Dexia exemption tests Europe's bank health checks

By Philip Blenkinsop and Leigh Thomas

BRUSSELS/PARIS, May 23 (Reuters) - Dexia (Other OTC: DXBGY - news) 's plan to shrink and eventually disappear marks it out as so different, the European Central Bank (ECB) believes, that no other bank can realistically plead for similar special treatment in upcoming stress test of the sector.

ECB supervisors agreed on Thursday that Franco-Belgian Dexia would not have to prove it could withstand a financial crisis in the Europe-wide stress test, reducing the chances of it needing further fresh capital, sources familiar with the talks told Reuters.

The exemption raised the question of whether other bailed-out or strained banks, who may also feel they are special and warrant softer treatment, could be exempted from tests intended to show banks are well enough financed to survive another financial meltdown akin to the crisis of 2008-2009.

But Bank of France Governor Christian Noyer, who sits on the ECB's decision-making Governing Council, said on Friday the full rigours of a stress test did not make sense for Dexia given its state guarantees.

"It's really a very unique case," Noyer told journalists during a briefing to present the annual report of the French financial watchdog ACPR.

Few banks were prepared to comment on the Dexia decision on Friday, which still needs approval by the ECB Governing Council.

However, Jose Maria Roldan, the head of the Spanish banking association, told a conference in Madrid the ECB should appreciate banks were different.

"One could talk about equality, but that wouldn't be the right term: the ECB must treat (all entities), if not the same, in a fair way depending on their weaknesses and strengths," Roldan said.

Bank of France Deputy Governor Robert Ophele was categorical no other banks would win special treatment. "I don't have any worries that it could be extended to other institutions," he said.

TOUGH TEST NEEDED TO BOLSTER CONFIDENCE

Still, there are some who were concerned that an easy test for Dexia undermines confidence in the EU's banking sector, something the tests were designed to bolster.

Dexia has more than halved its balance sheet, but at 237 billion euros ($323.7 billion) at the end of March was still about two-thirds the size of Belgian gross domestic product.

"But freeing it from a stress test? There are still a whole number of third-parties who hope to get their money back from Dexia. It means the only confidence they can have is the implicit backing of the states," said Ivan Van de Cloot, chief economist of Brussels-based think-tank Itinera.

"We are not where we must be (with banking union) and Dexia (Brussels: DEXB.BR - news) is a prime example of that," Van de Cloot said

Germany's banking association BdB said that any exception would need clear and convincing arguments.

"If there were special treatment given to banks that create exceptions within the comprehensive review, then we would be very sceptical about it," spokesman Lars Hofer said.

The ECB can point to the fact that it singled out Dexia when it announced plans to stress test the banking industry last October.

Dexia was the only one deserving of a footnote, which said the assessment would take account of Dexia's "specific situation", with an assessment of its finances carried out over its 2011 wind-down plan.

UNIQUE AMONG MANY

That EU-approved plan makes Dexia unique among the 128 major euro zone banks being reviewed by the ECB and the 124 EU banks being subjected to stress tests by the European Banking Authority (EBA).

There are solid reasons for considering Dexia a special case.

The group, once the world's largest lender to municipalities, has been forced to sell all its businesses and has become essentially a fund of bonds and loans being wound down now almost entirely owned by France and Belgium.

It has no retail or traditional banking customers and, apart from periodic bond issues, no new business.

Dexia relied on cheaper short-term borrowing to cover long-term loans and coverage, but when banks stopped lending to each other and the short-term money dried up, its model collapsed.

Belgium and France have already pumped in nearly 12 billion euros since then. The two, and to a far lesser extent Luxembourg, have guarantees on about 78 billion euros of Dexia's borrowings and so would be bound to contribute to any capital increase to keep it in business.

Dexia's chief executive said in March the lender could face a challenge passing the ECB's health check. A failure to do so could have led to a need for fresh state support. ($1 = 0.7323 Euros) (Additional reporting by Sarah White and Jesus Aguado in Madrid, with Kathrin Jones in Frankfurt; Editing by David Holmes)