Speech by Dr Elke König on the results of the Comprehensive Assessment

Date: 26.10.2014

Speech by Dr Elke König, President of the Federal Financial Supervisory Authority (BaFin), at the Press Conference of BaFin and the Deutsche Bundesbank for publication of the results of the Comprehensive Assessment on 26 October 2014 in Frankfurt am Main.

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Ladies and Gentlemen, I too wish to extend you a warm welcome to this joint press conference of the Deutsche Bundesbank and BaFin. Apart from the road closures, there hardly could have been a better backdrop for us than the Frankfurt Marathon. 130 European institutions – including 25 German – have taken part in the assessment marathon by the European Central Bank (ECB) over the past twelve months – a marathon which at the same time was a hurdle race. In a Comprehensive Assessment, the ECB examined these banks’ balance-sheet and off-balance sheet items for value and furthermore tested them for resilience in the event of crisis. The aim was to create transparency and to identify any past liabilities and equity gaps that might still be lurking.

An innumerable host of banking employees and, at peak times in Germany alone, roughly 250 supervisors and 1,700 auditors took their places at the starting line. For all those involved, this very athletic exercise cost a great deal in terms of time, effort and nerves. The famous stress with the stress test.

That makes the performance of the German participants all the more pleasing: 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 – Mr Dombret will say something about this right away. But the German institutions are in good shape. Even under the stern gaze of the ECB, their accounts have kept what they promised. I wouldn’t have expected anything else, even though time and again rumours to the contrary were heard. These were refuted by the ECB’s balance sheet assessment (Asset Quality Review – AQR). And even under the adverse stress test scenario, the banks have proven their endurance. They thus have enough capital to withstand even a severe global financial shock.

Only Münchener Hypothekenbank eG stumbled over one hurdle. In the Comprehensive Assessment it reports an equity gap of €229 million. As is known, however, the key date of the exercise was 31 December 2013. Since then the institution carried out a capital increase of €408 million, closing the gap comfortably. In Germany, then, there is no bank with a “net equity gap”.

Since the outbreak of the financial crisis in 2008, German banks have done a great deal to improve their capital base. The average Core Tier 1 capital ratio of all German institutions has since improved from 9.2 to 15.0 per cent in 2014 [June data in each case.]. For the German participants, the Comprehensive Assessment confirms this trend in an impressive manner.

The environment was good in 2013 and 2014, and here and there the ECB’s exercise surely had a catalyst effect: nine out of the 25 institutions have once again significantly expanded their capital base this year – in the vast majority of cases by raising fresh capital on the market or retaining profits.

Some banks have also divested themselves of company divisions and portfolios so as to reduce their risk-weighted assets. An additional €14.4 billion has been raised by the institutions since the start of the year – not yet including de-leveraging. That puts them amongst the leaders in the euro zone. And by the way, they didn’t employ any tricks for this; i.e. no “soft capital” came into play here. Neither did improvements to the ratios come about from adjustments to their internal banking models, as was criticised with the previous stress test as you all know.

It comes as no surprise, then, that most of the 25 German participants are already now in a position to fully meet key Basel III requirements – and not only in 2024 as planned in Europe. And that even under the adverse stress test scenario. 20 out of the 25 banks report a “fully-loaded” Basel III ratio of over 5.5 per cent for the adverse stress test scenario. A similar picture emerges for the leverage ratio, which according to the Basel Committee on Banking Supervision is to be binding only from 2018. For years, BaFin and the Bundesbank have been dealing with the subject of “preparation for Basel III”, and of course we have also had the "fully-loaded figures” in view at all times – as will the ECB in future as well. Mr Dombret will say something about this right away, too.

Just a word or two more on the balance sheet assessment and the stress test, Ladies and Gentlemen: in the balance sheet assessment the German banks on a weighted average report an additional effect on the Common Equity Tier 1 ratio of just 0.3 percentage points. That is all the more remarkable given that the ECB’s specific banking supervisory assumptions in some cases were much stricter than what accounting regulations in force would prescribe or even allow. It was almost exclusively these more stringent requirements of the ECB that resulted in additional impairments. We thus have no reason to doubt the accounting of the German institutions or the work of the auditors of the accounts.

The prudential thrust of the exercise made itself felt above all with those German banks that have major shipping portfolios on their books: given the forecasting uncertainty and the high volatility of the shipping market, the ECB prescribed additional haircuts, justified on supervisory grounds, for the valuation of the non-performing loans. That accounts for roughly 30 per cent of the total effect of the balance sheet assessment. Further impairment requirement resulted from haircuts on commercial properties and the revaluation of loans to large business clients. These impairments are – as stated – not relevant for accounting. They did however have an influence on the starting position for the stress test, which was adjusted to the results of the balance sheet assessment.

