One third of top German banks’ Tier 1 capital vulnerable to euro peripheral crisis

Problem loans

At home, German banks have so far met very little obstacles that undermined their asset quality and capital ratios. It is proof of the country's resilient economy.

Apart from the Netherlands, where system aggregates for problem loans seem soundly placed over the 2.5 percent region, no one else in the euro, dollar or sterling pound zones can shadow the Teutonic 4 percent–which has varied imperceptibly since 2008.

But “unfavourable market factors, mostly ancillary effects of the European debt and banking crisis, offset the relatively benign economic factors,” Moody's investor service said in its recent German Banking System report. “[These circumstances] materially counteract German banks' efforts to improve their weak performance.”

Some of these holes in the expansion net would be common to all euro zone partners.

Take, for instance, the current low interest-rate environment, which by many accounts will remain at flat levels for quite a long time to come and will place considerable pressure on margins. Or retail clients' continued aversion risk. Transactions volumes in asset management are unlikely to resurface for any recognisable competitor, either.

Moody's also mentions that the German banking sector has yet to confront an urgent deleverage process that appears to inexplicably delay forever: the truth of the matter is that regulation requirements only get tougher–unfortunately driven by populist pressures instead of technical assessments– and market conditions aren't expected any time soon to restore the prices assets had during the boom years, particularly real estate and mortgaged-backed assets. Again, you might shame most European entities for the same fault.

But among the “vulnerabilities that can have severe implications,” at least one is inherently German. Exposures to stressed peripheral euro states, according to the ratings agency, amount to €43 billion or 26 percent of their Tier 1 capital. That is the figure linked only to government debt for Germany's top ten banks, although some of them bear large interbank, corporate and household exposures. How large? Moody's says that “consistent data is not available for all top ten German banks.”

The study refers to legacy exposures to structured credit products, too. Including complex and subprime securitisations, they would represent 65 percent of the German banking elite's Tier 1 capital–or €106 billion. And non-domestic commercial real estate exposure reached €170 billion by the end of 2011.

Would anyone tell euro zone leaders to gather and let their financial system to come clean? The blame game feels already very tedious.


About the Author

Victor Jimenez
London contributor at, reporting about the City and the Eurozone economies. He regularly writes for Spanish newspaper group Prensa Ibérica--some of his features include shared work with journalists of The Daily Telegraph and the BBC.