Dhe Landesbank Hessen-Thüringen (Helaba), which has been known for its cautious risk policy for several decades, is suddenly in trouble with the ECB’s European banking supervisory authority. The ECB has imposed a fine of 6.8 million euros on Helaba. This sum will not overthrow the central bank of the savings banks in Hesse, North Rhine-Westphalia, Brandenburg and Thuringia, for 2022 alone they expect a profit in the hundreds of millions. But the justification for the penalty must rankle Helaba and its owners, the federal states of Hesse and Thuringia and the savings banks.
The bank supervisors explain that Helaba made unauthorized interventions in its risk models during the corona pandemic. As the banking supervisor, the ECB requires around a hundred large financial institutions in the euro area that the banks it controls assess their market price risks on a daily basis and report them to the supervisor. Because of its interventions in the risk measurement models certified by the regulator, Helaba reported to the ECB that the risk was too low for three quarters, criticized the supervisors.
The measurement of lower risks, which has not been approved by the regulator, is particularly problematic because the equity ratios, with which the capital liable for possible losses is set in relation to the risks, were reported too high. However, the fluctuations in Helaba’s hard core capital ratio are kept within narrow limits.
Tier 1 capital ratio rose at the end
In 2020, for example, which was criticized by the banking supervisory authority, the core Tier 1 capital ratio even rose from 14.4 to 14.9 percent between the end of December 2019 and the end of 2020 – essentially due to a higher capital base, as stated at the balance sheet press conference in March 2021.
As Helaba took on more risks as the corona pandemic progressed, the core Tier 1 capital ratio fell from 14.3 percent at the end of 2021 to mid-2022 to a still solid 13.9 percent. This is the last publicly available value for Helaba’s core capital ratio. It is well above the minimum requirements previously set by the ECB supervisors for Helaba at 8.52 percent of the core Tier 1 capital ratio.
However, Helaba’s regulator has just imposed a minimum requirement for the core Tier 1 capital ratio that is 0.25 percentage points higher. However, this higher requirement probably has nothing to do with the previously prohibited risk measurement. Finally, the supervisory authorities also increased their requirements for the Common Equity Tier 1 capital ratio at four other German financial institutions with large real estate business – Deutsche Bank, Aareal Bank, DZ Bank and State Street Germany.
The declaration of Helaba
On Friday evening, Helaba stated in a “statement on the ECB administrative sanctions” that when the corona pandemic broke out in spring 2020, there were “sometimes erratic price movements” on the capital markets. Some parameters in their risk models had shown abnormalities “that were difficult or impossible to verify”. “During this phase, Helaba made adjustments to some of the parameters in the models in order to better reflect the risks and thus be able to better control the bank in this phase of high volatility.” assumed that these interventions were permitted.
The ECB, on the other hand, sees a “serious breach”. That’s what she calls a moderate offense on a five-point scale, ranging from “minor” to “extremely serious.” With its interventions, Helaba ignored the volatility on the capital markets and went beyond the prudential relief that supervisors had temporarily granted to banks during the pandemic. The Landesbank should have had the ECB approve the intervention, the regulator complained. Helaba admitted the misconduct in its press release. You have taken measures “to further strengthen the processes for adapting such models”.
The annual financial statements for 2020, which have been audited for a long time, do not have to be opened again, since the risk calculations objected to by the supervisory authority were only applied during the year. In its 2022 business statement, which Helaba will present to the public on March 9, it has made a provision of EUR 6.8 million for the fine.