German Banks Face Higher Capital Buffer Amid Low Profitability

German banks have long suffered from low profitability. A new capital buffer set to be adopted by regulators isn’t going to help.

A financial stability committee on Monday recommended an additional capital requirement for German banks as it seeks to force lenders to build up defenses before the next downturn.

Adoption of the buffer is a near certainty and it will increase regulatory demands by 0.25 percentage points from the third quarter of next year. That’s equivalent to 5.3 billion euros ($5.9 billion) in additional capital, German banking supervisor Felix Hufeld said at a news conference in Berlin.

The burden will come on top of a regulatory regime that’s already more onerous than in many other European countries. German banks also tend to be less profitable than their European peers and higher capital requirements may further diminish their prospects.

Tough Capital Rules

German banks face higher capital requirements than many of their competitors
Source: Company filings
Note: Show average of requirements for three largest banks in each country
The counter-cyclical capital buffer, as it’s known, is meant to guard against banks’ tendency to boost lending in boom times and then slash it in a bust, potentially exacerbating an economic slowdown by denying companies credit when they need it most. It’s designed to be built up when risks are growing, and released during times of stress.

There are no acute financial stability risks but the banking sector needs to be prepared for possible global dangers stemming from Brexit, Deputy German Finance Minister Joerg Kukies said at Monday’s news conference. The German banking sector has enough capital to meet the new requirements, he said.

Germany’s BDB banking association has opposed the new buffer and Hans-Walter Peters, the lobby group’s president, said in April the current economic situation isn’t good enough to burden the banks with extra regulation.

An increase of 25 basis points in Deutsche Bank AG’s CET1 requirement would be equivalent to about 870 million euros in additional capital based on the level of its risk-weighted assets at the end of the first quarter. The lender currently exceeds its regulatory capital requirements and the additional buffer won’t change that if adopted.