Politics

The banks save the Euro

Now that the rescue of Greece has taken concrete forms, it is becoming apparent that the two major German banks, Deutsche and Commerzbank, will participate in the rescheduling action. While public aid from the European rescue fund EFSF and the International Monetary Fund (IMF) will amount to 109 billion euros, the European financial sector is to contribute a total of around 50 billion euros to the rescue package in the first step to 2014, by exchanging Greek government bonds for new securities with a longer term and putting up with markdowns. The contribution of German banks and insurers is likely to be around 8 billion euros. “It hits us hard,” Deutsche Bank CEO Josef Ackermann made clear in an interview. Ackermann had participated in the negotiations as head of international banking association IIF and given States the assurance that the private financial sector would participate in the bailout. Banks and other financial institutions will thereby eliminate about 21 percent of their claims.

The Deutsche Bank has already reduced its involvement in debt in the eurozone countries by 70 percent in the first half of the year. At the end of June, the institution still held government bonds from Greece, Italy, Ireland, Portugal and Spain to a value of 3.7 billion euros on its books, as the bank announced at the presentation of the latest quarterly figures. The financial paper Börsenzeitung quantifies the Greece commitment of the German market leader at 1.51 billion euros. Here, the Deutsche Bank no longer extended expiring loans in the case of Greece, and wrote off 155 million euros on these holdings. The impact of the euro rescue package for Greece has here still not been taken into account by the bank. At Commerzbank, Börsenzeitung says there is a burden of 2.90 billion euros in the area of ​​Greek bonds.

Bank levy made concrete

The special levy for the German credit institutions was already decided in March last year. It was not until early July of this year that the Bundesrat and Bundestag could agree on the regulation that governs the details of the bank tax. Although the Bundesrat agreed to an appropriate ordinance on 8 July, it nonetheless made changes. Thus, small banks with total assets of up to €300 million, i.e. generally savings banks and Volksbanks, are excluded from the levy. Critical to the amount of the levy are the size, the risk and the networking of the bank concerned. Until recently, the acceptability limit was controversial. It has now been raised from 15 to 20 percent of annual results. If the amount actually due exceeds this limit, it can be recovered over the next five years. By 2019, however, the time limit for recovery will be just two years. Around one billion euros a year are to be paid into the fund. The overall pot will be 70 billion euros. It is becoming apparent that the Deutsche Bank alone will have to pay around 124 million euros into the German fund this year. The exact effects are still not predictable and also depend on whether the German tax can be charged against the sum to be paid in Britain. Germany’s largest bank has to pay €200 million in the island kingdom.

Basel III spelled out

If the Basel III rules are implemented, European banks have to increase their core capital by up to 460 billion euros by 2019. The EU Commission arrived at this assessment in July. The baseline year here is 2009. According to the Basel Committee, on which central bankers and financial supervisors of the industry as well as the emerging economies sit, the proportion of common equity should be raised by 2013 from the current 2 percent to be 3.5 percent and then in further steps to 7 percent by 2019. The aim is to avoid a repeated financial crisis. Some institutions, such as the Deutsche Bank, have, however, increased their capital in the meantime.

The EU Commission must turn the Basel requirements into binding law for the approximately 8,300 European banks. Brussels will, under special conditions, allow the institutions to add silent contributions to core capital. For violations of the guidelines, however, the Commission could prove harsh: Internal Market Commissioner Michel Barnier plans fines of up to ten percent of income for non-compliance, as well as a temporary employment ban for bank managers responsible. Also planned are a maximum leverage ratio and a liquidity buffer. The European Commission’s draft law must still be approved by the individual EU governments and the European Parliament.

Now, a study ordered by the EU parliament has confirmed that the stricter capital rules will affect neither economic growth nor employment in the EU significantly negatively. In the long term the effects would tend to zero, says the paper. An increase in the equity ratio by one percentage point would lower growth in the short term by only 0.18 percent. The result thus contradicts the banks’ fears.

