ECB in discussion with German supervisors; question over treatment of ship loans in health check. Compromise emerging which may involve 'haircut' on loan valuations.
The European Central Bank is taking a hard line on the controversial issue of how shipping loans should be valued in a wide-ranging review into the health of the euro zone's banks, several sources familiar with the matter said.
The ECB is making sure the euro zone's most important banks have properly valued their assets and have enough capital to withstand future crises so it can begin with a clean sheet when it takes over as their supervisor from Nov 4.
In the past, critics said national supervisors overlooked or even tolerated warning signs of potential shortfalls at banks for fear of causing upsets. A regional supervisor like the ECB which is free from national bias is expected to do a better job.
Taking a tougher line on shipping loans, crucial for several banks in the euro zone's powerhouse Germany, would show that the ECB is resisting the influence of national interests in one of its powerful member states.
Shipping was one of the problem portfolios identified early on in the ECB's banking reviews, as the industry suffered one of its worst ever downturns in the last six years, raising the prospect of massive losses for banks who supported the sector.
The sources said that the ECB had deemed models German banks use to calculate the value of ships they financed as being based on assumptions that are too optimistic, demanding a mark-down after discussing the matter with German supervisors.
Two sources familiar with the review said shipping valuations had been hotly debated for months since, while the ECB suppports conservative valuations generally, shipping is one of the only areas where the tests allow scope for discretion.
After long discussions, a compromise is now forming, several sources said, adding that banks may end up having to apply a so-called prudential haircut to the models they use for the purpose of the health check.
This means that German ship financiers, among the largest in Europe, will face bigger losses on shippng loans, giving them a worse result in the ECB's overall assessment of their health. At its most extreme, they could be forced to raise more capital.
The implications for banks in the Netherlands and Greece, who also have extensive shipping portfolios but valued them on a different basis, are unclear.
Commerzbank has a shipping loan portfolio of 13 billion euros ($17.38 billion), HSH Nordbank has 20 billion euros and NordLB 16 billion euros.
NEARING A COMPROMISE
So far, German banks used discounted cashflow (DCF) models to calculate the collateral value of the ships they financed, which include multiples of future cash flows attached to the loans.
The derived value is currently higher than the ships' market value, mainly because the shipping industry remains stuck in a crisis following flagging global trade, rising fuel costs and over-capacities.
The Baltic Dry Index, a key measure of dry bulk freight rates, has fallen more than 60 percent since the beginning of the year.
The ECB, on the other hand, would prefer to use a calculation that is geared closer to the market value.
With negotiations continuing, the latest prospect was that the prudential haircut could be 12 percent, two sources close to the discussions said.
It was not clear yet how large the additional writedowns for banks in the health checks would be as a result of the modification, one banker said.
An ECB spokesperson declined to comment in detail, but said: "We are working according to the [tests'] Manual and will come up with requirements that produce appropriately conservative outcomes and are consistent across countries."
German regulator Bafin declined to comment, as did the Bundesbank. The two institutions share banking supervision in Germany.
By Andreas Kröner