WestLB and the IKB, once dubbed the turbines in Germany’s powerhouse, were struggling yesterday to cling on to their reputation as serious lenders.
The two banks are still reeling from the meltdown in the US sub-prime market. The crisis is percolating through the whole of the German banking sector; politicians are increasingly nervous that at least one German bank may go under, which would send a devastating signal to the markets.
A board meeting of the government-owned lender Kreditanstalt fuer Wiederaufbau (KfW) is scheduled for Wednesday to find a further €2billion (£1.5billion) to prop up the credit base of IKB, which is facing heavy new writedowns. KfW, which controls about 40 per cent of IKB, has been behind two earlier rescue packages for the bank at a cost of €5billion.
The sense of crisis has now reached the Berlin government. IKB lends to one in ten of Germany’s blue-chip companies. Jochen Sanio, the head of the financial services monitoring agency, has warned that if IKB’s problems were to spin out of control, then Germany could be facing its worst banking crisis in 75 years. Talks were held in the Chancellery this week and both Peer Steinbr?ck, the Finance Minister, and Michael Glos, the Economic Minister, will be attending the meeting on Wednesday.
The rescue deal being stitched together this weekend will have to involve commercial banks but no one seems to be very interested in taking on IKB. B?rsen-Zeitung, the well-informed financial newspaper, reported that neither the DZ Bank nor WGZ Bank would be submitting non-binding bids by the deadline of next Friday. The concern is that there is still not enough information available about the bank’s exposure to the sub-prime crisis.
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WestLB looks as if it could live to fight another day. But as Der Spiegel magazine commented yesterday, it was a case of “the patient being saved after an emergency amputation”. Even that may be looking on the bright side.
The rescue plan for WestLB, which until a few years ago was elbowing its way into the league of top international investment banks, signals a retreat from investment banking. Between now and 2010, there will be 1,500 jobs cut — a quarter of its workforce — bringing in savings of €300million a year. It will focus on cooperation with the savings banks, the Sparkassen, small business and private customers. The aim is to raise revenue by €100million a year. More work will be done on merging with the regional bank of Hesse, Helaba, a smaller but healthier Landesbank.
Most importantly, the state of North Rhine Westphalia - which has a 38 per cent stake in WestLB - will add €3billion to an already-agreed €2billion special purpose fund to guarantee the bank against further investments turning sour.
WestLB has been hit not only by the collapse of the US market for high risk home loans, but also by losses ensuing from the manipulation of stock in Volkswagen, BMW and Metro, the distributing chain. As a result it notched up an estimated €1billion losses in 2007.
Germany has 11 regional or Landesbanks. They thrived as long as they received state guarantees that allowed them to lend money at favourable rates. Under European Commission pressure, this competitive advantage was dropped, making a crisis in the Landesbank system inevitable.
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But the expected outcome — a consolidation of Landesbanks, a wave of banking mergers — has not happened. Ambushed by the sub-prime crisis, the Landesbanks are looking very nervous indeed.
The great hope of WestLB — a merger with Helaba — may not come off because Helaba executives have no interest in making common cause with a larger, sickly sister. The only link-up so far involving Landesbanks has been an act of desperation: SachsenLB, on the verge of bankruptcy, was placed under the protection of LBBW, the Landesbank of prosperous Baden-W?rttemberg.