The trouble with German banks

Slowly, public awareness is growing in Germany that bank riskiness is not only a problem in Southern Europe. On July 1, for example, Süddeutsche.de had a long article about the lack of transparency of financial institutions focussing on the latest financial statement of Deutsche Bank, and on July 9, Handelsblatt mused about the risks hidden in German bad banks in an article titled “Gefährliche Altlasten” (dangerous legacy).

This legacy is probably one of the reasons why, as Reuters put is, it is “unlikely that Berlin would accept the creation of a new agency in Brussels or elsewhere with powers to overrule its own national authorities on the sensitive issue of whether to save or close an ailing bank” .

In recent years, both German financial institutions and their regulators have developed a high level of bad-bank sophistication. In May 2009, a German  „bad-bank law“ (Gesetz zur Fortentwicklung der Finanzmarktstabilisierung) has been established which allows banks to “clean” their balance sheets by transferring non-performing loans and other loss-generating assets to special institutions.

There are two variants: In the beginning, solutions were part of public rescue operations and the resulting bad banks are external public law entities operating under the umbrella of the Financial Market Stabilisation Authority (Bundesanstalt für Finanzmarktstabilisierung – FMSA): In December 2009, Erste Abwicklungsanstalt (EAA) was established in order to take over, and unwind, assets and risk exposures of WestLB (now Portigon). In 2010, FMS Wertmanagement (FMSW) was founded in order to take over risk positions and non-strategic operations from the nationalised Hypo Real Estate (HRE) Group. More recently,  banks developed in-house solutions without public involvement. (A detailed general discussion of variants of private and official bad-bank solutions can be found in this McKinsey study on Bad Banks: Finding The Right Exit From The Financial Crisis.)

Compared to experiences elsewhere, the numbers appear encouraging. However, they also illustrate, that the banks still have a long way to go.

* Read the entire article via reszatonline.