Of Special Interest


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15th July 2011

Helaba says has withdrawn from European stress test

In an interesting twist to the European Stress test process Landesbank Hessen-Thueringen believes it can prevent the European Banking Authority from publishing the capital levels for the bank and says that it has withdrawn from the process.

Under the EBA's capital definitions the bank will fall below the 5% core capital threshold required - and the bank freely admits this. It argues that the EBA should accept silent participation, a form of non-voting equity capital still in common use within Germany. If silent participation was allowed the bank states that its core capital would be 6.8%. The state of Hesse, a major shareholder of the bank is said to support the bank's decision.

Many German banks complained about the exclusion of silent participation capital from this year's stress test and it is understood that the federal authorities argued the case strongly for its inclusion. Silent Participation is not recognised as Core Tier 1 capital under Basel III however and the EBA is seeking to use Basel III standards as it brings a common capital measure across Europe. Whilst silent participation may in some cases be argued as having a conditional element making it less good than common equity the state of Hesse made a 'public and binding' declaration backing its silent participation. This declaration might make you wonder why the state could not have simply converted the silent participation to ordinary capital. The measurement terms have been known for some considerable time.

Should Helaba's decision to exit the process be considered invalid and it be deemed to have failed the stress test it would then fall on the German Federal authorities to agree a remedial plan. The remedy might be that in the fullness of time the state of Hesse convert its capital to common equity. The incident, which touches on the farcical, will be used by those already doubtful of the rigour of the European stress test as evidence that their fears are well founded.