Watch Out Germany: Scholz’s Bank Plan Won’t Just Hit Italians

(Bloomberg) --

Banks across Europe -- not only in the south -- would be hurt by stricter rules on sovereign debt proposed by the German finance minister and some might need to change their holdings significantly.

That’s the conclusion of a recent study showing that firms in France, Germany, Italy and Spain may face the biggest burden if Olaf Scholz’s plans on European banking integration -- now under discussion in Brussels -- come to fruition.

Scholz proposed that government bonds held by banks should no longer be considered automatically risk-free, as part of wider plan to help revive stalled talks on the so-called banking union. That could dramatically increase the amount of capital the lenders would have to keep in reserve to protect against potential losses.

The research, conducted by Eric Dor, director of economic studies at the IESEG School of Management in Lille, France, assessed the potential impact of Scholz’s proposal on banks. While the minister’s eight-page plan didn’t specify how risks to government debt should be calculated, Dor said he based his review on “plausible” assumptions.

French heavyweight Groupe BPCE as well as smaller German lenders and development banks could see their capital requirements skyrocket because of large exposures to their respective home countries, Dor said. Italy’s UniCredit SpA and Intesa Sanpaolo SpA would also see a signifcant rise.

Scholz sought to break an impasse earlier this month, saying Germany is ready to relax its long-standing opposition to a joint form of bank deposit guarantees that’s key to closer integration. However it would only do so if other countries met a list of demands including the tougher rules on sovereign debt. Finance ministers meeting next month are expected to agree on the way forward.

The debt proposal aims to weaken the link between European banks and their home states, an interdependence that played a central role in Europe’s debt crisis. Germany has pushed for changing this relationship for years.

Scholz ideas drew an immediate rebuke from his counterpart in Italy, where domestic government debt makes up a relatively large share of banks’ balance sheets. The study shows the tougher rules would have a wide impact, including in more fiscally conservative states like Germany.

Dor’s study, dated Nov. 19, shows which banks would have the greatest incentive to diversify their sovereign debt holdings. German giants Deutsche Bank AG and Commerzbank AG as well as Dutch lenders and big French banks aside from BPCE would see little impact.

UniCredit would see its risk-weighted assets rise 8.37%, according to the study, meaning it would have to increase its capital by more than 4 billion euros ($4.4 billion) to maintain its tier 1 ratio, a key measure of financial strength. Intesa would need an increase of around 2.7 billion euros.

“We shouldn’t fall prey to the error of thinking we’re just talking about a torture instrument for undisciplined southern European countries,” Felix Hufeld, the president of German financial watchdog BaFin, said this month. “If we’re also talking about municipal bonds -- as we would of course -- then we have a huge German problem.”

--With assistance from Nicholas Comfort and Alessandro Speciale.

To contact the reporter on this story: Alexander Weber in Brussels at aweber45@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Ross Larsen, Patrick Henry

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