Bloomberg News

Germany Examines Bank Use of ECB Loans on Bubble Concern

May 10, 2012

Light trails made my passing vehicles are seen in front of a Euro sign sculpture outside the European Central Bank's (ECB) headquarters. Photographer: Hannelore Foerster/Bloomberg

Light trails made my passing vehicles are seen in front of a Euro sign sculpture outside the European Central Bank's (ECB) headquarters. Photographer: Hannelore Foerster/Bloomberg

German lenders’ use of cheap loans from the European Central Bank is under examination by the country’s top banking supervisor amid concerns the influx of funding may eventually create “a new bubble.”

Banks that took “implausibly high” amounts have to explain how they plan to use the money, said Raimund Roeseler, head of banking supervision at the country’s financial regulator Bafin. The exercise is part of a strategy change focusing more on what banks plan for the future than looking at what they did in the past, he said.

The ECB has flooded financial markets with more than 1 trillion euros ($1.3 trillion) of cheap cash to prevent credit markets from freezing up. European Union lawmakers have already demanded that banks disclose profits from carry trades derived from the so-called longer-term refinancing operations and exclude the money from bonus pools.

“In the short-term perspective, the main problem is the European sovereign-debt crisis; in the medium term it’s the question: what happens with all that liquidity?” Roeseler said in an interview at his office in Bonn. “If I see a huge number of banks all go into one field, I’m afraid of a new bubble.” Bafin will review whether borrowing is in line with refinancing needs, he said.

While Bafin can’t tell banks to refrain from certain investments, it can use a variety of regulatory instruments if it sees risks accumulating, said Roeseler. These include capital surcharges, asking for continuous reporting or even starting special audits, he said.

German Banks

ECB President Mario Draghi said March 8 that 460 German banks borrowed money in the ECB’s second three-year tender. The interest on the loans is tied to the average benchmark rate, currently at 1 percent, over the maturity of the loan. Commerzbank AG (CBK), Germany’s second-biggest lender, borrowed 16.2 billion euros of ECB three-year loans, Chief Financial Officer Stephan Engels said May 9.

Bafin’s new strategy stems from lessons the regulator learned in the aftermath of Lehman Brothers Holdings Inc.’s 2008 collapse. The agency is looking more closely at lenders’ governance issues and risk management, including their business models, Roeseler said.

Since the Lehman bankruptcy, global regulators approved new rules known as Basel III that will more than triple the core capital that lenders must hold to at least 7 percent of their assets, weighted for risk.

EU governments and lawmakers are now debating how to meet a January deadline to adopt the measures set out in 2010 by the Basel Committee on Banking Supervision. Merely implementing Basel III won’t be enough, according to Roeseler.

Basel ‘Miss-Kick’

“We won’t get the banking sector stable with Basel III alone,” said Roeseler. “We also need to be closer to the banks and watch them intensively,” he said. “If we were to implement the new rules and not change our attitudes and actions as supervisors, Basel III would be a miss-kick.”

Bafin set up a new unit that examines how banks perform compared with their peers. The analysis helps to detect outliers, said Roeseler.

While regulators aren’t better bankers than those in charge of the companies they oversee, talking to lenders about these issues allows them to better monitor them and to take appropriate steps when risks are accumulating, said Roeseler.

German banks are in a good shape and don’t have refinancing problems, said Roeseler. They profit from Germany’s top credit ratings and the trust that financial markets have placed in their home country, an advantage that banks from many other European countries lack, according to the regulator.

All German banks would survive a Greek default, even if for some it would be “painful,” said Roeseler. While a Spanish or Italian default would “put everything into question,” such a scenario is more than unlikely, he said.

Credit Crunch

Aside from preparing for Basel III, EU lenders faced calls last year from the European Banking Authority to raise 114.7 billion euros in fresh capital by the end of June as part of measures introduced to respond to the sovereign-debt crisis.

Tighter capital requirements are unlikely to lead to a credit crunch in the German banking industry, according to Roeseler. Instead, the country’s banks say that they have trouble finding enough businesses seeking loans, he said.

“Those who say that Basel III will curb lending are the same who complain about a ruinous competition among German banks forcing them to offer loans too cheaply,” said Roeseler.

The London-based EBA set this year’s capital-raising target after eight banks out of the 90 tested failed 2011 stress tests with a combined capital shortfall of 2.5 billion euros.

The way the stress tests are carried out should be overhauled to reflect the change in philosophy at regulators such as Bafin, said Roeseler, who represents Germany on the EBA’s boards.

Stress Test Trust

“These stress tests were aimed to calm markets,” Roeseler said. “They yield a number of how much capital you need and if you do that on a yearly basis, you may increase capital but not necessarily trust.”

There is a consensus at the EBA that stress tests need to be transformed to provide regulators with tools to detect lender’s weak points, which aren’t limited to capital gaps, he said.

The exams could “look at risk management deficits and analyze a bank’s various fields of action and whether risk from different business sectors balance out,” he said.

The EBA set up a task force earlier this year to examine a possible overhaul of the tests’ structure. The next round is likely to take place at the end of 2013 and would have to implement the idea, he said.

“We will also have to decide how we communicate the idea so that the market won’t perceive that as dodging and what results we should disclose,” said Roeseler. “I’d opt to not disclose too many details and rather use the test as an internal tool and real supervising instrument.”

To contact the reporter on this story: 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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