All 12 approved as Helaba withdraws

GERMANY:ALL 12 participating German banks passed yesterday's European stress test after the last-minute withdrawal of the publicly-owned Hessen Landesbank (Helaba).

The Frankfurt-based institution excluded itself after learning it would fail because the European Banking Authority (EBA) disregarded €1.92 billion worth of “silent participations” in the bank.

Silent participations are a kind of non-voting hybrid capital common in German public financial institutions. In Helaba’s case, the bank would have fallen short of the core tier-one capital target of 5 per cent. The bank said yesterday that, when all capital is included, it had a capital ratio of 6.8 per cent.

Yesterday’s stress test result showed the 12 remaining German banks tested returned an average capital ratio of 7.5 per cent in adverse financial market conditions.

The results were book-ended by publicly held financial institutions. At the top of the table was the remains of the troubled, nationalised Hypo Real Estate Holding AG, with 10 per cent. At the bottom were publicly owned HSH Nordbank and NordLB with 5.5 and 5.6 per cent respectively.

Yesterday’s tests have brought renewed attention to Germany’s public-owned regional banks. Under new Basel III rules, they are obliged to convert “silent participations” into traditional equity by 2018. After a demand by the EBA to speed up the transfer, one Landesbank after another hurried to convert its hybrid capital to equity before the stress test cut-off of April 30th.

In mid-April, NordLB raised €600 million in fresh capital after the state of Lower Saxony took a majority stake in the bank. At the same time, some €1.1 billion of “silent participations” were converted into regular equity capital. The state government in Hanover says the investment has been made – and will be repaid – at market rates to the wrath of EU regulators.

Helaba took a different approach, announcing an overhaul of hybrid capital last April worth €1.9 billion. Unlike NordLB, however, the Helaba decision is only backed by a cabinet decision not a parliamentary vote.

A spokesman for the bank, owned by savings banks and governments in the central German states of Hesse and Thuringia, admitted in April it was not clear whether this would appease the EBA. Yesterday Helaba accused the banking authority of sending mixed signals on whether silent participations would be acceptable.

The Helaba row revives questions about the health of Germany’s public banks, controlled by state governors, all of which passed stress tests last year widely seen as too lax.

The banking authority said it demanded an end to silent participations and this be changed for this round of stress tests, prompting the row with German Landesbanks.

Yesterday’s results – and the Helaba row – will increase pressure on Germany’s publicly owned banks to further reforms after losses incurred through expensive failed ventures in Ireland and elsewhere.

The largest public institution, WestLB, has already been broken up with other public banks under pressure to merge or be wound up.

Germany’s central bank said Helaba is sufficiently capitalised while Germany’s regulator, Bafin, has accused the EBA of “knitting together” its own definition of equity “without any legal remit let alone legitimacy”.