The critical state of German banks | FT Alphaville

The critical state of German banks

Axel Weber, president of Germany’s Bundesbank, may rue his words of eight  days ago when he referred to the bail-out of IKB as an “isolated,  institution-specific incident”, Ivar Simensen and Ralph Atkins note in an FT analysis of German’s state-controlled banks.

By late on Friday it had happened again. Sachsen LB, a publicly-owned  Landesbank, became the second German financial institution in  three weeks to be forced to accept an emergency rescue. That has left both the financial markets and policymakers worrying whether further bank crises are  lurking and whether banking regulators are really in command of the facts. Indeed, the situation amongst German bank was “not uncritical”, according to WestLB chief executive Alexander Stuhlmann.

The focus right now is on ABCP conduits, which brought down Sachsen LB. German banks account for nearly a quarter of European investment in ABCP  conduits, according to Moody’s Investors Service. But  the country’s savings banks  association (DSGV), which represents the Landesbanken, rejects suggestions that  the banks should be singled out for their exposure. A DSGV spokesman said:

We do not think the current problems at Sachsen LB are representative for  the whole Landesbanken sector. It is clear that at the moment, some banks are  having difficulty refinancing in the market, [but] the difficulties in the  asset-backed finance market are not confined to the Landesbanken.

The willingness of German banks to engage in such risky activities, such as ABCP, is in part  explained by rising competition and regulatory changes that forced Landesbanken  to seek new revenue sources to compensate for declining earnings in home  markets. Two years ago, after intervention by the European Union, they lost  state government guarantees that had allowed them to borrow in capital markets  at a lower cost than commercial rivals — and pass on the savings when lending to  companies.

Meanwhile, Carl Mortished at the Times poses a rhetorical question:

Why was Sachsen LB, an institution whose declared aim is to stimulate development and create jobs in the Free State of Saxony, buying mortgage-backed American securities through an Irish tax shelter?

The answer is: because it could. More specifically, the answer is that it could do so without risk to its own lenders. Sachsen’s awfully big American adventure was supported by the sovereign guarantee of Saxony.

If the root cause of this credit crisis is bad risk management, Mortished says, then what better example than a state-owned bank dabbling in speculative foreign credit markets, using its sovereign guarantee as ultimate security?

If it all goes queer, the taxpayers of Saxony will clean up the mess.