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German banks will pass stress tests, says regulator

The European Central Bank (ECB) won't find cause for concern over German banks when it carries out rigorous stress tests of European lenders, according to the president of the country's banking regulator.

"I wouldn't have any specific concern for the German banks with this asset quality review," Elke Koenig, the president of BaFin told CNBC Friday.

"You have to see also that the banks have already taken precautions.Last year and during this year you could see that they added to their provisions. So I think what is good news for me is all the banks (at least that's my impression) have understood that the asset quality review will be a serious exercise and they have tried to get ready for it in being prepared."

(Read more: More liquidity coming from ECB to avoid 'cliff': Nowotny)

Last Wednesday, the ECB unveiled tough criteria for its stress tests of euro zone banks, designed to determine their ability to withstand adverse economic conditions or "stress". The region's 128 "systemically important" banks will undergo an assessment of their risky assets, the quality of their balance sheets and the amount of capital they hold.

The stress tests - set to begin in November - are a key part of the journey towards banking union – the EU's attempt to strengthen the region's financial industry so that governments will not be forced to step in and rescue them. The union will include a central system to manage the demise of bust banks, a deposit insurance scheme and a single banking supervisor, which will be run by the ECB.

(Read more: ECB's Draghi: New bank stress tests 'just the beginning')

Koenig's confidence comes after a report by audit PWC on Monday showed that German banks had the highest amount of non-performing loans out of all European banks at the end of 2012, at 179 billion euros ($243 billion).

Paul Gambles, managing partner at advisory firm MBMG International, told CNBC in June that Germany's banking system is one of the worst in the world with Deutsche Bank, in particular, over-leveraged and an accident waiting to happen.

(Read more: ECB keeps all options open to support recovery)

"(What) doesn't get pointed out is just how dependent this horrible, bloated German banking system - which to me looks like one of the worst banking systems in the world - has now become," he said.

"(Deutsche Bank) has still got horrible leverage based on very poor quality assets."

By CNBC.com's Matt Clinch. Follow him on Twitter @mattclinch81.

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