All of Germany’s largest banks except for one – state-backed HSH Nordbank – are expected to narrowly pass a comprehensive “stress test” of their financial health that is being carried out by the European Central Bank, according to banking sources.
Commerzbank, Germany’s second-largest bank and one-time industry problem child, should be in the clear, according to sources in the financial sector.
The ECB’s examination of the 130 biggest banks in the euro zone – including 21 in Germany – is designed to put doubts aside once and for all about the health of Europe’s financial system. The results, which have been hotly anticipated by the global financial community for months, will be released on October 26, the ECB announced Friday.
The ECB’s stress test was a big topic among the bankers at the International Institute of Finance, a global banking lobby, which hosted an annual gathering in Washington at the weekend. How hard should the test be? Getting the balance right is critical for restoring confidence in Europe’s financial sector.
According to circles close to Commerzbank, no surprises are expected. Negotiations with the ECB this month offered “no reason for the bank to assume it will fail."
“If everybody just passed automatically, that would be fatal,” said Jürgen Fitschen, co-chief of Deutsche Bank and president of the association of German banks, said on the sidelines of the summit. “At the same time, there’s no need to take it to extremes either.”
According to sources in the financial sector, the banks’ board members have all completed their negotiations with the ECB over the test, which combines both an audit of their balance sheets and a stress test that examines whether they are healthy enough to withstand another financial crisis.
Most banks are pretty clear about where they stand, but they do not yet know exactly how much more additional capital the ECB might require them to raise in order to make them healthy. “We have to communicate this as soon as possible,” Mr. Fitschen said.
The banks will receive the full results of the stress test slightly in advance of the public release on October 26 – a Sunday that was purposely chosen by the ECB to allow markets some time to digest the results. The banking community has prodded the ECB to release the results to them as soon as possible to give them time to prepare.
There had been concerns about whether three German banks in particular – NordLB, Commerzbank and HSH Nordbank – would pass the test. All are involved in financing the shipping industry, which largely collapsed after the 2008 financial crisis, causing bank loans to many shipbuilders to turn sour.
But according to circles close to Commerzbank, no surprises are expected. Negotiations with the ECB this month offered “no reason for the bank to assume it will fail,” an industry source said. Neither Commerzbank nor the ECB was prepared to comment.
This is good news for Commerzbank, which was bailed out by the German government in 2008. The government still holds a 17-percent stake. Likewise, NordLB, a state-backed German lender, is expected to narrowly pass the ECB’s hurdles, according to financial circles.
“It is already clear that the test has been a success, because European banks have strengthened their balance sheets by about €200 billion.”
But questions remain about HSH Nordbank, whose management is in intensive talks with the ECB and the financial regulator Bafin, according to sources close to the regulator. On Friday, Hamburg’s state parliament, a majority shareholder and key financial backer of HSH, considered the consequences of the possibility of the bank failing the test would have on the budget.
Even though the ECB will reveal all on October 26, there remain questions about how markets should digest the results. Each bank will be told whether it has passed, or how much additional capital it needs to make up its shortfall. But the results are based on end of year results from 2013, and it is unclear how far any corrective measures since then can be factored into this.
Banks have raised as much as €200 billion, or $253 billion, in additional capital to build up their balance sheets in anticipation of the results. Others have sold loss-making assets. According to an insider, “if a bank has sold assets, it is harder to identify precisely the capital effects.”
Andreas Dombret, a board member of Germany’s central bank, the Bundesbank, said the fact that banks took steps ahead of the text to shore up their capital bases should be taken into account.
“It is already clear that the test has been a success, because European banks have strengthened their balance sheets,” Mr. Dombret told Handelsblatt. “The banking system is therefore already safer today.”
This is good news for the ECB, which on November 4 will become the chief supervisor of Europe’s leading banks, taking over this role from national regulators. The audit and stress test was done in advance of this date to give it a clean slate. From November, the health of the European banking sector will be in its hands.