Meanwhile, the Financial Stability Board and the Basel Committee have drawn up a list of 28 banks classed as systemically important, to which more stringent capital requirements are to apply. Among those affected by this surcharge of 1.0 to 2.5 percentage points on top of the Basel-III minimum requirements are the Deutsche Bank and Commerzbank. A final decision on this will be taken by the leaders of the G20 countries meeting in early November in Cannes.

Europeans want to rate themselves

The three major rating agencies, Fitch’s, Moody and S&P, are accused in Europe of not just being US-centric, but also of firing up the euro debt crisis by giving government bonds bad grades in their rating judgments. Again and again the call for the curtailment of the three houses was loud. Recently EU Justice Commissioner Viviane Reding called for the three U.S. agencies to be broken up: out of three agencies the U.S. should make six. Germany’s President Christian Wulff, however, brought up the question of the rating agencies’ liability for the damage they have caused. EU Competition Commissioner Michel Barnier, on the other hand, wants to allow national governments to review the data the agencies relied on before a downgrade of a country, which would amount to a clear curtailment of the agencies’ independence. Moreover, the call for a European counterweight is often made. The business magazine Capital now reports concrete plans for setting up a European rating agency in the form of a foundation. The initial capital of around €300 million is to come from European companies in the financial industry. By the end of the year, a consortium of 25 members should be set up. Ideas were that not issuers - as hitherto - but investors should pay for the ratings. The evaluations should also be half as expensive. Already in the second quarter of 2012 the first sovereign ratings could thus be published. Later, banking and corporate valuations should follow. Deutsche Bank CEO Josef Ackermann was also said to support the idea.

Stressful stress test

In mid July the European Banking Authority (EBA) presented the results of the second bank stress test, hotly debated in the run-up. The 91 houses tested represent 65 percent of total consolidated assets of the banking system in the whole EU. Two different scenarios were used to test whether the capital adequacy of financial institutions was sufficient under certain stress assumptions, such as a decline in GDP, rising unemployment or falling stock prices. However, no State bankruptcy was simulated. Of the 91 institutions from 21 countries tested, eight banks, including five Spanish, two Greek and one Austrian, failed. 16 more banks barely met the requirements. The resulting capital requirement of the failures is estimated at €2.5 billion. Analysts at Crédit Suisse expect a real need for capital totalling 83 billion euros. Standard & Poor’s even estimates it at 250 billion euros. By the end of the year the failing banks must fill the capital gap.

The twelve German participants came out relatively well, with an average core capital ratio of 7.5 percent by the end of 2012. HSH Nordbank and Nord/LB scraped past, close to the minimum rate of 5.0 percent. A problem for the German Landesbanks is that the EBA did not count silent partnerships as part of the core capital. While the Deutsche Bank shows its involvement in Greece at 1.5 billion euros in the stress test, Commerzbank considers its Greek papers as worth around three billion euros. Criticism of the stress test came prior to its completion from the Central Credit Committee (ZKA), the federation of the German banking associations. In a letter, the federation complained that as part of the test banks would need to disclose far more than in their regular financial reports. Thus, the institutions had been asked to disclose their credit positions in detail for each country, including amount and maturity. Other market participants could read from this a need for depreciation, and bet against the firm, warned the ZKA. Previously the association had complained that the EBA was now requiring a core capital of five percent from the banks, which the Basel-III regulations demanded only by 2019.

Snail’s pace in Solvency II

As with the Basel III rules, new capital rules for the European insurance sector are to apply from 1 January 2013. However, the European Parliament is currently working on a compromise that the regulations will apply in full only as from 2014 and initially transition rules could be introduced. The new rules stipulate that insurers with high equity exposure or other high risks have to hold more equity. However, European bonds are considered with a uniform probability of failure. In March a stress test carried out by the industry showed that approximately ten percent of European insurance companies do not meet the capital rules laid down in Solvency II, said the European insurance supervisory authority EIOPA. According to the test, in unfavourable market conditions, declining share prices or frequent natural disasters, 13 of the 129 European companies tested will sink under the minimum capital threshold. While the Federal Financial Supervisory Authority (BaFin) voted generally against the postponement of the Solvency II start date, it does, however, foresee transitional periods for individual parts of the rules.