Eurozone banks face £42 billion 'capital black hole'

Eurozone banks are facing a new capital black hole of as much as euros 50bn (pounds 42bn), according to one of the UK's most respected financial analysts.

Davide Serra, the chief executive of Algebris, who advises the Government on banking, said that this year's stress tests by the European Banking Authority and the European Central Bank were likely to find fresh problems in the eurozone banks. He said that Germany had one of "the worst banking systems in the world" and that three or four regional Landesbanken were likely to be wound up.

He also said banks in Portugal and Greece were likely to need more capital.  "The country where I expect bad news is the country which has not been scrutinised and has been deemed to be the strongest," Serra said. "I expect more bad news coming out of Germany. The strongest German Panzer was unbeatable, but there is only one problem - they have one of the worst banking systems in the world. If you are a bright engineer in Germany you work for BMW or Mercedes, you do not become a banker. I expect at least three or four [regional] Landesbanken to be put in run-off mode. The German regulator, BaFin, is one of the weakest. It has always been lobbied by local politicians."

Sera, who was famously photographed last year walking to a meeting in Downing Street clutching a sheaf of papers on the future of the Royal Bank of Scotland, said the stress tests would finally allow the German authorities to "come clean" on their banking system. 

With combined assets of a trillion euros, the banks account for 12pc of the country's total banking assets, and 3pc of Europe's as measured by the ECB. 

Many believe that a number of them are sitting on badly performing property loans which have never been properly accounted for. "I think the ECB exercise will actually allow them to do what is right," Serra said of the German regulators. "That is one of the reasons why the Bundesbank has been very forceful - requiring auditors to be in the process. Why? They need a legal piece of paper so they can go to the local Landesbanken and say: 'Sorry, game over'."

Serra praised the UK financial sector for being more robust and transparent than many countries in the European Union. Although RBS, Lloyds Banking Group, Barclays and HSBC will be included in the stress tests, it is thought unlikely that any fresh problems will be revealed. 

Last year, the Bank of England demanded that Barclays raise fresh capital after scrutinising its balance sheet. "I don't expect more bad news to come out of the UK," Serra said. "Britain is the country that lost the most - we almost blew up the country so they had to fix it. The change in leadership [at the Bank of England] with Mark Carney is massively welcomed. The UK is now basically clean. We had our own Fukushima and you had to deal with it swiftly."

Serra said although previous stress tests had failed to pick up significant problems at banks such as Dexia and Bank of Ireland (which both needed bail-outs after passing the test), the ECB had learned its lesson. "The ECB has hired about 900 people to perform the exercise," Serra, who was formerly one of the top-rated banking analysts for UBS and Morgan Stanley, said. "These people's job will be not to fail. If they do, their job is at risk. They will have a strong incentive." He said that institutional investors in banks should have a duty to reveal how they voted at AGMs about a bank's policy."Institutional shareholders, unless they vote clearly at the AGM and there is a record, then they should not be entitled to the dividend," he said.