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While other countries take the opportunity to reform their banking systems, in Germany the buck is still being passed
During the financial crisis, problems with Germany's state-owned banks brought the country's financial system to the brink of collapse and received billions in bailout funds. But they are still in terrible shape. Now, the billions in toxic assets still on their balance sheets could be passed on to taxpayers. And as a group of former managers and academics have now pointed out, little is being done about it.
They have written a polemic in which they argue that a government commission is needed to finally do something about what they call a "political mess". While countries such as the United States took advantage of the financial crisis to clean up and strengthen their banks, "Germany's most important banking problem remained unresolved", says Heinz Hilgert, a former manager at the state-owned WestLB. He is referring to the long overdue reorganisation of the country's ailing state-owned banks.
Prior to the financial meltdown, the lenders "“ with government backing "“ borrowed hundreds of billions of euros at favourable terms and invested the money in what they believed to be highly profitable securities. But after the collapse of US investment bank Lehman Brothers, many of these investments proved to be toxic. The government had to rush to the banks' aid with billions in bailout funds, but the banks still have large numbers of the toxic securities on their books.
All attempts to tackle the problem have failed. There has been a dearth of workable concepts and a lack of effort on the part of the state governments and the regional savings bank organisations, which own the banks.
Officials at the finance ministry in Berlin hope stress tests to be performed on European banks later this year will force the industry to rethink. The tests are designed to show how well or poorly Europe's banks are equipped to withstand future crises. They will "make it clear to everyone involved, once again, how urgent it is to consolidate the state-owned banks", said one finance ministry official.
The drama surrounding WestLB, partly owned by the state of North Rhine-Westphalia, illustrates how expensive the delayed reforms will be. During the financial crisis, toxic securities valued at more than â?¬77bn (£70bn) had to be transferred to a so-called bad bank called the Erste Abwicklungsanstalt (EAA). A â?¬3bn cash injection from Soffin averted the bank's collapse.
But it wasn't until European competition commissioner Joaquín Almunia announced he would no longer accept unconditional government bailouts that bank owners began to look at possible future solutions. WestLB, for example, is to be shrunk from its present size of 5,000 employees down to an institution with just 600 to 1,000 employees. Its primary purpose is to be the processing of payment transactions for savings banks. All other divisions will be sold off or transferred to the EAA.
The rescue of the stricken institution threatens to cost the state of North Rhine-Westphalia additional billions. Some 31% of North Rhine-Westphalia's share of WestLB is still on the books of NRW Bank, the state's development bank, at a nominal value of â?¬2.2bn. According to an internal government memo, appraisers recently estimated the real value of the holding at just â?¬300m. North Rhine-Westphalia will have to make up the difference. The state guaranteed as much in 2005, and even pledged to pay a 4% annual interest rate on the difference between the official value and the actual book value.
If the state surrenders its WestLB shares during the course of the bailout as planned, NRW Bank will be confronted with an outstanding claim of up to â?¬2.5bn. Governor Hannelore Kraft will have to plug yet another gap in the budget.
And this is probably only the beginning. The state, the federal government and the savings banks are jointly liable for unexpectedly high write-offs of securities held by the EAA. These costs, too, could run into the billions. The expected downsizing could generate additional costs.
Things aren't quite as bad with other state-owned banks. Some, in fact, are cautiously optimistic about the future. BayernLB, for example, proudly announced, prior to the official release of its financial statement, that it had achieved a pre-tax profit of â?¬800m in 2010. Gerd Häusler, its chief executive, said the bank was "on the right track". Häusler is in the process of drastically reducing the size of his bank "“ sufficient measures for now, he believes. Even scandal-ridden HSH Nordbank, partially owned by the city-state of Hamburg and by Schleswig-Holstein, achieved a tiny profit in 2010.
Nevertheless, there is no reason to be "shouting for joy" at the state-owned banks, officials at the finance ministry say soberly. Positive numbers are often misleading. They come about because the banks have reduced their risk reserves, and because the government provided billions in bailout funds.
State-owned banks still have to fight for every euro on the financial markets. Some have joined the stricken Irish banks as being among the biggest beneficiaries of the European Central Bank, which still provides needy banks with unlimited liquidity. Without this fresh cash, the state-owned banks would quickly run into trouble. Because their needs are enormous.
