Deutsche Bank woes show de­sire for ECB clar­ity

The Pak Banker - - COMPANIES/BOSS -

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 6.9 per­cent as of 10:28 a.m. Frank­furt time. 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 eu­roarea 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.

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.

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