Lautenschlaeger Sees Backstops in Place as ECB Readies Bank Test

The European Central Bank is working under the assumption that funds will be available to plug equity shortfalls at banks as it prepares a “tough” test of their balance sheets, ECB Executive Board member Sabine Lautenschlaeger said.

“Public backstops will be available the moment we need them,” she said at a conference hosted by the Bundesbank in Frankfurt today. This year will be “very decisive -- we have a chance to clean things up and we should take the opportunity,” she said.

The ECB is scrutinizing the balance sheets of the euro area’s biggest banks to restore confidence in their financial strength and prevent a repeat of the region’s debt crisis. The concern for some investors is that the central bank will hold back from identifying the true extent of unrealized losses at individual banks because of a lack of available support funds.

A Europe-wide fund for winding down banks without viable business models that are unable to access funds from investors will be “crucial” to restoring credibility to the banks as national mechanisms are not sufficient, Lautenschlaeger said.

The fund may never have to be used as it is the “third line of defense” for banks after tapping shareholders for equity and imposing losses on bondholders, according to Juergen Fitschen, Deutsche Bank AG’s co-chief executive officer. Banks need more information on how a so-called bail-in of creditors will work, he said on a panel with Lautenschlaeger today.

Resolution Fund

The annual cost to German banks from efforts to create a banking union will peak at as much as 10.6 billion euros ($14.6 billion), Michael Stappel, an economist at DZ Bank AG, wrote in a report yesterday. The main expenses are deposit insurance, contributions to the resolution fund, and higher financing costs for debt subject to losses, he said.

Lautenschlaeger and Fitschen were joined by Martin Hellwig, a German economist who has called for banks to hold $20 of equity per $100 of assets, and Gerhard Schick, a member of Germany’s parliament from the opposition Green Party.

The ECB board member said that, unlike Hellwig, she supports the use of capital ratios that take account of the risk of bank assets. The leverage ratio, which measures equity as a share of a bank’s total balance, should be just one part of a “sound toolkit” and regulators must ensure banks have enough capital to continue to lend to companies, she said.

Fitschen, whose career in banking spans about four decades, took a similar position on the leverage ratio. The 65-year-old co-CEO of Germany’s biggest bank said lenders have made progress on efforts to build equity since 2008 and were never as well capitalized in his lifetime.

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