This year, bank bonds worth â?¬123bn will mature at WestLB and the other state-owned banks. In 2012 that value will increase to â?¬151bn.
In light of the necessary reforms, finance minister Wolfgang Schäuble, a member of Chancellor Angela Merkel's centre-right Christian Democratic Union (CDU), made a big to-do about inviting the owners of the troubled banks to a crisis meeting last September. The participants were eager to demonstrate their good intentions. But the merger proposals they made were often without substance, say members of the administration. Another meeting that had been scheduled for November was quietly cancelled.
Many governors are having trouble parting ways with institutions with which "they can move a few millions with a phone call, without having to ask their parliaments", says economist Martin Hellwig of the Max Planck Institute. In 2010 Peter Müller (CDU), the governor of the western German state of Saarland, even bought back the majority of shares in his state's Landesbank, SaarLB, which had once been sold to its Bavarian counterpart, BayernLB.
Meanwhile, the savings bank associations and their president, Heinrich Haasis, are primarily concerned with getting off as cheaply as possible. As part owners, the savings banks are partly liable for the mistakes of the state-owned banks. Dirk Schiereck, a finance professor who specialises in banks, believes the savings banks have a special obligation, because they did not prevent the state-owned banks from making faulty investments "and therefore failed miserably as owners". So far, however, the savings banks, with the support of politicians, have repeatedly managed to pass on most of the bailout costs to taxpayers.
With the obliging help of then Bavarian governor Horst Seehofer "“ head of the CDU's Bavarian sister party, the Christian Social Union (CSU) "“ the savings bank representatives in Bavaria pulled off a clever coup. During the financial crisis, the state provided BayernLB with â?¬10bn in taxpayer money while the savings banks paid nothing. Indeed, they were even able to reduce their ownership stake from 50% to 6%. The bank's future, of course, is still up in the air.
It is a situation that cannot continue. "Something has to happen," says former Soffin head Günther Merl. Many hold similar views at the finance ministry in Berlin, where the group of four's pamphlet was read with interest. Regrettably, say officials, the government commission the group has called for cannot be established. State-owned banks, after all, are the states' responsibility. And the buck is being passed from one set of politicians to another.
"¢ Translated from German by Christopher Sultan
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15 March 2011 6:27PM
"While countries such as the United States took advantage of the financial crisis to clean up and strengthen their banks"
Err did they? Glad to see lazy journalism isn't confined to the British media :)
15 March 2011 6:59PM
Many recent financial failures have arisen because German companies seem easily seduced by savvy Americans: Daimler and Chrysler, SAP and TomorrowNow/PeopleSoft/Oracle, Karstadt and Goldman Sachs, the Landesbanks and large US investment banks.
Merger and Acquisition executives and investment bankers with an eye to bonuses are always on the lookout for German companies with ambition and a cash pile, and ever eager to flatter. Will the lesson never be learned?
15 March 2011 7:09PM
Oh no this is just terrible!
Yesterday we had on the Guardian website Mr Hans Olaf Henkel, basically telling the rest of us how damn good Germany has been since WWII with its seventeen appreciations of its old currency (!) -- match that the rest of you Europeans if you can! --; and now we're told by another German source (no less than Der Spiegel) that German banks have been engaging in "ostrichism". Been burying their head in the sand.
And there was Mr Hans Olaf Henkel in yesterday's article (his article, "Germany Needs to Resist the Euro") telling the world that the euro needs to split in two. A northern euro (Austria, Finland, Benelux countries). That is the north's prudently capitalist, disciplined countries. And a southern euro, in circulation in the usual reprobate countries of southern Europe (Spain, Portugal, Italy, Greece, France, etc.).
Well, going by Der Spiegel's revelations over the German banks, so much for the disciplined and prudently capitalist northern Europeans.
I guess when it comes to bucks and buck making, southern European, northern European; south of the equator, north of the equator all humans like money just the same and can do anything for it.
Certainly though it's almost uncanny that day after Mr Henkel had his article published by the Guardian, Der Spiegel "somewhat" spoilt Mr Henkel's eulogy of prudent northern European capitalism. Damn!
15 March 2011 7:46PM
You think Germany is dragging their feet over Financial regulation? Just look at the catastrophe unfolding in Britain. And we don't even have a budget surplus.
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