German Banks Warn ECB Against Stricter Rules in Review

Germany’s two main banking associations said the European Central Bank should refrain from imposing stricter rules on bad loans and capital buffers in its planned review of banks’ asset quality.

The ECB should rely on existing accounting rules to measure capital, non-performing loans, and the provisions to cover them when it probes banks’ assets in the assessment, the Bundesverband Deutscher Banken and the Bundesverband Oeffentlicher Banken said in a paper last month obtained by Bloomberg. Applying other rules may unjustifiably lower values for assets or capital and raise buffer requirements, they said.

“We urgently advise against prescribing own supervisory definitions, such as a definition of non-performing loan portfolios,” the two associations said in the document, which was addressed to the ECB, the German Bundesbank and the country’s banking regulator Bafin.

The ECB is slated to take over supervision of euro-area banks next year, after a transition period in which it will assess the quality of banks’ assets and their resilience to shocks. The bank reviews are the final opportunity to restore confidence in the region’s financial system, ECB Executive Board member Joerg Asmussen said last month.

Stress Tests

Europe’s lenders have undergone two stress tests since 2010, with eight banks failing the last round conducted by the European Banking Authority in 2011 with a combined capital shortfall of 2.5 billion euros ($3.4 billion). Belgium’s Dexia SA was among banks that passed only to be wound down.

The ECB should abandon plans to unify bad-debt rules in line with a proposal made by the European Banking Authority, the associations say in the document. Loans that are more than 90 days overdue shouldn’t require banks to book an impairment charge in every case, they say. Such a rule will ignore national customs on extending loan terms and could lead to “excessive risk assessment,” they said.

The asset review “can only be an assessment of whether the applicable accounting rules have been correctly applied,” the groups said. Questioning the value of assets based on benchmarks or other banks’ valuations shouldn’t be allowed, they said.

The supervisors also shouldn’t be allowed to question the risk weights banks apply to assets in order to determine capital requirements or to order banks to raise risk provisions as a percentage of an asset’s value, the associations said.

The regulators should also refrain from defining capital rules that diverge from the legal status quo, such as bringing forward rules from the Basel Committee for Banking Supervision or the European Commission which are phased in over the coming years, they said.