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Deutsche Bank Gets Relief as Germany Lowers a Capital Buffer

Germany to Let Banks Tap Capital Buffer to Weather Virus Fallout

(Bloomberg) --

Germany’s financial watchdogs eliminated a key capital requirement for the country’s banks to keep credit flowing and give flexibility to lenders such as Deutsche Bank AG and Commerzbank AG that have been hit hard by the recent selloff in stocks and credit risk.

The countercyclical capital buffer, meant to strengthen banks during good times for a downturn, will be cut to 0% starting on April 1 and remain there until at least through December, the Finance Ministry said in a joint statement with financial supervisor BaFin and the Bundesbank. As a result, banks will be able to release more than 5 billion euros ($5.5 billion) of capital they were in the process of building up.

That brings the volume of excess capital that German banks have on hand to digest losses and keep lending to about 225 billion euros, according to people familiar with the matter. That includes 120 billion euros of capital that the lenders held on top of their regulatory demands and 100 billion euros that the European Central Bank freed up last week, said the people, who spoke on condition of anonymity.

Read more about the banks most hit by the recent selloff

After more than a decade of tightening financial strength requirements, bank regulators around the world are loosening the reins to prevent the economy from seizing up. The task for banks is daunting as many corporate clients are at risk of defaulting on loans while others will probably require additional funds as supply chains are disrupted, stores and restaurants shut down and public life grinds to a halt.

“The move shows how critical the situation is in Europe,” ABN Amro Bank NV strategist Tom Kinmonth wrote in a note. “German regulators fought tough competition for a long period to raise the buffer and now have to remove it almost straight away.”

The ministry met BaFin as well as Germany’s central bank last week to discuss eliminating the buffer, Bloomberg reported at the time.

German banks are well capitalized on the whole and the industry isn’t showing liquidity bottlenecks, according to the statement.

The buffer applies to the German operations of banks, meaning those lenders with the biggest focus on the country will feel the most relief. Deutsche Bank AG, which has one of the most international footprints among German lenders, started the year with a countercyclical capital buffer of 0.08% while smaller competitor Commerzbank AG had a 0.12% requirement.

German banks as well as their European competitors presented their regulators with a long list of demands last week to help them weather the fallout from the virus. The ECB loosened several capital demands on Thursday and nudged national authorities to follow suit on their own requirements.

“One of the justifications to remove the buffers is to ‘free up lending capacity’,” wrote Kinmonth. “However, more realistically, banks will now try to actively reduce their provided credit lines” given the increase in risk.

©2020 Bloomberg L.P.