In Europe: Deutsche Could Need 9 Bln Euro To Pass New EU Test

13 October 2011


European Banking Authority may likely require banks to stockpile more capital in the event of sovereign debt writedowns. This is the weighty difference between a 7 and 9 percent core Tier 1 capital ratio

Deutsche Bank (DBKGn.DE) would need 9 billion euros (8 billion pounds) in fresh equity if new EU stress tests imposed a 9 percent core tier 1 capital ratio, two people with direct knowledge of the bank’s finances said on Thursday.

The bank would pass the latest European Banking Authority test if a 7 percent ratio were to be required, the sources told Reuters.

Deutsche Bank declined to comment, but in separate remarks the bank’s chief executive said it would do all it could to avoid a forced recapitalisation.

Josef Ackermann said the bank had enough funds of its own to cope with a crisis and added that writedowns of sovereign debt, or haircuts, combined with demands to boost bank capital could lead to a credit crunch in the real economy.

The European financial watchdog is going to require banks to hold more capital than previously demanded in order for them to be able to withstand sovereign debt writedowns and a worsening economic situation.

Ackermann, Germany’s most high-profile banker, said it was doubtful whether a blanket recapitalisation of European banks — a measure being considered by politicians in Germany andFrance — would help solve the sovereign debt crisis.

“It is not the capital position which is the problem, but the fact that sovereign debt as an asset class has lost its risk-free status,” Ackermann told a conference in Berlin. “The key to the solution is therefore in the hands of governments, to restore confidence in the solidity of state finances.”

He said it was key to ensure that banks had access to long-term financing from markets. “At the moment that is close to impossible for any bank,” he said.

Before considering further measures to stabilise the euro zone politicians and regulators should consider the cumulative impact of proposals such as forced recapitalisation, a transaction tax and writedowns on bonds.

“We need to find the right balance between stricter regulation of the financial sector and the impacts these have on the economy as a whole,” he said.

Deutsche Bank’s obligation to retain Greek bonds had cost it 400 million euros this year, he said.

Ackermann’s warning comes as Europe’s economic engine faces slowing growth in many ofGermany’s top export markets as governments rein in spending to bring down high debt levels.

The German government expects gross domestic product growth of 3 percent this year, which would provide vital economic stimulus to a euro zone that has become increasingly dependent on Germany as the debt crisis intensifies.

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