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Corporate Governance – portrayed in the individual cultural and legal framework, from the standpoint of equity capital.

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New stress test shows gaps

At 115 billion euros, the capital gap that opens up at European banks as a result of simulated failures on government bonds is a veritable hole. Overall, the European Banking Authority EBA scoured the balance sheets of 71 banks at the target date of 30 September 2011, in a newly launched stress test to see the extent to which they must reckon with failures of government securities. Six German banks need capital of 13.1 billion euros. The Commerzbank alone is 5.3 billion euros short of what it needs to reach a hard core capital ratio of nine percent by the end of June 2012. The gap at the Deutsche Bank amounts to €3.2 billion and at DZ Bank to €353 million euros.

Against the backdrop of this huge cash requirement, Federal Finance Minister Wolfgang Schäuble at first aimed for a forced capitalization of the troubled financial houses. After strong criticism from both the banking federation and shareholder associations, however, he moved away from this solution. The federal government decided in return to revive the bank rescue fund SoFFin in early 2012 and use it to offer the necessary funds to the banks. Banks can then obtain by request a total of 80 billion euros of new capital and up to 400 billion euros in guarantees. SoFFin II, unlike its predecessor, is to make it possible to move not only structured products but also government securities, to 90 percent of their value, to a governmental Bad Bank.

The affected German institutions now have time until 20 January to tell the Federal Financial Supervisory Authority (BaFin) how they want to close their capital gap. The Deutsche Bank wants to redeem around two billion euros through the sale of large parts of its asset management. The first non-binding offers of the 50 potential bidders, including private-equity houses, will be available in January or February. Germany’s largest private bank is confident of achieving the nine-percent target. The net credit exposure of Commerzbank to heavily indebted eurozone countries was a total of 14.7 billion euros in summer. Commerzbank CEO Martin Blessing has ruled out his house for support once more by the now-revived bank rescue fund SoFFin. Blessing wants to reduce the balance-sheet risks by up to 30 billion euros and so cut down the need for additional capital by up to €2.7 billion. The second-largest German private bank already bought back bonds in December, which should have a positive impact on earnings and increase equity capital, says Blessing. The idea is also to sell non-core businesses, retain profits and limit new loan business to Germany and Poland. The biggest impact comes through the real-estate financier Eurohypo, which Blessing has to get rid of by 2014 anyway according to conditions imposed by the European Commission. Without the burden of the real-estate subsidiary the Frankfurt bank could probably meet the equity requirements. Hiving off Eurohypo to a bad bank would be the most elegant solution for Commerzbank - where after the banking crisis of 2009 the federal government still holds 25 percent - releasing capital of around five billion euros. The option to generate equity capital through capital increases is hardly likely to find takers at present. Blessing held intensive talks in Berlin in mid-December, but denied they were about a potential state-aid package.

Meanwhile, Europe’s monetary watchdog Mario Draghi and EBA chief Andrea Enria warned the banks against downsizing and reducing their assets more than slightly. Otherwise there could be a credit crunch that could promote a recession.

Women buck things up

Although Family Minister Kristina Schröder (CDU) already laid out her bill for a “flexi-quota” for women on supervisory boards in early October, internal party disagreements on the quota of women on the control bodies of companies have to date prevented publication. The draft is aimed initially at businesses with a State holding of at least 25 percent and plans to commit them to an individual quota by early 2013, and then also publicly traded companies by early 2015. To avoid a split in the CDU/CSU parliamentary group or even the conservative-liberal coalition, CDU leader Volker Kauder has not yet placed the issue on the agenda. in mid-December, however, the impatience of some women broke through: a group of women from the CDU/CSU faction allied itself with fellow activists from the FDP, SPD, Greens and the Left. In their joint appeal, the so-called Berlin Declaration, they call for a legal quota of at least 30 percent of women on supervisory boards, at latest by 2018. The call is a challenge to Schröder, who wants to allow companies a free hand in the decision of their individual rate, and only asks for an explanation if the flexible rate is not to be achieved. Among the supporters of the Berlin Declaration is also Labour Minister Ursula von der Leyen (CDU). Schröder’s draft will now be discussed at the next meeting of the coalition leaders in the new year.

Small auditing firms against large ones

After EU Internal Market Commissioner Michel Barnier published a first draft of the reorganization of the audit rules in Europe at the end of September, both proponents and opponents spoke out. Barnier wants to break the existing oligopoly of the ‘big four’, KPMG, Deloitte, Ernst & Young and PricewaterhouseCoopers (PwC). The midsized accountants, in a letter to the Commissioner in Brussels, backed his plans and even warned against a looming softening of his proposals. They insist that so-called joint audits be bindingly introduced and not be softened. With such ‘tandem auditing’, one of the big four is flanked by a small auditing firm in the audit. Against such joint audits, however, Denmark and Sweden have expressed concerns. Barnier’s proposals further provide for a change of auditing firm every six years, as well as the separation of auditing and consulting. The big four dominate about 85 percent of the market in Europe.

Banks threatened with BaFin Special Representative

The EBA is asking six German banks for additional capital totalling 13.1 billion euros. In order to enforce the European Banking Authority’s more stringent capital requirements, the Federal Financial Supervisory Authority (BaFin) is if necessary to be given the opportunity, at any risk to financial stability, to set standards for capital adequacy of banks through a special representative at board level, says the draft legislation to revive the bank rescue fund SoFFin approved by the Cabinet on 14 December. The Special Representative can not only outvote the Board, but also demand plans to increase equity, and amendments to them. This is considered in government circles as a strong incentive for the banks themselves to seek the way to the bank rescue fund if they are in doubt.