Germany wants Basel agreement but clearer rules

Germany will not agree to global supervisors' proposals to beef up banking capital and liquidity until they take into account the needs of its public banking sector, officials said on Tuesday.

But officials and analysts said it was wrong to conclude from Germany's hesitancy over bank stress tests and Basel III supervisory talks that Germany was now balking at tighter global regulation, after having led the charge until recently.

Germany took issue on Monday with the Basel Committee's definition of what qualifies as capital held by banks in its plan to guard against a repeat of the worst global financial crisis since the Great Depression.

The committee plans to scale back many proposals made in a draft last December, signaling concessions in the face of lobbying by banks and governments. But German regulators still balked at supporting it.

"We have misgivings about decisions by the Basel Committee," Bundesbank spokeswoman Madleen Petschmann said on Tuesday.

One person involved in the deliberations said regulators from Germany were cold to the proposal throughout negotiations over the so-called Basel III package, designed to beef up bank capital and liquidity.

Germany will withhold its decision on whether to give its support until figures for higher capital and phase-in timetables are added in September.

An official in Berlin said the current proposal was out of step with the nuances of financing for small and medium-sized firms that are the backbone of Europe's largest economy.

"We have a very specific problem in Germany which no other country has: our savings banks and cooperative banks," the German government official said, declining to be named.

"They finance the Mittelstand, which does not have access to capital markets," the official added, in a reference to small and medium-sized enterprises.

"Disruptive" for Economy

Germany's savings and cooperative banks rely on deposits but have no real equity. The Basel committee defines core capital as only equity and retained earnings, but does not take into account other capital contributions on which the banks rely.

"If you impose a U.S.-style definition of capital on these banks it would be very disruptive, and extremely disruptive to our economy," said the official in Berlin, adding however that Germany felt it was very close to a deal on Basel III.

One banking expert said that since savings and cooperative banks have traditionally been risk averse and make lower profits, Berlin would be aiming for rules from Basel that take risk into account when setting capital requirements.

"The rules need to be dependent on risk levels," said Wolfgang Gerke, President of the Bavarian Financial Center.

Berlin's reservations at the Basel III talks come after a number of German banks, including Deutsche (DBKGn.DE), declined to detail their exposure to the debt of heavily indebted euro zone members in European stress tests.

The stand-off over Basel, combined with Deutsche's reluctance to reveal sovereign debt holdings that turned out to be twice as high as expected, contrast starkly with Germany's recent hawkish approach on global financial regulation.

Until recently Germany was seen as leading the charge and in May took its euro zone partners by surprise with a unilateral decision to ban naked short selling of some assets.

But Standard & Poor's analyst Stefan Best said the German banks' delay in publishing sovereign debt details looked more like a misunderstanding of the stress test rules than a deliberate, concerted German tactic.

"I wouldn't consider that a big deal," he told Reuters.

Gerke also said it should not be taken as foot-dragging by Berlin, calling Deutsche's reluctance natural and saying the government would not have encouraged it.

"They would surely have pushed for more transparency, but I'm not aware the government was involved at all," he said.

The official in Berlin said Germany was as eager as any other country to steer banks to hold more and better quality capital so they can withstand future shocks without taxpayer help, but that final agreement would be put off until later.

"We are very committed to coming to an agreement (at the G20 summit) in Seoul in November, but it has to be an agreement for the whole package," the official said. "We are waiting for the completion of the impact studies before we can agree."

[Source: By Brian Rohan and Alexander Huebner, Reuters, Berlin and Frankfurt, 27Jul10]

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