EU Erosion

Eurozone banks face £42bn ‘capital black hole’

– “I expect more bad news coming out of Germany. The strongest German Panzer was unbeatable, but there is only one problem – they have one of the worst  banking systems in the world

Government adviser Davide Serra says this year’s stress tests by European   authorities are likely to find fresh problems in the eurozone banks.

Bronze sculpture of goddess Europa holding up a Euro sign symbol in front of the Europarliament buildings Brussels Belgium

The ECB has hired about 900 people to stress-test banks Photo: Alamy

9:30PM GMT 08 Feb 2014

Eurozone banks are facing a new capital black hole of as much as €50bn (£42bn), according to one of the UK’s most respected financial analysts.

Davide Serra, the chief executive of Algebris, who advises the Government on   banking, said that this year’s stress tests by the European Banking   Authority and the European Central Bank were likely to find fresh problems   in the eurozone banks.

He said that Germany had one of “the worst banking systems in the world” and   that three or four regional Landesbanken were likely to be wound up. He also   said banks in Portugal and Greece were likely to need more capital.

“The country where I expect bad news is the country which has not been   scrutinised and has been deemed to be the strongest,” Serra said.

“I expect more bad news coming out of Germany. The strongest German Panzer was unbeatable, but there is only one problem – they have one of the worst  banking systems in the world. If you are a bright engineer in Germany you   work for BMW or Mercedes, you do not become a banker.

“I expect at least three or four [regional] Landesbanken to be put in run-off   mode. The German regulator, BaFin, is one of the weakest. It has always been   lobbied by local politicians.”

Serra, who was famously photographed last year walking to a meeting in Downing   Street clutching a sheaf of papers on the future of the Royal Bank of   Scotland, said the stress tests would finally allow the German authorities   to “come clean” on their banking system.

With combined assets of a trillion euros, the banks account for 12pc of the   country’s total banking assets, and 3pc of Europe’s as measured by the ECB.

Many believe that a number of them are sitting on badly performing property   loans which have never been properly accounted for.

“I think the ECB exercise will actually allow them to do what is right,” Serra   said of the German regulators. “That is one of the reasons why the   Bundesbank has been very forceful – requiring auditors to be in the process.   Why? They need a legal piece of paper so they can go to the local   Landesbanken and say: ‘Sorry, game over’.”

Mr Serra praised the UK financial sector for being more robust and transparent   than many countries in the European Union.

Although RBS, Lloyds Banking Group, Barclays and HSBC will be included in the   stress tests, it is thought unlikely that any fresh problems will be   revealed.

Last year, the Bank of England demanded that Barclays raise fresh capital   after scrutinising its balance sheet.

“I don’t expect more bad news to come out of the UK,” Serra said. “Britain   is the country that lost the most – we almost blew up the country so they   had to fix it.

“The change in leadership [at the Bank of England] with Mark Carney is   massively welcomed. The UK is now basically clean. We had our own Fukushima   and you had to deal with it swiftly.”

Mr Serra said although previous stress tests had failed to pick up significant   problems at banks such as Dexia and Bank of Ireland (which both needed   bail-outs after passing the test), the ECB had learned its lesson.

“The ECB has hired about 900 people to perform the exercise,” Serra, who was   formerly one of the top-rated banking analysts for UBS and Morgan Stanley,   said. “These people’s job will be not to fail. If they do, their job is at   risk. They will have a strong incentive.”

He said that institutional investors in banks should have a duty to reveal how   they voted at AGMs about a bank’s policy. “Institutional shareholders,   unless they vote clearly at the AGM and there is a record, then they should   not be entitled to the dividend,” he said.

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