Wednesday, July 28, 2010

Germany Holds Out for Better Deal at Basel

By BRIAN BLACKSTONE And DAVID ENRICH

FRANKFURT—Germany outlined its objections to the revised Basel banking rules proposals announced Monday, but its concerns didn't deter investors who drove bank stocks sharply higher across Europe.


The Basel Committee is part of the Bank for International Settlements, shown above in Basel, Switzerland.
.German officials balked at the new rules aimed at shoring up the global banking system, referred to as Basel III, saying the rules would unfairly penalize the thousands of saving and cooperative banks that provide financing for many of the small and medium-size businesses that power Germany's economy.

European bank stocks, including German banks, rallied Tuesday because the revised Basel III rules, while tougher than current regulations, are considered less severe than the initial Basel III proposals announced last December. A bank-led surge helped boost the Athens ASE index 4.1%, the strongest country performance in Europe Tuesday.

The U.K.'s Barclays PLC was another beneficiary; its shares rose 7.6%. Analysts had worried that a provision of the original Basel proposal, revised Monday, would have punished the bank for its stakes in U.S. money manager BlackRock Inc. and South African bank Absa.

Not everyone sees the new rules as positive. The package agreed to Monday in Basel included a footnote that "one country still has concerns." Germany's central bank, the Bundesbank, and its financial regulator, Bafin, confirmed Tuesday that Germany was the holdout.

"Germany wants to give its approval, but not until all the details are on the table," a Bafin spokesman said.

A person familiar with the German position said the vote on Basel III should never have gone ahead so early. Delegates didn't have all the information they required before taking a vote, the person said, recounting the German position. A spokeswoman for the Basel Committee declined to comment.

Germany's hesitance is centered on the use of "silent participations" in its savings banks, known as Sparkassen, and state-sector regional banks, known as Landesbanks. Silent participations are nonvoting shares, including government loans, that buffer bank capital positions and often come with a set date for repayment to the investor.

Germany had successfully lobbied for full recognition of silent participations when the current Basel II framework was negotiated.

But other countries want only a minimal share of banks' core capital to come from sources other than common equity and retained earnings. The Bundesbank has said it wants a bigger share to be eligible.

Germany's cooperative banks, another pillar of the banking system, have also expressed dissatisfaction with the proposed rules, saying they lacked clarity about future capital ratios.

Other countries have cooperatives and savings associations, but those networks are much more extensive in Germany, where they make up as much as half of bank assets. Unlike private banks and the Landesbanks, savings banks and cooperatives weren't highly exposed to mortgage-backed securities during the financial crisis. Instead, they tended to remain focused on lending to local firms in their regions, limiting their exposure to the global financial crisis. Germany has recovered from the recession faster than its peers in Europe, and is expected to have grown as much as 5%, at an annualized rate, in the second quarter.

German officials insist a deal is reachable. "It would be wrong to say that we won't be able to find an agreement," said German finance ministry spokesman Martin Kreienbaum. Officials are under pressure to wrap up new capital requirements before the Group of 20 summit meeting in November, in Seoul.

Ultimately, Germany's acceptance of a final agreement will hinge on two key issues: a definition of acceptable capital and how much capital a bank must hold to meet Basel III criteria, the person familiar with Germany's position said. Germany argues that the two issues are so interconnected that a change in the definition of capital would require an adjustment in the calibration of minimum holdings. German officials believe the two issues must be decided at the same time, this person said.

Despite its reservations, Germany didn't come away empty-handed from the Basel negotiations. Officials in recent weeks lobbied the Basel committee to rework the proposed "leverage ratio," which is intended to restrain banks from bulking up on risky assets without holding large capital buffers. Monday's agreement said changes to leverage ratios wouldn't be mandatory until 2018.

German officials had resisted the proposal partly due to concerns about its impact on Deutsche Bank AG, according to people familiar with the Basel negotiations. The bank said it welcomed the revisions. announced Monday

Germany's withholding of its support from Monday's Basel agreement marks the second time in four days that the country has stood alone on a key banking issue. Last week, when the European Union disclosed the results of its stress tests of 91 banks, most banks revealed their holdings of EU government bonds, hoping to address a key source of investor anxiety in recent months.

But several German banks refused to follow suit. The surprise move caused investors to wonder what sovereign bonds were on the banks' books.

On Tuesday, Deutsche Bank reversed course and disclosed its sovereign-bond portfolio. The lender said it is holding more than €10 billion ($12.99 billion) of debt issued by the Greek, Italian and Spanish governments—considerably more than the bank previously had disclosed.

Germany's failure to release details of its bank's sovereign-debt holdings Friday was unintended, the Bafin spokesman said.

"Due to a misunderstanding in the communication, six German banks failed to publish their levels of sovereign debt Friday," the spokesman said. "The details have since been published."

—Geoffrey T. Smith and David Crawford contributed to this article.
Write to Brian Blackstone at brian.blackstone@dowjones.com and David Enrich at david.enrich@wsj.com