Bank of England official hits out at Deutsche stress test
Special treatment by ECB branded as ‘terrible for undermining stability’
A Bank of England official has slammed European counterparts for giving Deutsche Bank special treatment during recent stress tests, alleging it could undermine financial stability.
In his maiden hearing in front of the UK’s powerful Treasury select committee on Tuesday, Anil Kashyap said that even though a mooted $14bn fine from US authorities was looming over Deutsche, the biggest problem European lenders generally faced was that they were suffering from poor growth and that they were “badly capitalised, by all standards”.
The Financial Times reported earlier this week that supervisors at the European Central Bank had allowed Deutsche to count the $4bn proceeds of the sale of its stake in Hua Xia, the Chinese lender — a deal yet to complete — even though the EU’s stress test rules stated specifically that only transactions completed before December were allowed to be counted.
“That’s just terrible for undermining stability,” said Mr Kashyap, a professor of economics and finance at the University of Chicago Booth, who has just been appointed as an independent member of the BoE’s Financial Policy Committee. “[European banks] are thinly capitalised, for sure. But having a stress test where the rules say: ‘you are not going to do this’ and then giving them a pass is not the way to deal with it.”
The exemption was disclosed. While 20 other lenders were granted exceptions in the tests — which are run by the European Banking Authority but where individual supervisors sign off any special treatment — they were within the ambit of the rules. Even without the Hua Xia proceeds, Deutsche would still have been comfortably above regulatory minimums during the stress test.
Germany’s biggest lender has seen its share price plunge by 22 per cent in recent weeks over concerns about its ability to pay a fine to the Department of Justice over the way it sold mortgage-backed products that sparked the financial crisis. The DoJ wants to fine Deutsche as much as $14bn but the bank has said it will not pay that level of penalty. Both sides are still locked in negotiations.
Mr Kashyap was responding to a question by Stephen Hammond, a Conservative member of the select committee, over whether such fines posed risks to financial stability; the BoE’s committee on which Mr Kashyap sits aims to spot and mitigate risks to the UK’s financial stability.
The debate over Deutsche’s treatment comes amid rising tensions between policymakers and regulators around the world about banking resilience, and questions over whether European authorities are giving their lenders an easier ride.
The EU’s financial regulation chief, Valdis Dombrovskis, said last week that the EU stood ready to reject new global reforms that aim to curb banks’ gaming of existing rules. He argues that the reforms unduly penalise European lenders.
Mr Kashyap also said that the flash crash in sterling last week had no “material effect”, adding that algorithmic trading — largely blamed for the crash that saw sterling drop from $1.26 against the dollar to a little over $1.18 in two minutes during Asian trading — was not a particular threat to stability but something that the FPC should keep an eye on.