(Updates with DZ Bank in fifth paragraph, Commerzbank capital requirement in 12th.)
Nov. 24 (Bloomberg) -- The European Banking Authority may ask German lenders to boost their capital levels by more than 12 billion euros ($16 billion) as the regulator reviews their ability to withstand losses from the sovereign-debt crisis, said two people familiar with the EBA’s estimates.
The amount, presented by the German government to lawmakers in Berlin yesterday, may change in a final assessment as early as next week because national regulators in countries such as Germany and Spain are contesting the criteria being applied by the EBA in its calculations, said the people, who declined to be identified because the information isn’t public.
European leaders are demanding that banks raise more capital after they agreed to accept a 50 percent writedown on Greek sovereign debt as part of wider measures to stem market turmoil. The EBA estimated last month that the region’s financial institutions need 106 billion euros to reach a 9 percent core Tier 1 capital ratio by mid-2012, after marking their sovereign bonds to market. That includes an original estimate of 5.18 billion euros for German banks.
“The figure for German banks will definitely rise,” said Olaf Kayser, a Mainz, Germany-based analyst at Landesbank Baden- Wuerttemberg. “Market prices for sovereign debt have significantly worsened, especially for Italy.”
The capital shortfall for German lenders in a new round of stress tests may double to more than 10 billion euros from the previous amount estimated by the London-based EBA on Oct. 26, a third person said. The latest figure presented this week to German lawmakers stands at more than 12 billion euros, the people said.
DZ Bank AG, Germany’s biggest cooperative lender, may be required to boost its capital under the revised stress tests, joining four other German lenders previously told to raise their buffers, according to two people familiar with the matter.
DZ Bank, based in Frankfurt, may need to raise about 350 million euros, said one of the people, who declined to be identified because talks are confidential. The number may still change, the people said.
EBA spokeswoman Franca Rosa Congiu declined to comment on the capital figures because the agency is still in the process of checking the data and the numbers aren’t final. Ben Fischer, a spokesman for German financial regulator BaFin, declined to comment.
National regulators are negotiating with the EBA over how much the value of benchmark debt such as German bunds may be used to compensate for writedowns on bonds from peripheral European countries such as Greece and Italy, the people said. The EBA may apply Basel rules more stringently and limit the positive effect of debt such as German bunds, one person said this week. The EBA is also considering limiting the size of unrealized capital gains, said one person.
The regulator has said it will use sovereign holdings as of Sept. 30 as the basis for its calculations, rather than the June figures used for the preliminary estimates. The EBA said it would use September market prices.
Germany’s public and savings banks yesterday criticized the EBA’s plans to change the criteria applied in the stress tests, saying they are increasing the uncertainty on financial markets.
Commerzbank AG, the country’s second-biggest lender, slumped 15 percent in Frankfurt trading on Nov. 22 on concern it may need more than the 2.94 billion euros estimated by the EBA in October, the most of any German bank. The lender’s capital requirements may increase to 5 billion euros in an adverse scenario, said a person briefed on the bank’s own calculations.
Deutsche Bank AG, Norddeutsche Landesbank Girozentrale and Landesbank Baden-Wuerttemberg were also told by the EBA last month to raise capital. NordLB, a state-owned lender in Hanover, said last month that it plans to raise 660 million euros based on the preliminary estimates while LBBW of Stuttgart said the regulator identified a 364 million-euro shortfall.
Deutsche Bank Chief Financial Officer Stefan Krause said in a third-quarter earnings presentation on Oct. 25 that the lender needs to fill an estimated capital gap of 2.8 billion euros with earnings to reach a 9.1 percent core tier 1 level by mid-2012. The lender, which has not explicitly disclosed an amount for capital needs, has said it doesn’t need to sell shares or take state aid and can cut risk-weighted assets and retain earnings.
Spokesmen for Deutsche Bank, Commerzbank, NordLB, LBBW and DZ Bank declined to comment on the new EBA estimates.
Eight European banks failed the official European Union stress tests in July after regulators said they had a combined capital shortfall of 2.5 billion euros, which was lower than predicted by analysts and investors at the time. The EBA concluded in those tests that most lenders had sufficient capital to withstand an economic recession.
Revive Rescue Fund
In the latest round of tests, European lenders have been asked to raise money on their own and only seek aid from national and then European authorities if their efforts fail. Rather than tapping investors or governments, firms are trying to hit the 9 percent core capital target by adjusting risk- weightings, limiting dividends, retaining earnings, reducing loans and selling assets.
Germany plans to revive the country’s bank-rescue fund Soffin to provide capital to lenders that can’t raise money from owners or investors, Deputy Finance Minister Joerg Asmussen said on Nov. 14.
--With assistance from Oliver Suess in Munich, Karin Matussek in Berlin and Ben Moshinsky in London. Editor: Angela Cullen, Frank Connelly
Aaron Kirchfeld in Frankfurt at firstname.lastname@example.org
To contact the editor responsible for this story: Frank Connelly at email@example.com