As was to be expected, the German participants did not emerge from the stress test completely unscathed. The effects here are of course significantly higher than in the balance sheet assessment. But then, it wouldn’t have been a real stress test otherwise. After all, it wasn’t just about measuring participants’ resting heart rate in the baseline scenario. The adverse stress test scenario was an exercise ECG. Under this scenario, the ratio for Common Equity Tier 1 declined by an average of 3.6 percentage points. That was primarily due to the rise in risk-weighted assets based on the higher credit risks and the additional impairments in the lending business resulting from that. On the revenue side, the stress assumptions influenced the net interest income to a significantly negative extent, the refinancing assumptions were very strict. Losses in trading activities had a rather minor role to play.

And you must not forget one thing: the ECB and the European Banking Authority (EBA) have drawn lessons from the 2011 stress test and have taken a much stricter approach in designing the requirements for the current stress test. For example, the stress test results for the two scenarios have now been determined over a period of three years – compared with only two years in 2011. Moreover, negative developments in government bonds were taken into account – to name just one other example. In short: the stress test put the banks to a hard test.

And yet, even under the adverse stress test scenario, the capital base of the German institutions is well above the minimum level – albeit only after the capital increase in the case of Münchener Hypothekenbank eG. If you take a look at the banks of other countries, you will see that the stress effect in Germany is quite significant. And yet: the capital base of the German institutions under the adverse stress test scenario is indeed rather impressive. Even though it is true here, as always, that some banks are in a more comfortable situation than others.

The join-up, i.e. the combination of the balance sheet assessment and stress test results, revealed only a relatively small additional effect for the German institutions, specifically a reduction in the Core Tier 1 capital ratio by 0.19 percentage points. That was primarily owing to the fact that the balance sheet assessment resulted in negative adjustments for valuation parameters only in isolated cases, which were then included in the stress test accordingly (e.g. for probability of default or the percentage of non-performing loans).

Was this complex exercise really worthwhile? It definitely was. The German institutions have proven that they are well capitalised, and refuted many a doubter. The Comprehensive Assessment provides the market and the wider public with transparency. Now everyone can see how resilient the banks in the euro zone are and where there is still a need to act.

The ECB will summarise the findings from the Comprehensive Assessment and take them into account in its future supervision. This includes organisational questions and questions relating to data availability. The knowledge gained goes beyond mere figures. German institutions, too, still have some homework to do. There is no need to say that the ECB will keep a critical eye on those areas involving the largest uncertainties, as we have done in the past. Exercises like the Comprehensive Assessment are important. But we should not forget that they consist of scenarios that we make up. We are only really wiser in real life.

One remark in closing before I hand over to Mr Dombret: in a few days we will be placing supervisory responsibility for 21 of the 25 German banks reviewed in the hands of the ECB. I am happy that these banks will enter into the new supervisory world without any immediate need for action.

What role will be played by us national supervisors once the starting gun goes off for the new supervisory regime? A minor role? Certainly not. A supporting role? Certainly more likely, but a major one. Without the expertise of the national supervisors the Single Supervisory Mechanism would not be able to function.

As members of the Joint Supervisory Teams, BaFin and the Bundesbank will participate in the supervision of the major institutions from the entire euro zone. Also on the Supervisory Board – the highest operative body of future European supervision – we have a decisive say in things. That said, we will not be putting on any international cockfights there. All board members have an obligation to act in the interest of the Union. I see the Single Supervisory Mechanism as an opportunity for Europe and for us. Naturally, this includes that the Single Supervisory Mechanism aims at addressing the national differences uncovered by the Comprehensive Assessment.

It is only reasonable that the national supervisors will retain their existing competences and powers for the less significant institutions. However, the ECB must and will ensure that these institutions also continue to be supervised in all countries of the euro zone in accordance with uniformly high standards. We will therefore report to it regularly on our supervisory activity. The ECB does not have any specific right to issue instructions to us on individual measures. However, in the event that national supervisors should breach the common supervisory standards, it may assume full supervision over a less significant institution. It is of course for us to ensure that we never go down that road in the first place.

Ladies and Gentlemen, I thank you for your attention and look forward to hearing Mr Dombret’s statements. After the game is before the game. You have the floor.

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