The IMF on Germany’s Bank-Asset-Berg | FT Alphaville

The IMF on Germany’s Bank-Asset-Berg

We’ve seen a variation of the below chart, which we’ve dubbed Germany’s Bank-Asset-Berg, before:

The above version, however, comes from the IMF’s latest report on Europe’s biggest economy.

It’s pretty self-explanatory; in the run-up to the financial crisis Germany’s banks, primarily the Landesbanks, went on something of a shopping spree — snapping up subprime debt in the US, commercial real estate in Spain and any number of things from Greece and the rest of Club Med.

And while there’s been some some deleveraging during the crisis — according to the IMF foreign claims of German banks contracted by $1,200bn between March 2008 and June 2009 — it hasn’t been enough to mitigate their total exposure very much. Here’s what the IMF says:

But German banks remain exposed to foreign risks. Simulation exercises suggest that German banks could suffer significant losses from commercial real estate investments in the U.S. and Spain, and more generally from exposures to Southern Europe. The simulations also suggest that a reassessment of risks associated with claims on Southern Europe could have a large impact on capital flows within Europe, as German (and also French) banks would significantly reduce their foreign claims to restore capital ratios.

The issue is really that a large proportion of those assets now carry the implicit guarantee of the German government, including the Landesbanks. Small wonder then, that the IMF is also urging prompt structural reform for Germany’s financial system:

The health of the financial sector has improved, but time is running short for dealing with the remaining problems and risks, in particular in the ailing Landesbanken sector. Strengthening capital buffers should be a priority for most banks. Despite initial steps towards restructuring, much more needs to be done to prevent the Landesbanken from being a continuous drain on the public finances and source of financial instability . . . Additional reforms can help Germany’s adjustment to the post-crisis world— and contribute to reducing global imbalances.

(H/T Joe Weisenthal at Business Insider)

Related links:
Germany’s Bank-Asset-Berg – FT Alphaville
Why Germany cannot be a model for the eurozone – Martin Wolf, FT
Don’t forget the German banks – FT Alphaville