Commerzbank has dodged a huge nationalization-shaped bullet. Back in December, the German lender was told to raise an eye-watering €5.3-billion ($6.9-billion) of extra capital as part of the European Banking Authority's push to create a sector-wide buffer against sovereign bond losses. Commerz has hit the target – but in a way that may not help the EBA's objective of increasing confidence in European banks.
The achievement hardly comes out of the blue. The bank revealed in January that it was over halfway to meeting the shortfall. Then the EBA allowed provisions taken against the lender's stock of peripheral debt to be deducted from what it had to raise, meaning Commerz only had €1.8-billion left to do by the EBA's June deadline. In the end the bank has met its EBA target and found another €1.1-billion of extra capital on top. That is all well and good. The snag is how Commerz has got there.
Some of the bank's capital raising was via conventional means, such as retaining earnings. But over half the shortfall was achieved via so-called "risk-weighted asset management" – measures that reduce the capital calculation's denominator, rather than increasing its equity numerator. Some of this is perfectly justifiable – Commerz is deleveraging, after all. But some of it comes thanks to tinkering with the internal models that calculate the risk-weightings. These tweaks may also be justified. But their black box nature makes it very difficult for investors to see what's going on.
Commerz can contend, quite reasonably, that its approach is better for shareholders than finding €5-billion via a conventional rights issue, or adding to its 25 per cent government stake by accepting further state capital. And while its tweaks to risk-weighted asset calculations are on the heavy side, other banks are playing the same game. Indeed, the EBA reckons that the management of risk-weighted assets accounts for 23 per cent of European banks' capital-improvement plans.
Commerzbank deserves credit for meeting its side of the bargain. But the pattern of European banks improving capital ratios via a series of tweaks rather than by raising new equity has downsides. One is that by signing them off the EBA's own credibility as a tough supranational regulator takes a dent. The other is that investors may keep feeling jumpy about European banks.