Deutsche Bank was given special treatment by the European Central Bank during recent stress tests carried out on Europe’s biggest banks, according to a story released by the Financial Times on Monday.
The FT’s Laura Noonan, Caroline Binham, and James Shotter report that Deutsche’s stress test result was given a substantial boost by the inclusion of an asset sale which took place after the European Banking Authority’s deadline for transactions to be included in the tests.
Deutsche Bank’s stress test included proceeds of around $4 billion from the sale of its stake in the Chinese bank Hua Xia, which was agreed in December 2015, but has not yet been completed thanks to regulatory issues. Under the normal conditions of the EBA stress tests, any transactions completed after the end of last year were not included, but Deutsche Bank was given a special concession, according to a footnote in the stress test results.
No other banks were given such concessions. For instance, Spain’s Caixabank sold €2.65bn worth of foreign assets to its parent company Criteria Holding in March, but that sale was not included.
The inclusion of the sale basically means that Deutsche Bank’s stress test included $4 billion on its balance sheet that it does not actually have yet, boosting its top capital ratio — the key component of the stress test.
The results of the stress test, released in late July, showed that Deutsche’s
key capital ratio, the so-called fully loaded common equity tier one (CET1) ratio, a measure of the reserves a bank has to withstand a shock to its balance sheet, stood 12.1% in the baseline scenario, and 7.8% in the so-called “adverse scenario” — basically a significant negative shock to the economy.
According to the FT’s calculations, that 7.8% would have fallen to 7.4% if the Hua Xia sale had not been included. That result would still put DB well above the minimum capital ratio needed by banks.
The German bank is facing several issues right now. US authorities are demanding a fine of up to $14 billion (£11 billion) for mis-selling mortgage-backed securities, and Deutsche Bank is throwing its energies into reaching a settlement before next month’s presidential election. However, so far no deal has been reached, and fears in the markets remain that the bank could be on the verge of collapse.
Consequently, shares have slumped by more than 20% in recent weeks, dropping to a more than 30-year low a couple of weeks ago. On Monday, the bank’s shares are marginally lower, off by 0.8%: