Bloomberg News

German Banks Say EBA Stress Test May Worsen Sovereign Crisis

October 13, 2011

(See EXT4 for more on the euro-area financial crisis.)

Oct. 13 (Bloomberg) -- The European Union’s top banking regulator risks worsening the sovereign debt crisis with a new round of stress tests as policy makers push the region’s lenders to raise capital levels, Germany’s banks said.

Finance Minister Wolfgang Schaeuble should stop the European Banking Authority from using stricter capital definitions under future Basel III rules to test the strength of lenders today, according to a letter to Schaeuble from Germany’s five banking associations. The Oct. 12 letter, a copy of which was obtained today by Bloomberg News, also was sent to the head of Germany’s Bundesbank and financial regulator BaFin.

“It can’t be in the interests of stabilizing financial markets to use an artificially tightened definition of capital to feign the supposed weakness of the European banking sector,” the banks said in the letter. “Self-fulfilling prophecies that exacerbate the crisis should not be created.”

The lenders face core Tier 1 capital requirements as high as 9 percent as part of European Commission President Jose Barroso’s plans to help banks survive the region’s debt woes, a person familiar with the proposals said yesterday. “Systemic” banks lacking capital should first seek market finance, tap their own governments if that fails and draw on the European rescue fund only as the ultimate backstop, Barroso said.

‘Sufficient Time’

Banks should have “sufficient time” to raise capital independently if needed because government involvement could hurt acceptance of euro-zone stabilization measures and carry legal risks, the banking groups said in the letter. National governments should be a second option and the European Financial Stability Facility should be relied upon only as a last resort, according to the letter.

At least 66 of Europe’s biggest banks would fail a revised EU stress test and need to raise about 220 billion euros ($303 billion) of capital, Credit Suisse AG analysts said in a note to clients today. Eight banks out of about 90 tested failed the EBA’s July stress test, with a combined capital shortfall of 2.5 billion euros, when the minimum pass level was set at 5 percent.

Deutsche Bank AG Chief Executive Officer Josef Ackermann, 63, said in a separate speech today that he doubts forcing European lenders to boost their capital levels will solve the debt crisis because the “actual problem” is that government bonds have lost their status as risk-free assets.

His criticism was echoed by the five German associations, which represent commercial, state-owned, cooperative, savings and pfandbrief banks.

“This is a sovereign debt crisis and not a banking crisis,” the associations said in the letter. “Therefore, a spread of the sovereign debt crisis should be avoided.”

--Editors: Peter Eichenbaum, Dan Reichl

To contact the reporter on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net

To contact the editors responsible for this story: Frank Connelly at fconnelly@bloomberg.net; Edward Evans at eevans3@bloomberg.net


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