'Bad bank' proposal no hit with politicians
Selling loan risks is not business as usual in Germany, but asking for state help is
By Elise Kissling
News leaked this week alleging that the head of Germany's biggest bank had called on the government to help the country's banks spin off their loan risks into a government-backed company, bringing to a zenith recent speculation that the sector is nearing collapse.
The Frankfurter Allgemeine Sonntagszeitung reported that Deutsche Bank Chairman Josef Ackermann had suggested pooling the high-risk loans of several major banks, merging them into a new company and selling them on the capital market, presumably to big institutional investors. Ackermann, whose alleged comments were made at a meeting of top bankers and politicians, supposedly also suggested that the government guarantee the new company, also known as a 'bad bank.'
A Deutsche Bank spokesman - Ackermann himself has refused to comment - said the bank could not comment because of the highly secretive nature of the talks. Berlin also refused to make an official comment, but the unofficial word is that the banks will have to solve their own problems without a government bailout.
The bad bank, according to the Frankfurter Allgemeine Sonntagszeitung, would absorb EUR7 billion ($7.5 billion) in loan risks from Dresdner Bank, Commerzbank and Hypovereinsbank. Deutsche Bank, it said, had no plans to merge its loans into the bad bank. Instead, it now plans to systematically hedge loans with capital market derivatives.
People familiar with the U.S. banking scene may wonder what all the hype is about. Most U.S. banks have long kept their loan risks off the books by bundling them and selling them to big institutional investors such as pension and investment funds. This inveterate practice, however, refers to loans that are good enough to be sold on the market and does not involve a state default guarantee.
It is a practice that has been rare in Germany. Accounting rules allow banks to spread out their loan losses over several years, a strategy that can pan out in good economic times. But things can turn sour during prolonged downturns, which is apparently what is happening now.
The strict market orientation of U.S. banks forces them to value their loan and investment portfolios on a continual basis. Market volatility can immediately be seen in the bottom line, prompting banks to sell their loan portfolios on the capital market. This strategy sent U.S. banks into the current market downturn in relatively good condition.
But a mounting pile of bad debt and rock bottom trading commissions are not the only problems facing German banks. Poor cost management and the industry's three strictly separate segments - private, public and cooperative - are also huge drawbacks. These three segments have prevented consolidation and cooperation among players in an overbanked and overbranched market.
Around 50 percent of the banking market is controlled by public-sector savings banks, 30 percent by cooperatives. That leaves just 20 percent of the market for privately owned banks. Savings banks, which are less interested in high margins than in supporting small businesses and ensuring geographical coverage, offer loans without sufficiently calculating the risk. Margins are therefore well below those in England or the United States. This also makes it comparatively difficult for banks to cover high loan defaults during bad economic times.
Anemic consumer spending in Germany is another big problem. U.S. banks have been making lots of money with their retail customers, while many of their German counterparts make losses. In the United States, thin branch networks keep costs low, while high consumer spending keeps the lucrative credit card and personal loan markets booming.
Lacking reform momentum and faced with competition on open capital markets, Germany's banks are stuck in the deepest earnings rut since World War II. Until now, the government, the banking regulator and the banks themselves have all stressed that the stability of the financial system is not in danger.
Politicians can help the sector, but not with subsidies. The state, say such experts as consultant Roland Berger, must pull out of the banking business and finally privatize the public sector savings and wholesale banks. This would pave the wave for the desperately needed consolidation of the German banking sector.
Feb. 28 |
