German Banks May Face $2.4 Billion Hit on Dividend Stripping

(Bloomberg) -- German banks may face a hit of 1.9 billion euros ($2.4 billion) from their involvement in a dividend-stripping practice that has recently come under scrutiny, the country’s financial market regulator estimates.

The amount reflects the exposure of 24 banks involved in the transactions, known as Cum-Ex, calculated by regulator BaFin based on figures provided by the lenders. As part of a parliamentary inquiry, BaFin provided the information to German lawmaker Gerhard Schick, who confirmed the figures to Bloomberg.

Cum-Ex transactions relied on language in German tax laws that seemed to allow both short-sellers and the actual holders of shares to claim tax credits on a dividend that was only paid once. The strategy made use of tax certificates issued by banks involved as custodians of the trades. While Germany eliminated the rules in 2012, there has been an ongoing debate to what extent their use before that time was legal.

The BaFin figure is lower than an estimate from the German finance ministry reported last month. The ministry confirmed in an emailed statement to Bloomberg that it sees a total exposure of 5.3 billion euros based on 417 cases of suspected involvement by banks in the transactions, 2.4 billion euros of which has already been reclaimed or not paid out in the first place.

German federal and regional governments had recorded 196 suspected dividend-stripping cases worth a total of 3 billion euros by the end of 2016, deputy finance minister Michael Meister said in an answer to a letter from Schick.

Commerzbank AG recently said it had found evidence that it used the practice between 2003 and 2011. The public prosecutor’s office in Frankfurt is investigating the bank over the case, Commerzbank said in its interim report for the third quarter of 2017.

©2018 Bloomberg L.P.