Banking supervision

Unpacking Europe’s banking stress-tests: German and French banks at the brink of insolvency


Smoke and mirrors apart: it is France and Germany that have by far the largest equity funding shortfalls among Eurozone banks.* Further, the aggregate equity funding shortfall for European banking is much larger than the ECB would have us believe. The aggregate equity funding shortfall for the 11 largest Eurozone banks alone is roughly 90 bn, or almost 10-fold larger than the shortfall identified by the ECB for all 130 banks included in their study ( vis-à-vis a 3 % leverage ratio). If a more prudent equity funding ratio is adopted, the equity funding shortfall is €540 bn, or 50-fold larger than the ECB figure released a few weeks ago.

The ECB’s comprehensive assessment of Eurozone banks rounded up the usual suspects: to find poorly capitalized banks we should look to Europe’s periphery in general, and to Italy in particular. Of the 13 banks identified as undercapitalized, nine were Italian (4), Greek (2), Slovenian (2) or Portuguese (1) **, and their aggregate capital shortfall was just under 10 bn euros.

We’ve explained that this result depends crucially on using a category of equity funding that is broader than what is commonly understood to be truly loss-absorbing equity capital and measuring equity capital relative to risk-weighted assets instead of relative to total assets.

Assessing equity capital relative to risk-weighted assets essentially means assessing capital to only (roughly) one third of the exposures of large banks, accepting as a premise that the other two thirds of the bank’s balance sheets are riskless. In extreme cases, such as Deutsche Bank, the ratio of risk-weighted to total assets is as low as 18 % and, by implication, more than 80 % of their assets are treated as riskless, with no need for equity funding to absorb losses on those parts of its balance sheet. On this background, it’s a small wonder that Deutsche Bank passed the ECB’s “stress-test”.

The relevant measure for the solvency of European banks is loss-absorbing equity funding relative to total assets. One can arrive at this measure, on the basis of the data released by the ECB and the European Banking Authority (EBA), in two steps:

The European Banking Authority published data that included figures on “fully loaded CET11 ratios” in their report on the Results of the 2014 EU-wide stress-tests (see Annex 1, table 5) – such data were, for undisclosed reasons, not included in the ECBs comprehensive assessment. Combining those data with absolute numbers for risk-weighted and total assets from the Bankscope database, solid measures of ratios of loss-absorbing equity funding to total assets can be calculated.

Consider the 11 largest of banks (by total assets) in the Eurozone. For each bank we calculate a equity capital ratio (loss-absorbing equity to total assets) and equity funding shortfalls vis-à-vis two thresholds: a 3 % threshold (roughly corresponding to the Basel 3 minimum leverage ratio), and a 7 % threshold, in recognition that scholars agree that 3 % equity capital to total assets would still constitute a low level of equity funding (with recommendations often much higher, at between 10 and 15 % of total assets. The thresholds used in these calculations are relatively conservative, in other words. ***

Total assets (million euros) Stressed   leverage ratio, Y2016 Capital shortfall with 3 % threshold, bn euros Capital shortfall with 7 % threshold, bn euros Capital shortfall with 7 % threshold, per cent of GDP
Deutsche Bank AG 1611400 1.3 27.32 91.77 3.35
Commerzbank 549661 2.39 3.34 25.33 0.93
ING 787644 2.94 0.46 31.97 5.30
Groupe Credit Agricole 1706326 2.22 13.36 81.61 3.96
BNP Paribas 1800139 2.36 11.47 83.48 4.05
Societé Generale SA 1235262 1.81 14.66 64.07 3.11
Groupe BPCE 1123520 2.10 10.09 55.03 5.38
Banco Santander SA 1115638 3.20 42.34 4.14
Banco Bilbao 582575 4.55 14.24 1.39
Unicredit SpA 845838 3.26 31.67 2.03
Intesa Sanpaolo SpA 626283 3.44 22.29 1.43
All 11 banks 81 544 5.68 % of Eurozone GDP

Sources: ECB 2014; EBA 2014; Bankscope. Note: The stressed equity funding ratio is calculated on the basis of EBA data on ‘fully loaded common equity tier 1 (CET1*) – meaning that goodwill and other ‘phantasies formerly known as capital‘ are not counted as equity Funding – multiplied by ratios of risk-weighted to total assets, as reported by the banks themselves for end-2013 (available in Bankscope). For details of the calculation of stressed leverage ratios, see the table below.

