Germany’s banks may not be as sound as they seem, if European regulators decide against their use of a specific form of capital as Tier 1, according to the Financial Times.
Much of the German banking sector relies on hybrid capital, or stille Einlagen, to make up its Tier 1 capital requirements. It is essentially a type of debt that functions like a stock in some ways.
London regulators appear to be pushing for this hybrid capital to not be counted as Tier 1. This could force many German banks to fail the upcoming European stress tests, or a least struggle to pass them, and could put further costs of restructuring and recapitalization on the German government.
And while Deutsche Bank, with 33% of its Tier 1 capital made up of hybrid capital appears to be safe, others like West LB (76%) and Commerzbank (73%) may have immediate cause for concern.
While Germany is still struggling with its troubled Landsbanks and the exposure of its banking sector to Europe’s fringe, this tier 1 capital crisis now seems the country’s most imminent financial threat.