Helaba withdrawal hints at 'fundamental value' in stress test results, says analyst

German bank Helaba’s withdrawal from the European stress-testing process indicates there could be 'fundamental value' in the results, an analyst says
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One of the largest banks in Germany withdrew from the European stress-testing process on Wednesday, in a move that one analyst believes indicates the results, due late on Friday, could contain "fundamental value".

"It appears that the European Banking Authority (EBA) is sticking to its guns, something that lends legitimacy to the regulator," said Jennifer Kapila, a financial institutions analyst with Roubini Global Economics in London. "The rising and public concerns of some banks vis-à-vis core capital definitions and disclosures suggest there may be some fundamental value in the upcoming tests."

Kapila's comments struck at the core of the criticism of the last round of stress testing, carried out by the EBA in 2010. Under those tests, only a handful of banks failed. For example, Allied Irish Bank and the Bank of Ireland passed the tests, just a few months before the banking crisis in the country saw the lenders need large government bailouts.

The Bundesbank leapt to the defence of the German lender. The central bank's vice-president, Sabine Lautenschlaeger, said, "Helaba is, in the opinion of Deutsche Bundesbank, even under the stringent assumptions of the European stress tests, adequately capitalised."

There has been uproar among German banks after non-voting capital was excluded from the testing, also known as silent participations. These are permitted by German bank supervisors, meaning German banks are up in arms about the European testing, which they believe leaves them in an unfair position.

Jochen Sanio, the chairman of Germany's banking regulator, Bundesanstalt für Finanzdienstleistungsaufsicht (Bafin), has attacked the stress tests' "legitimacy".

Sanio said that the EBA had used a definition of capital in its stress tests that departs from international norms "with consequences no-one can gauge". He also claimed that the EBA's tests lacked "clear, defined corporate-governance structures, which alone could guarantee process legitimacy".

The withdrawal of Helaba from the process, whereby it has revoked the EBA's permission to publish some data related to the bank, is ambiguous in terms of why they chose to pull out, said Kapila.

"Helaba, and some other German banks, may have a fundamental problem or may simply be standing their ground. Either way, this bickering shows a serious disconnect between those banks' managements and markets or market participants," she said.

Kapila stressed that clear information was the only route to solving the European financial crisis. "[Markets] need clarity around bank exposures as well as a coherent plan to deal with the European banking system's vulnerabilities. This is a critical element to mitigating the eurozone crisis," she said.

The EBA is set to release the results of its latest round of stress testing late on Friday after weeks of delays. And it is not only German banks that face strife from the stress tests.

"To top-tier investment banks, the release of the results will not be all that important as they did the work months ago. To the markets, there is some feeling you will then get speculation, and that is probably right. Those banks that haven't been ready for this, which are not the top-tier in London, will probably be wondering where this is all going," said Clive Stainton, head of risk at Rule Financial, an investment bank consultancy.

UK also faces trouble
Stainton did predict significant difficulties ahead for the UK, however, this time concerning the capability of the British regulators to cope with the process.

"Speculation is rife that a significant proportion of banks in the European Union subject to the EBA's latest round of stress tests will fail against the new criteria," said Stainton. "Inevitably, a number of these banks requiring additional external support will be headquartered in the UK. However, our own regulatory body, the FSA, is behind the curve in dealing with these issues. Firstly, it is not entirely sure yet how to approach those banks that fail the stress tests. Secondly, the regulator just doesn't have the manpower or systems in place to handle the large volumes of data that will be submitted by the banks when looking for support in meeting the stress-testing requirements."

 

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