The main results are as follows:

  • In this sample of the 11 largest banks in the Eurozone, only the four Italian and Spanish banks have sufficient loss-absorbing equity funding to meet a 3 % threshold
  • The largest equity funding shortfall is that of Deutsche Bank, amounting to nearly 100 bn euros, or more than 3 % of German GDP
  • The four French banks in this small sample of European banks have an aggregate equity funding shortfall of 284 bn euros, corresponding to almost 14 % of French GDP
  • The aggregate equity funding shortfall of the two Italian banks is just over 50 bn euros – less than 10 % of the aggregate equity funding shortfall in this sample of the 11 largest Eurozone banks
  • The equity funding shortfall for these 11 banks is almost ten-fold larger than the equity funding shortfall identified by the ECB for all 130 banks even in the mildest of the two scenarios (the 3 % threshold)
  • Against the stricter threshold (7 %), the equity funding shortfall for the 11 banks is more than 500 bn euros, or 50-fold more than the equity funding shortfall identified by the ECB and corresponding to more than 5 % of the GDP of the entire Eurozone.

Despite all the talk about enhancing transparency, the ECB has published a report on the solvency of European banking that fundamentally misrepresents the issues. This does not bode well for the future of banking supervision in Europe, nor for a future European banking union.

But in so doing, the ECB continues a tradition of ‘smoke & mirrors’ in the supervision of Europe’s banks.

Jakob Vestergaard, GEG Watch, 20 November 2014.

Photo by Sherry Burklew.

* Whereas the ECB uses the phrase “capital shortfall” we find the phrase “equity funding shortfall” more appropriate: the point is that the funding mix of the banks rely far too much on debt funding, with only marginal equity funding. The equity funding shortfalls we identify signal a need to shift the composition of funding: reducing debt funding and increasing equity funding. A key challenge in all of this, is to change the way we talk about issues of bank solvency.

** The 13 banks that failed the ECB’s capital assessment were two Greek banks (Eurobank and National Bank of Greece), four Italian banks (Monte dei Paschi di Siena, Banca Carige, Banca Popolare di Milano and Banco Popolare di Vicenza), two Slovenian banks (Nova Ljubljanska Banka and Nova Kreditna Bank Maribor), Portugal’s Banco Comercial Portugues Cyprus’ Hellenic Bank; Franco-Belgian Dexia, Austria’s Oesterreichischer Volksbank Verbund and Ireland’s Permanent TSB.

*** We will soon publish the data for all 130 banks included in the ECB assessment. Stay tuned for the full results.


CET1* Total assets RWAs RWA/TA (%) Leverage ratio
Deutsche Bank 7,00 1611400 300369 18,64 1,30
Commerzbank 6,90 54966 190588 34,67 2,39
ING Bank NV 8,20 787644 282503 35,87 2,94
Credit Agricole SA 8,60 1706326 439928 25,78 2,22
BNP Paribas 7,60 1800139 559632 31,09 2,36
Société Générale SA 7,10 1235262 315496 25,54 1,81
Groupe BPCE 6,40 1123520 368977 32,84 2,10
Banco Santander SA 7,30 1115638 489736 43,90 3,20
Banco Bilbao Vizcaya Argentaria 8,20 582575 323605 55,55 4,55
UniCredit SpA 6,50 845838 423739 50,10 3,26
Intesa Sanpaolo SpA 7,80 626283 276291 44,12 3,44

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