Under ECB stress test rules, bank asset sales must be booked (not just expected to close) to count.
Numerous EU banks had asset sales pending but the ECB ignored its own rules in just one case: Deutsche Bank.
The Financial Times reports Deutsche Bank Received Special Treatment in EU Stress Tests.
Germany’s biggest lender, which has seen its share price fall as much as 22 per cent in recent weeks on fears that it could face a US fine of up to $14bn, has been using the results of the July stress tests as evidence of its healthy finances.
But the Financial Times has learnt that Deutsche’s result was boosted by a special concession agreed by its supervisor, the European Central Bank.
Deutsche’s results included the $4bn proceeds from selling its stake in Chinese lender Hua Xia even though the deal had not been done by the end of 2015, the official cut-off point for transactions to be included.
The Hua Xia sale was agreed in December 2015. It has still not been completed and now faces a delay after missing a regulatory deadline last month, though the bank is still confident of completion this year.
Bank of England Complains About Special Favors
Also consider Bank of England Official Hits Out at Deutsche Stress Test.
A Bank of England official has slammed European counterparts for giving Deutsche Bank special treatment during recent stress tests, alleging it could undermine financial stability.
In his maiden hearing in front of the UK’s powerful Treasury select committee on Tuesday, Anil Kashyap said that even though a mooted $14bn fine from US authorities was looming over Deutsche, the biggest problem European lenders generally faced was that they were suffering from poor growth and that they were “badly capitalised, by all standards”.
“That’s just terrible for undermining stability,” said Mr Kashyap, a professor of economics and finance at the University of Chicago Booth, who has just been appointed as an independent member of the BoE’s Financial Policy Committee. “[European banks] are thinly capitalised, for sure. But having a stress test where the rules say: ‘you are not going to do this’ and then giving them a pass is not the way to deal with it.”
The debate over Deutsche’s treatment comes amid rising tensions between policymakers and regulators around the world about banking resilience, and questions over whether European authorities are giving their lenders an easier ride.
The EU’s financial regulation chief, Valdis Dombrovskis, said last week that the EU stood ready to reject new global reforms that aim to curb banks’ gaming of existing rules. He argues that the reforms unduly penalise European lenders.
Deutsche Bank Deleveraging Progress
Deutsche Bank was supposed to be deleveraging. Why did it’s balance sheet increase from €1.629 trillion to €1.803 trillion?
When diving into Deutsche Bank’s $47 Trillion Derivatives Book, the Wall Street Journal offers these tidbits.
Deutsche Bank has more Level 3 assets compared with its common equity Tier 1 ratio, a measure of financial strength, than its peers. Its Level 3 assets are estimated as being valued at 72% of its Tier 1 assets, according to J.P. Morgan Chase & Co. analysts. That compares with a 38% average for 12 global banks.
At the end of last year, Deutsche Bank was sitting on a pool of $10.2 billion in illiquid derivatives, according to the bank’s own valuations, compared with $8 billion for Barclays PLC and $5.9 billion for Goldman Sachs Group Inc.
For illiquid assets, investors have to rely largely on the bank’s internal valuations, which S&P Global Ratings noted “could be vulnerable to adverse changes in the underlying assumptions.”
David Hendler of advisory firm Viola Risk Advisors said the bank is developing a “Lehman-like profile,” and the Level 3 holdings pose a considerable risk to Deutsche Bank’s capital base, given the lender’s low earnings.
Gaming the Rules
The EU’s financial regulation chief, Valdis Dombrovskis, specifically supports “gaming the rules” because “reforms unduly penalise European lenders“.
When gaming the rules is not enough, big problem banks can count on special favors as needed.
The ECB said it “treats all banks equally in line with the regulation”. It would not comment on the Deutsche case specifically.
It appears some banks are more equal than others. But why? Deutsche Bank supposedly did not need that boost.
Which of course leads to the obvious question: What other special favors did Deutsche Bank receive that we have not yet learned about?
Did Deutsche Bank’s illiquid derivatives exposure get special favors too?
Mike “Mish” Shedlock