German banks at risk to widen debt crisis: Bafin

BONN: A widening of the euro zone debt crisis beyond a Greek government default would pose an incalculable risk for Germany's banks, a top German regulator said in an interview.

"A Greek government default cannot be seen in isolation," Raimund Roeseler, head of banking supervision at German financial watchdog Bafin, told Reuters.

Germany's banks are robust and better capitalised than they were two years ago but the potential for a chain reaction following a Greek government default would take the sector into unknown territory, Roesler said.

"We are worried particularly about the possible knock-on effect, which we cannot reliably calculate. Every figure you can name is just a guess," he said.

German banks have less than 10 billion euros ($14 billion) of exposure to Greek government bonds in total, with Deutsche Bank at around 1.2 billion euros and Commerzbank at 2.2 billion.

But a Greek default could hurt banks in other countries and potentially drag down German lenders in their wake, a prospect that keeps Bafin on high alert.

"We take a reading of the liquidity situation of all important banks every day. We've tightened our surveillance and are in intensive talk with banks about their exposures and also the way they view the money market situation," Roeseler said.

German lenders are less vulnerable than their counterparts in France and Italy, banking observers say.

"German banks are in a comfortable situation because no one in the market doubts the German AAA-rating," Roeseler said.

Refinancing is also no problem for German lenders, despite a broad-based pullback from Europe by US money market funds.

"Some US investors got out of Europe without taking into consideration the different situations in individual countries, but we've seen that German banks have been able to sufficiently cover their dollar refinancing needs," he said.

Roeseler said he saw no near-term panacea to calm financial market jitters.

"In the medium term, we've got to slow the markets down. I'm particularly concerned that the derivatives markets have decoupled themselves from the real economy," Roeseler said.

In the run-up to the implementation of tighter risk-capital rules for banks, known as Basel III, Bafin is taking an ever-closer look at the systems banks have in place to assess risk.

"We are using powers to influence business models that we did not have before the crisis," Roeseler said.

The European Union wants the Basel III rules to apply to all 8,400 banks in the bloc, a view that has angered small savings and cooperative banks, who decry the extra regulatory burden.

"It is true that big banks are the focus of Basel but we need a level playing field," he said, adding that the needs of small banks would be taken into account when developing technical standards.

The new Basel rules have evoked opposition in US banking circles, notably from JP Morgan's chief executive earlier this month.

Roeseler, who is one of Germany's representatives on the Basel Committee of banking regulators, said he expected the United States to apply the rules that it helped to negotiate.

Regulators are also working to develop a list of global banks that would disrupt the financial system should they fail. These big banks will face more stringent capital requirements.

"The price of systemic relevance is not just 1 to 2.5 percent more capital, but rather a much more intense supervision than now. We will be more closely man-marking these players," Roeseler said.

Regulators are still seeking rules for winding down big banks that do fail, but one point is certain: "All investors, including creditors, will be called upon ahead of taxpayers."

Contingent-capital or "CoCo" bonds would not meet international standards for hard equity capital and the market for these bonds was unlikely to develop significantly, he added.

Following the European bank stress tests in July this year, the European Banking Authority is discussing if and how to handle publishing the results of next year's exercise.

"The raft of detail in the latest published results did not exactly serve to calm markets," Roeseler said.

Copyright Reuters, 2011