Deutsche Bank Woes Show Will for ECB Clarity Amid Volatility

  • ECB officials debating right amount of disclosure on SREP
  • In the meantime ECB willing to let information come from banks

In a world where Deutsche Bank’s stock can whipsaw more than 10 percent over three days, investors are asking for the European Central Bank to tell them what’s going on. In the short term, they’ll probably be kept waiting.

Instead, as the bedding-in process of Europe’s nascent “banking union” continues and the ECB debates how to provide transparency to volatile markets, officials are leaving it up to lenders to lay bare the process that determines their capital levels. That could worsen the uncertainty over regulatory policy evidenced last month when Italian bank stocks slumped following a misunderstanding over an ECB data request on non-performing loans.

Since a selloff erased almost 2 billion euros of Deutsche Bank’s stock value on Monday, attention has focused on one trigger for the slump -- the opaque process known as SREP that affects a bank’s capital levels and its ability to pay coupons on risky debt, dividends and bonuses. While the European Banking Authority says investors should know how supervisors can limit payouts, so far the ECB hasn’t been able to resolve an internal discussion about how much to say -- and has remained silent during the recent market rout.

“It would be good if the European Banking Authority, the ECB and the national central banks sit together to synchronize their policies in order to restore some calm,” said Patrick Lemmens, who helps oversee about 8 billion euros in financial-services stocks at Orix Corp.’s Robeco Groep NV in Rotterdam. “If you look at the fundamentals of European banks, how they are capitalized and have improved profitability, there’s no real reason to panic.”

Deutsche Bank fell 6.6 percent as of 12:26 p.m. Frankfurt time on Tuesday. The stock is down almost 40 percent this year.

The Supervisory Review and Evaluation Process can lead to an additional capital requirement on top of the legal minimum. While the ECB has significantly boosted transparency since becoming the region’s bank overseer in 2014 and could publish the plans for all 129 euro-area banking groups under its charge, it’s unlikely to make that its response to the stock tantrum. Rather, the institution’s view is that there’s nothing stopping the Frankfurt-based lender from releasing more information itself.

Banks can of course publish details about their SREP plans if they see the need or are legally obliged to, an ECB spokeswoman said by telephone. Regarding communications with market participants, the ECB is in line with and follows best practices among international supervisors, she said.

Deutsche Bank said in January that the ECB told it that it must maintain a minimum 10.25 percent capital ratio, rising to 12.25 percent when applying additional requirements it will implement by the start of 2019. While the bank has disclosed the headline discretionary capital number, it didn’t provide other details on its SREP plan.

Wary ECB

At the same time as banks are feeling market pressure to disclose full details of capital plans, ECB officials are wary of giving up their room for maneuver with lenders. Still, Ignazio Angeloni, a member of the ECB’s supervisory board, has spoken in favor of providing investors with more information.

“An appropriate degree of disclosure may enhance market confidence and encourage investment decisions, actually reducing uncertainty,” he said in a speech in November. That said, he acknowledged that others argue that “in order to preserve an open and productive dialogue between the supervisory authority and the bank, all information exchanged should remain confidential.”

The outcome has been somewhere in the middle. While the ECB hasn’t encouraged lenders to make their SREP plans public, it’s allowed some to do so when pressed by their local stock regulator. That includes Italian banks such as Banca Monte dei Paschi di Siena Spa, the worst performer in the 2014 ECB Comprehensive Assessment, though the whole process was heavily criticized by the Bank of Italy in September.

Italian Slump

In January, an ECB request for more information over banks’ handling of non-performing loans led investors to believe that higher capital demands were on the way, causing the stocks to slump. Despite the selloff, the ECB didn’t initially correct the misunderstanding.

“When considering whether to speak up, central bankers will doubtless consider the lessons of 2007, when they assured markets that banks like Dexia were fine shortly before those lenders collapsed,” said Karel Lannoo, chief executive officer of the CEPS think tank in Brussels. “They would probably prefer to say nothing than to say something which looks stupid afterwards.”

The teething pains of ECB supervision are now being felt against the backdrop of Europe’s evolving regulatory landscape, which includes a new mechanism for managing bank failures that rules out the possibility of automatic state bailouts. A measure of euro-area bank stocks has declined more than 25 percent this year.

In the midst of market volatility, there’s no reason to expect the ECB to communicate on individual share-price movements or act to calm the market. That’s not the job of supervisors, according to Nicolas Veron, a senior fellow at the Brussels-based think tank Bruegel.

At the same time, “I don’t think that everything about SREP can be kept confidential, given how important these decisions are for investors,” he said. “The ECB is very slow-moving about this compared to the market, and they’ll have to work on that.”

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