FTAlphavilleFT Alphaville is a 2008 Webby Award Winner

• News
• Markets Live

If you thought the UK taxpayer had it bad with Northern Rock, spare a thought for the poor Bürger of Nordrhein-Westfalen.

Düsseldorf-based IKB is a bank in trouble. Not on paper, but in real terms. As Thursday’s FT reports, the German government is today extending €1.5bn to the bank - bringing the total money pumped in to €6bn.

A glib comparison makes IKB Germany’s version of Northern Rock.

But the reality is slightly different. Rock was the casualty of an indiscriminate collapse in interbank commercial-paper lending. The bank risked a failure to meet its (admittedly high) maturing debt repayments because of that, even though Rock’s books were backed by an almost exclusively high-grade portfolio of prime UK MBS. Northern Rock’s problem, despite what many commentators seem to imply, was, and is, pretty vanilla.

For IKB, however, the problem was, and is, subprime. IKB had a 100 per cent credit line to a massive, €17bn, ABCP conduit it owned - Rhineland Funding - into which were parked billions in structured subprime debts. The interbank commercial-paper lending market collapsed precisely because of vehicles like this.

Thus whereas Northern Rock was a casualty of an interbank liquidity crisis, IKB was both casualty and cause.

Another big difference is perhaps also in scale. A Northern Rock collapse was deemed a systemic risk by the Bank of England. Understandable, perhaps, for a bank with over £100bn of assets. IKB, however, is considerably smaller.
Nonetheless, the usually straight-laced Deutsche Finanzministerium, says the market effect of an IKB collapse would be “incalculable”. Germans, let alone Germans with degrees in economics, are not known for their hyperbole. But in this case, perhaps we have an exception to the rule?

Willem Buiter certainly seems to think so anyway:

If ever a bank was sufficiently systemically insignificant and small enough to fail by any metric except for the political embarrassment metric, it is surely IKB.

This is an institution which, through its out-of-sight-and-out-of-mind conduit, invested badly and paid the price. It deserves to fail. And it is in the interest of future sound banking in Germany that it be allowed to fail. Contagion effects are extremely unlikely, as it is plain as a pikestaff that it is insolvency because of bad investment decisions rather than illiquidity because of disorderly financial markets or other irrational herding behaviour that is causing the downfall of this minor German bank.

On the other hand, Germany’s banks are in hock to more than just the relatively small credit lines they have with IKB. Banking collapses have a grim historical precedent in Germany. Which is why conservative laws are in place to deal with banking collapses and mitigate systemic risk. As the FT reports:

…a collapse of IKB… would trigger a guarantee mechanism designed to spread the burden of a bank failure across the sector.

A trigger of which would cost German banks €24bn, according to Peer Steinbrück. Consider also that IKB has loans to more than 1 in 10 German companies, and maybe a case for systemic risk - and with it, similarity to Rock - can be made afterall.

Then again, as Willem Buiter points out, that might be something the EU commission will have to decide on, not the Bundesgovernment.