Colin Barr

Following the money in banking, economics, and Washington

Germany's bleating bankers

June 6, 2011: 2:52 PM ET

As a thrifty export powerhouse, Germany often puts the United States to economic shame.

But don't despair: its bankers are every bit as irresponsible and politically powerful as ours.

That's why German banks and their supposed masters are lobbying the European Banking Authority to weaken the stress tests that are due out in coming months. Their sauerbraten is that the EBA is trying to make banks hold higher-quality capital to ensure that shareholders, rather than taxpayers, help pay the bills in the event of a big bank failure.

A no-no for the banks

German banks are carping because they have been issuers of so-called hybrid securities that share the characteristics of stock and debt. Banks like to sell these rather than common shares because issuing them allows them to raise money at less cost to shareholders, which of course is good for bonuses and the like. They have those over there too.

So they want the EBA to back off – and in a replay of a movie you may have seen once or twice already on these shores, they have managed to persuade their regulator they are in the right.

"This gives cause for concern in the future," Jochen Sanio, who runs Germany's financial regulator, said of the tough EBA rules.

Money, needless to say, is the big concern. A Goldman Sachs survey of bankers finds that they expect big European lenders to have to raise 29 billion euros ($42 billion) to shore up their finances against possible losses in a financial shock or recession. The harder line the regulators draw on capital quality, the more money the banks will have to raise.

Yet the case for more bank capital is quite strong from everyone else's perspective. Fed governor Daniel Tarullo this month called for higher capital standards for the biggest banks, along with strict rules on what counts as capital – with little tolerance for hybrid instruments.

Tarullo said regulators should generally steer clear of letting banks use hybrid securities for capital, because history shows that "there is considerable risk that once some form of hybrid is permitted, a slippery slope effect ensues, whereby national regulators approve increasingly diluted forms of capital under political pressures."

Sanio, you might say, is in danger of becoming the chief citation for this case. But by all signs he is blissfully unaware of the laughingstock risk.

"It would be regretful," he said Monday in railing against the tougher capital rules, "if the European banking supervisor would be discredited right at the beginning of its work."

So true. You would hate to see the European banking supervisor join the German one in that camp.

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About This Author
Colin Barr
Colin Barr
Senior Writer, Fortune

Colin Barr has covered finance for Fortune.com since November 2007. Previously he was a writer and editor for TheStreet.com, winning a 2006 Society of American Business Editors and Writers award for "The Five Dumbest Things on Wall Street," and for Dow Jones Newswires. He is a 1991 graduate of Penn State and lives in Port Washington, N.Y., with his wife Meena Bose and their two kids.

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