March 27, 2014 / 7:26 PM / in 4 years

German banks oppose including legal costs in stress tests - banking group

FRANKFURT, March 27 (Reuters) - German banks would not favour including potential legal costs in upcoming stress tests on European lenders, the head of a German banking group said, after the U.S. Federal Reserve pointed out those risks in its health check on lenders in the United States.

The head of the association of German banks (BdB), Michael Kemmer, said on Thursday it would be too complex to address such issues in the tests, which will check how a selected group of European banks will hold up under certain stress scenarios.

“Stressing of legal risks is problematic in principle because it implies using sweeping assumptions,” said Kemmer, managing director of BdB, whose members include large commercial lenders Deutsche Bank and Commerzbank.

“It would stretch stress test methodology to the limit and it would be a very difficult exercise,” he said.

Legal risks and the buffers banks need to cover them are already a challenge for banks themselves to quantify in their annual financial accounts.

Such risks did not feature as a parameter in the U.S. stress test scenarios but the Fed came to the conclusion that large banks could face in the worst case another $151 billion of losses related to potential litigation and other costs.

The ECB is due to take over responsibility for overseeing the 128 largest euro zone banks in November. Its assessment of banks’ assets and liabilities as well as the stress tests to root out potential hazards is aimed at giving it a clear picture of the banks it will be supervising.

Kemmer said he had some doubts whether the ECB’s testing of banks would be completed in time.

“The timetable is extremely tough, and the data demands are extremely high, not just for Germany but for other countries as well,” he said.

“Everything has to run optimally if we are to keep to schedule, not just for the banks but also for those giving the stamp of approval.”

Kemmer said he expected the stress test exercise to build confidence in the system, but warned against simplifying the results into a pass-fail interpretation for individual banks.

Banks, for their part, were building their capital safety buffers further where needed, he said.

“Capital measures are certainly already being prepared,” he said. (Reporting by Jonathan Gould, Eva Taylor and Andreas Framke)

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