EBA’s Deutsche Bank Test Concerns Brushed Aside by Board Members

  • Huaxia sale helped Deutsche Bank report higher capital ratios
  • Board of Supervisors approved exception over staff reservation

National supervisors on the European Banking Authority’s board overruled EBA’s stress test experts to grant Deutsche Bank AG an exception in this year’s European Union stress test.

The decision allowed Deutsche Bank to record the capital impact of its sale of a stake in Chinese lender Huaxia Bank Co. in the bank health assessment even though the transaction hadn’t been completed by the test’s cut-off date. The exception was approved by the EU national supervisors, the voting members of EBA’s supervisory board, after staff questioned it, EBA Chairman Andrea Enria said in a letter to a European Parliament lawmaker.

The decision, which was disclosed in footnotes in EBA’s documentation, helped Deutsche Bank to show higher capital ratios when the test was published in July. It highlights the fact that European supervisors are still influenced by national institutions, contributing to concerns about political meddling in stress test results and banking supervision.

“With this approach, EBA destroys the trust in the results of the stress test and in the stability of European banks,” said  Sven Giegold, a German Green member of the European Parliament, in an e-mailed comment. “With this special approval, Deutsche Bank just about managed to meet the leverage ratio in the adverse case.”

Deutsche Bank’s sale of the Huaxia stake was agreed Dec. 28, 2015 but hasn’t been completed yet. Under EBA’s stress test methodology, such transactions could only be considered deals in its stress test if they weren’t only agreed, but also completed by the end-2015 cut-off date.

‘Raised Concerns’

“EBA staff raised concerns as to its consistency with the static balance sheet assumption of the methodology,” Enria said in a letter to Sven Giegold, a member of the European Parliament who had asked the regulator about the case. “The EBA’s Board of Supervisors was requested to express its views in a vote and approved this exception.”

The deal is expected to increase Deutsche Bank’s common equity Tier 1 capital ratio by about 40 to 50 basis points, the bank has said. The lender’s CET1 ratio dropped to 7.8 percent in the EBA stress test’s adverse scenario, while its leverage ratio declined to 3 percent.

Deutsche Bank Chief Executive Officer John Cryan has struggled to stem a slide in shares and maintain client confidence after the U.S. Department of Justice made an initial $14 billion request to settle a probe into faulty securities. Some investors have called for deeper cost cuts amid concern that the lender will have to raise capital even after eliminating thousands of jobs.

The problem with the EBA exemption for Deutsche Bank’s Huaxia sale was illustrated when the bank missed an initial goal of closing the deal in the second quarter. Chinese regulators didn’t approve the sale until the beginning of this month.

In his letter, Enria said that EBA approved “one-off events” for 21 lenders which were allowed to adjust future earnings estimates for the impact of divestments or restructurings already completed in 2015. The ECB, which submitted the request to make the exemption for Deutsche Bank, has said that its supervisory arm “treats all banks equally in line with the regulation.”

Members of EBA’s board of supervisors are the 28 national banking supervisors, Enria himself and his deputy Pedro Duarte Neves. The EBA declined to comment on the result of the board’s vote on the exception.

— With assistance by Nicholas Comfort

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