ECB banks stress test

DW: Twenty-four German banks have been subjected to the latest ECB stress test. The names of five banks are already circulating which may well have reason to be nervous when the results of the stress test are announced. Is the condition of German banks really that bad?

Elke König: I think you have to take the whole thing down a few pegs. I don't know who put five names into circulation. For weeks now, one or another name has popped up. On Sunday we'll all know more. In answer to your second question: Are things so bad with the German banks? Not at all.

German banks are doing well. We have repeatedly pointed out that in Europe in recent years, German banks in particular have done their homework. So you should wait to see who really has a problem within the framework of the stress tests. I, at least, am very relaxed.

The ECB has been criticized for having designed different scenarios for different countries. In other words, German banks have to show they'll survive much more stringent scenarios than Greek banks are subjected to. Is there some truth in this critique?

Yes and no. It is true that the ECB has designed different scenarios for different countries. A great deal of work flowed into that. Naturally, everyone sees this and says the other banks are given softer treatment in this or that respect. Overall, I think, the scenarios are well balanced.

To make it more concrete for your readers: Of course the German real estate market has been treated with other assumptions than the Spanish real estate market. Anything else would have made ​​no sense. Overall, it was a balanced package. We have always said - and this applies to the German government as well as to us - that we want a serious, tough stress test. I think that's what we've got.

Are you expecting turmoil in the financial markets next Monday?

I've been asked that several times lately. I'm assuming that I'll see business as usual here both this week and next week. I see no indication of turbulence. Or let me rephrase this as a question: Would I go and withdraw a lot of cash now? Certainly not.

The ECB has become a very political institution. Is the stress test therefore actually a political test?

I can rule out that it's a political test in terms of a preconceived opinion, where you want to show some prepared result. I think it's really a very serious exercise, taken seriously by all parties. Whether the ECB as a whole has become a political institution, that's something I'll leave to others to assess.

What effect will it have on the work of Germany's financial regulator, BaFin, which you head, when the ECB becomes the regulator of the largest banks in the eurozone in November?

This will certainly have a significant impact on BaFin, but also on all the other national supervisory authorities. Starting November, we'll be working within a network in which the ECB and its employees bear the responsibility for supervision of the large European banks. But you can imagine, for simplicity, that a large German banking institution will be overseen by five to 10 ECB employees on average.

In addition there will be employees from the national supervisory institutions - our colleagues from other countries in which the ECB operates. Overall, some 50 to 100 regulators, not five or 10, will supervise each large European banking institution. The ECB will in future bear the ultimate responsibility. But we're working within a single system, and it's very important to me that we think as Europeans and not merely as national regulators responsible for their own little garden.

Can the ECB on the one hand support the banks by buying securitized loan packages, and on the other hand, supervise those banks? Do you not see a conflict of interest in those roles?

You know the clear German position that one must clearly separate monetary policy considerations and banking supervision. The legislature achieved that through a very strong position and role for the supervisory board in the ECB, going as far as is possible given existing law.

But of course there is always an inherent conflict between monetary policy considerations and regulatory considerations. To show this, you needn't take the highly controversial example of the ECB's new program of buying securitized loans. You can point to a program that's already running, the so-called Targeted Long-Term Refinancing Program, through which the ECB provides refinancing on favorable terms to banks that provide additional credit to the real economy.

If you promote this, you might have a problem in individual cases when a bank says it has a great many bad loans on its balance sheet. That's why the separation between the ECB's supervisory role on the one hand and monetary policy on the other is so important.

Do you think that in the long term, the supervisory role should be taken on by a different institution?

We said at the outset that we would very much appreciate it if there were an independent European supervisory authority. But I'm a realist - that was not possible without European Union treaty changes. So the ECB was the natural anchor. And to quote the head of European supervision, the ECB is perhaps a good home, because it can provide a lot of support for the establishment of this mechanism. In the long term, one might certainly wish for the supervisory role to be spun off from the European Central Bank. For now, the priority is to bring the stress test to an end, and to manage the launch of the supervisory role in November without accident, calmly and in an ordered way.

Elke König is president of Germany's Federal Financial Supervisory Authority (BaFin), which oversees banks and financial institutions.