Fascinating about German banks, eh?

Ortseifen and Matthäus-Maier are perfect examples of the fatal mix of amateurism, greed and political protection that is symptomatic for many of Germany\’s state-owned, partially state-owned and public sector banks. It is an environment that can only thrive in the shadow of the state — and that has drained more than €20 billion from the public treasury within the last decade.

Until now, the government has always been there to pick up the tab in the end. Fully aware of this safety net, the executives at state-owned banks gambled with their employers\’ assets as if there was no tomorrow. Munich-based BayernLB did it with stocks in Singapore, Bankgesellschaft Berlin with real estate investments, and WestLB with holdings in British companies.

Anyone who is not responsible for bearing the consequences of the risks he or she takes can easily turn into a gambler. And the bets kept increasing in recent years, getting more and more public-sector banks into financial hot water. Now the banks find themselves lacking the assets they need to weather the turmoil of an international financial crisis.

Matthäus-Maier\’s bank KfW has already had to provide IKB with close to €5 billion in a series of three bailouts. With KfW itself gradually running out of cash, the federal government has now contributed another €1.9 billion.

The state of North Rhine-Westphalia has injected €1 billion into WestLB, another state-owned bank, as well as providing the ailing bank with another €3 billion in loan guarantees. The situation is even worse in Saxony, where the state has issued €2.73 billion in loan guarantees to Sachsen LB, that state\’s Landesbank, as Germany\’s state-backed regional banks are known. The other state-owned banks are providing another €14 billion in guarantees. Hamburg-based HSH Nordbank urgently needs €1 billion in fresh capital, while BayernLB last week reported a €1.9 billion write-down as a result of subprime exposure. BayernLB announced Tuesday that the bank\’s chief executive, Werner Schmidt, will be stepping down as of March 1 as a result of the crisis.

The situation for Germany\’s public banks has become so dramatic that it threatens to topple what has been one of the key pillars of the country\’s banking system. The state-owned banks are supposed to bail each other out when necessary, but the problem is that many are in trouble themselves and hardly in a position to help their peers. And things could get even worse.

If an industry giant like WestLB were forced to its knees — which almost happened two weeks ago — at least two other state-owned banks and a dozen savings and loan associations would crumple along with it. The member banks of the German Savings Banks Finance Group (Sparkassen-Finanzgruppe) are closely interlinked, and they are required to vouch for each other — as long as they are in a position to do so, that is. The failure of a major state-owned bank like WestLB would also inevitably affect corporate customers, even forcing some into bankruptcy.

It is a nightmare scenario that the government financial supervisory authority now believes is increasingly likely. Germany\’s public-sector banks speculated far more heavily than private banks in American subprime mortgage securities. Now these banks\’ beleaguered executives are calling on the government to bail them out from a disaster of their own making.

Of course, in the UK, this would never, ever, happen. We can put Ritchie, Seumas, Prem, in charge of state owned regional banks with a special remit to consider the local economy when lending to local business and nothing will ever go wrong, will it?

4 thoughts on “Fascinating about German banks, eh?”

  1. From Spiegel in 2008?
    Give us an update, please, Tim. Are the placemen and women still in place?

  2. Then there’s this paragraph in the same article:

    It is a paradoxical situation, because the government, responding to pressure from Brussels, was required to withdraw its guarantee of protection for state-owned banks as of July 2005.

    The Lander Banks piled into American sub-primes because they were no longer underwritten by the Landers.
    Dearie me, if you can’t trust Brussels to run your life for you, who can you trust?

  3. Don’t forget you can add the Savings and Loans Crisis in the US in the 80s and 90s to the list of ‘progressive’ banking failures. S&Ls being the equivalent of mutual building societies over here.

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