Joint press release issued by BaFin and the Bundesbank: Results of the comprehensive assessment for Germany
The comprehensive assessment (CA) conducted by the European Central Bank (ECB) has determined that the balance sheets of the 25 participating German institutions are sound and that the banks’ capital position would be sufficient to withstand a severe economic shock. This positive result is due not least to the capital measures taken over the past few years, and it does not include measures taken this year. Dr Elke König, President of the German Federal Financial Supervisory Authority (BaFin), described the performance of the participating German banks as very gratifying: "
Almost all of them made it to the finish line of the Comprehensive Assessment without tripping over even a single hurdle. Of course, no bank can or should rest on its laurels."
The only bank with a nominal capital shortfall is Münchener Hypothekenbank. However, it has already considerably strengthened its capital position this year, which means this gap is now closed.
The balance sheet assessment and the stress test have created an unprecedented level of transparency," said Dr Andreas Dombret, the Bundesbank Executive Board member in charge of banking supervision. He noted that this exercise had been successful also because it motivated many institutions to be proactive in making improvements to the quantity and quality of their capital ahead of the assessment. The German institutions under observation raised an additional €14.4 billion in capital from the beginning of this year to the end of September.
In the asset quality review (AQR), more than 18,000 credit files and 15,000 collateral items in Germany were reviewed according to uniform standards. The portfolios, selected using a risk-based approach, covered around two-thirds of each bank’s credit risk-weighted assets. The vast majority of these assets turned out to be recoverable and properly reported – in both the banking and trading books. On a weighted average, provisioning needs in Germany identified by the AQR amounted to 0.3% of risk-weighted assets (RWA). These low provisioning needs clearly show that German institutions have applied the accounting standards conservatively, especially since in some areas the requirements imposed by the AQR were considerably stricter than the accounting rules currently in force. Most of the provisioning needs in Germany were attributable to these prudential requirements and will therefore not be reported on balance sheets. "This result is in line with our expectations. The additional prudential adjustments show clearly that caution remains warranted in individual market segments," Dr König noted, adding that this was particularly the case for shipping and real-estate finance.
Germany’s banks proved to be well capitalised even under the assumption of a significant deterioration in the economic environment. In the join-up of the AQR and the tough stress test, total capital depletion for Germany’s institutions was estimated to be over €30 billion, reducing German institutions’ overall common equity tier 1 (CET1) capital ratio to 9.1%. After the exercise, the overall capital ratio was a little over 4 percentage points below the starting figure as at 31 December 2013. Value adjustments to the original figures in the AQR and the attendant adjustments to the risk parameters accounted for around 0.5 percentage point of this figure. This shows that the stress test was the major determinant of German institutions’ overall CA results.
This time, the assumptions were significantly more rigorous than those for the 2011 stress test. The incorporation of key findings from the AQR, which was conducted simultaneously, represented major progress. For Germany, the stressed scenario simulated a cumulative GDP contraction of 7.6% by 2016 (i.e. over a three-year period). In this scenario, banks also had to contend with rising interest rates and falling prices for government bonds without being allowed to take business policy adjustments into account.
The greatest losses (in terms of CET1) were incurred through write-downs and provisioning in the banking book; this reduced the figure by 2.18 percentage points. Trading losses and the stress-related rise in RWA contributed 0.88 percentage point and 1.88 percentage points, respectively, to the losses. The phasing-out of transitional arrangements for the recognition of capital instruments by supervisors reduced institutions’ own funds by an additional 0.72 percentage point up to 2013. However, banks were able to counter this with positive income effects before losses and provisioning, which accounted for 2.13 percentage points.
130 European institutions, including 25 from Germany, took part in the CA, which consisted of the AQR and the stress test. Of the 25 German institutions, 21 will be supervised directly by the ECB in the future. The Single Supervisory Mechanism (SSM) for euro-area banks will be launched on 4 November 2014. German supervisors will continue to be closely involved in the supervision of these banks.
The insights gained from the CA lay important foundations for the SSM’s agenda. "
Just because the largest German banks did not show any capital shortfalls in the stress test does not mean they can sit back and relax. After all, after the stress test is before the stress test," Dombret said. "
Germany’s large banks will have to continue to make efforts to improve their capital positions and profitability, especially in an environment of international competition."