Deutsche Bank was given special treatment in the summer stress tests that promised to restore faith in Europe's banks by assessing all of their finances in the same way.
Germany’s biggest lender, whose share price fell as much as 22 per cent in recent weeks on fears of a $14 billion US fine, has been using the results of the July stress tests as evidence of its healthy finances.
But the Financial Times has learnt that Deutsche's result was boosted by a special concession agreed by its supervisor the European Central Bank (ECB).
Deutsche’s results included the $4 billion proceeds from selling its stake in Chinese lender HuaXia, even though the deal had not been done by the end of 2015, the official cut-off point for transactions to be included.
The HuaXia sale was agreed in December 2015. It has still not been completed and now faces a delay after missing a regulatory deadline last month, though the bank is still confident of completion this year.
The HuaXia treatment was disclosed in a footnote to Deutsche’s stress test results. None of the other 50 banks in the stress tests had similar footnotes, even though several also had deals agreed but not completed at the end of 2015.
Foreign assets
In one case, Spanish lender Caixabank completed the €2.65 billion sale of foreign assets to its parent company
Criteria
Holding in March but was still not allowed to include the impact of that sale in its results.
"This [Deutsche's treatment] is perplexing," said Chris Wheeler, an analyst at Atlantic Equities. "The circumstances mean that it is inevitable the market watchers will be suspicious and have some concern about the veracity of the results."
Deutsche’s common equity tier one capital fell to 7.8 per cent after the bank was subjected to the stress tests’ imagined doomsday scenario of fines, low interest rates and low economic growth.
Without the HuaXia boost, the ratio would have been 7.4 per cent, a level comfortably above regulatory minimums. Still, the higher published result helped reassure investors who were growing increasingly nervy about the bank’s capital adequacy.
Nicolas Véron of Bruegel said it was important that both the ECB and the European Banking Authority (EBA), which oversaw the tests, could "explain and defend their methodological choices", especially given the market focus on Deutsche.
“Stress testing methodologies should be applied uniformly and without any special treatment,” he added. “This of course equally applies to banks that are systemically important, such as Deutsche Bank.”
The ECB is responsible for approving any deviations to the published methodology for banks in the eurozone countries it supervises. The EBA does not have the power to reject deviations.
The ECB said it “treats all banks equally in line with the regulation”. It would not comment on the Deutsche case specifically.
‘One-offs’
The EBA said that there were more than 20 “one-offs” approved in the stress tests. “The one-offs are designed to avoid obvious anomalies in the forward-looking stress test where events have already taken place in 2015,” the EBA said.
Research by the FT shows that the other "one-offs" were disclosed, citing a clause in the methodology that permits limited concessions around "administrative expenses, profit or loss from discontinued operations and other operation expenses".
The Deutsche disclosure simply says that the results include the proceeds of the HuaXia sale, which “will be closed in 2016”.
There is no effort to reconcile that to the official rules, which say: “Any divestments, capital measures or other transactions that were not completed before 31 December 2015, even if they were agreed upon before this date, should not be taken into account in the projections”.
Deutsche declined to comment. The German bank still took a battering from the stress tests: its capital position was hit by 540 basis points, compared with an average in the sample of 380 basis points.
