ECB Chief economist disses German banks (and Eurostresstests)

A little shock for the Germans while we’re at it, with resonances for the whole Eurozone. From FT Deutschland:

The chief economist of the European Central Bank (ECB), Juergen Stark, considers the German banks to be undercapitalized. Stark made this statement on Wednesday at a meeting with the head of Unions Parliamentary Group in Berlin, according to participants. He was referring largely to savings banks and regional banks (Sparkassen und Landesbanken). Accordingly, [Stark] called for privatization of the German savings banks, based on the successful Spanish model. The ECB declined to comment.

Jürgen Stark’s comments feed doubts about the local banking system.This is even more surprising given the positive results for the regional banks in the stress test of the EU in July, in which the ECB were heavily involved.

Well, whether any of that is a big novelty is debatable: not if you read Hubert in the comments, or read Yves’s posts passim, for the last couple of years at least, or anything at all about the recent stress tests, apart from the official puffs. Very tasteless remarks, these. Good for Stark, though there is some serious politics going on, no doubt, when the ECB’s Chief Economist contradicts the ECB.

Apart from the nationalized Hypo Real Estate, which took part hors concors, as it were, all the banks, even in the worst scenario, reached the required minimum capital ratio. According to statements at the time by the Bundesbank and BaFin, which share regulatory responsibility, the banking system was “robust” and “resistant”. Admittedly, the German savings banks, unlike the Spanish Cajas, did not take the test.

So he’s administering a glancing blow to BuBA and BaFin as well. Hmm. Takeaway: some breaking of ranks in Europe on the quality of the stress tests.

Meantime, irrespective of all that, Stark  agrees that the German banks are going to need rather a lot of new capital because of the Basel III changes to their very arcane capital calculations.

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  1. Diego Méndez

    As I see it, the stress tests just tried to measure how far from bankruptcy European banks were.

    But even if a banking system is not nearing bankruptcy, e.g. because that banking system is getting capital from its operations and can repay its debt, a credit crunch can occur. In order to avoid a new credit crunch, the banking system needs more capital than it needs when it simply wants to avoid bankruptcy.

    By the way, this is also true for the US. While total credit has stagnated in the eurozone, credit is falling at an alarming 15% annual rate in the US, which is tantamount to a credit crunch due to an undercapitalized banking system.

  2. rental_paradise

    Ah, the Sparkassen – the very backbone of the Mittelstand, utterly regional and generally run in a way that tends to place the interests of that region (though of course, ‘interests’ has a number of meanings) first. And who are a bulwark in Germany from the banking sector consisting of a few TBTF institutions.

    Politics? Oh yes, nothing but. Not without reason, especially in the case of the Landesbanken, but still politics.

  3. Dieter

    My understanding is that it is the big German banks that are undercapitalized compared to the regional Landesbanken and Sparkassen. This should be a question of fact, not opinion. Does anyone happen to know this fact for sure?

    1. Martin

      Already your question is phrased wrongly. Some of the Landesbanken are actually members of the big banks.
      By balance sheet size of 2007
      LBBW is number 4 of German banks
      Bayern LB is number 7
      WestLB number 10

      However, number 9 is Kreditanstalt fuer Wiederaufbau – the federal govt bank.

      Number 1 is Deutsche Bank by a large margin, but with a lot of non-German business – and so far without need for direct bail out.
      Number 2 and 3 are Dresdner and Commerzbank, which fusioned and needed bail out, and are now partially owned by the federal govt – the govt has a hybrid capital share, which currently counts as equity, but would not count as such under Basel III.

      In 2007 number 8 was Hypo Real Estate -which by now is 100& by the federal gov’t.

      If you look into the Wikipedia list

      you will easily find, that more than half of the 20 biggest banks in Germany have considerable public shareholders.

      In total Sparkassen, Landesbanken and other banks with significant public influence should easily make more than 50% of all balance in Germany.

  4. b

    To put the Sparkassen, regional banks owned by the county or city with a quite limited business, into the same class as the Landesbanken is ridiculous.

    The Landesbanken were on the way to privatization which let them to stray away from the stringent rules they once had.

    The Sparkassen still have those rules and are the backbone of the local communities.

    To privatize them is a terrible idea.

    1. Martin

      “The Landesbanken were on the way to privatization which let them to stray away from the stringent rules they once had.”

      Really? There are several independent Landesbanken and they were big in every crisis – Asia, dotcom, now the house price stuff. In addition there were special scandals e.g. at the Landesbank Berlin. The Landesbank Sachsen was only created after the Reunification (so not too many years earlier than the Asian crisis).
      The problems of the Landesbanken are
      a) lousy personal. The Landesbanken have a bad image among “real” investment bankers, there personnel is often chosen based on partisan politics.
      b) no control. The people responsible for controlling the Landesbanken have neither time nor knowledge. Often e.g. the finance minister of the corresponding land. They have to run the lands finances, campaigning, and very often have never worked in high finance themselves.
      c) much more savings than credit demand. This actually affects all German banks, as well the private. But banks of a country with low net investment and high CA surplus is difficult terrain for banks. If the Landesbanken would try to stick with providing the German Mittelstand with liquidity, they would have to scale down dramatically. The only form of credit that some might argue is underdeveloped in Germany is consumer credit, but this is certainly not the job of the Landesbanken. LBBW has some household finance arm, but this was really not the original intention of the Landesbanken, and the others don’t operate in the household sector.

  5. yoganmahew

    One of the failures of the stress test was the limited scope. Only slightly more than 50% of each market (eurozone country) was tested.

    It is not clear how the 50% benchmark was arrived at – is it domestic assets of the domestic banks? Clearly not as otherwise external eurozone sovereigns wouldn’t be included. What then of Deutsche and Commerzbank? Between the two of them with their international operations wouldn’t they more than exceed the size of the German market?

    It should be noted that Anglo Irish Bank, the one that has caused (and continues to cause) much angst in Ireland was under 25% of banking by assets. It likely would not have been included in the stress test had it not already been nationalised. The German banks that got themselves in trouble were all relatively small operations looking to turn themselves into big players (much like Anglo).

    So a selective method for a partial look in search of a preset answer – drunks under streetlights springs to mind…

    1. Diego Méndez

      I agree. Let me add: In the case of Spain, which, I think, tried to be honest, 90% of the system was stress-tested.

  6. charles

    W.Münchau estimated a few weeks ago ‘Der Stress nach dem Test'( ) that the German banking system, mainly because of what he referred to the inventivity, meisterschaft of the banking system,in various forms of ‘stille einlagen'( hybrid capital )could be considered broadly ‘insolvent’ and that the authorities had failed or turned their back on the problem of ‘ramping’ then up correctly.

  7. Debra

    WHO is Stark ??
    When the Emperor has no clothes on… it is not because the Emperor has no clothes on that the empire crumbles, it is because SOMEBODY points a finger, and pipes up..
    Shared illusions bolster up society.
    It’s the party poopers who are VERY RESPONSIBLE for bringing it down…
    Maybe Stark should have kept his mouth shut ?
    Too much blabbing going on all the time.
    It will be the death of us.

  8. Peter Dorman

    Regarding the politics of the Landesbanken especially, but also the Sparkassen, don’t overlook the pressure from Brussels to demonstrate that they don’t receive public subsidies. To do this, they have been pushed to show a market rate of return, and to do that the inexperienced asset managers bought tons of MBS crap. Now this is used as an excuse to go to privatization, which was the EU idea all along.

    Even after years of dithering, it is not too late to put forward a strong defense of public banking in Germany.

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