” Sanio said today.

“I think the Germans are feeling a bit picked on, because they’ve been asked to bail out several Euro countries and now their banks are being penalized for the way they structure their capital,” James Babicz, head of risk at analytics company SAS U.K., said in a telephone interview.

Results Delayed

An EBA spokeswoman didn’t immediately respond to a phone call seeking comment.

The publication of the stress-test results may be delayed until July, a European Banking Authority official said last week. They had been scheduled to be released this month. A date for publication hasn’t been set, because the EBA must ensure it is satisfied with the data the banks submitted, the EBA official said. The EBA delayed publication because of concerns about Spain’s savings banks, El Economista said last week, citing people in the financial industry it didn’t name.

Europe-wide regulators established by the EU last year will now “dominate the scene,” cutting back Bafin’s powers and influence, Sanio said. Many of their decisions will be made under a “one country, one vote” system, so it isn’t yet clear whether Germany can have much influence on them, he said.

“One thing is clear: there are ‘interesting times’ waiting ahead of us -- according to Chinese understanding, a rather unpleasant prospect,” Sanio wrote.

Not Tough Enough

The EBA said on its website earlier this year that, under the stress-test scenarios, banks will be expected to maintain a Core Tier 1 capital ratio of at least 5 percent. Last year’s tests, which allowed national regulators to use their own capital definitions, were criticized by bank analysts for not being tough enough. Lenders in the 27-nation region were shown by regulators to need only 3.5 billion euros ($5.1 billion) of new capital, about a 10th of the lowest analyst estimate.

This year’s tests will include a review of how banks would handle a 0.5 percent economic contraction in the euro area in 2011 as well as a 15 percent drop in European equity markets.

The EBA tests will also examine the effect of a 75 basis- point jump in interest rates on European sovereign bonds and an increase in short-term inter-bank financing costs of 125 basis points. Losses on sovereign bonds held to maturity won’t be tested, according to the EBA.

--Editors: Christopher Scinta, Peter Chapman

To contact the reporter for this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net. Karin Matussek in Berlin at kmatussek@bloomberg.net

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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