Turmoil in Germany’s financial services sector
Germany’s financial services sector has faced over a year of turmoil with a series of mergers, takeovers and rescue packages required to maintain the viability of a number of major companies. This article looks at the impact of restructuring within the sector in the light of the deepening global financial crisis. Germany’s finance minister has called for a review of the national banking system, while the International Monetary Fund sis in favour of a reform of the sector.
Bank rescue plans
A series of mergers, takeovers and rescue packages were required to maintain the viability of a number of major companies in Germany’s troubled banking sector. The latest episode followed the collapse of the Lehman Brothers investment bank in the US. The knock-on effect in Germany was the 70% collapse in shares at the Hypo Real Estate (HRE) bank.
HRE is one of biggest commercial property and public sector lenders in Europe. Other German private sector banks, along with the German federal bank, the Bundesbank, and the European Central Bank (ECB) combined their efforts to put together a rescue plan at the beginning of October 2008. The financial institutions stepped in with an offer of loan guarantees totalling €35 billion to cover HRE’s re-financing needs until April 2009.
Measures to save regional banks
Meanwhile, WestLB – one of Germany’s regional banks (Landesbanken) – was facing the possibility that the European Commission would reject its long-term restructuring plans. The bank submitted its proposals to Competition Commissioner, Neelie Kroes, in September 2008. However, Ms Kroes made a statement in early October that the bank’s plans were inadequate and did not set out a strategy securing long-term viability.
In February 2008, the European Commission had approved a rescue package for WestLB that included €5 billion in guarantees from its regional government owners. The approval was on the basis that the state aid was limited in time and reversible, and that the bank would submit a longer-term restructuring plan.
Ms Kroes argued that WestLB’s proposals should have included plans to increase its retail banking activities. Regional institutions like WestLB are wholesale banks, which provide a service to local savings banks, and any significant move by such institutions into retail banking would mark a significant change to the country’s banking arrangements.
Following the establishment of a financial sector rescue fund by the federal government, WestLB made it clear that it was likely to use the €500 billion scheme. An acceptance of government aid by WestLB will increase the probability that the rescue fund becomes a vehicle for a substantial shake-up of Germany’s troubled Landesbank sector.
BayernLB and HSH Nordbank
Apart from the problems facing WestLB, several other regional financial institutions have experienced difficulties. BayernLB is looking to strengthen its finances by getting new investors on board. Meanwhile, HSH Nordbank, owned by the federal states of Hamburg and Schleswig-Holstein, announced in September that it wanted to cut 750 out of 4,300 jobs by 2010. These job cuts are part of a major restructuring programme which aims to reduce costs and raise overall profits.
The Leipzig-based SachsenLB, which is owned by the regional government of Saxony and the Sachsen-Finanzgruppe, a holding company linking eight savings banks in the region, was rescued in 2007 when it faced a liquidity crisis. Support came from the other Landesbanken and the savings banks association. However, one week later, SachsenLB realised further losses of €250 million through two hedge funds and further action was needed. On 26 August 2007, SachsenLB’s takeover by Landesbank Baden–Württemberg was agreed.
The European Commission launched an investigation of the rescue package in February 2008. It concluded that while the measures do constitute state aid, they are compatible with the EC rules on rescue and restructuring aid. The measures will allow the restructuring of SachsenLB and include compensatory measures to limit distortions of competition created by the aid. Moreover, the Commission concluded that the aid has been limited to the minimum necessary and is accompanied by a significant own contribution in line with the targets indicated in the Guidelines on state aid – that is, above 50% of the restructuring costs.
Consolidation in Germany’s financial services sector
Germany’s banking sector has three main pillars that operate separately – commercial, public sector and cooperative. At local level, most savers have accounts with one of the 450 local banks or 1,200 cooperative institutions. All of the three pillars have been hit by the financial crisis that has led to significant restructuring.
The most high-profile development came at the end of August 2008 with Commerzbank’s acquisition of Dresdner Bank from the Allianz insurance company, thereby merging the second and third largest banks in the country. Following the takeover announcement, Commerzbank indicated that it would cut some 9,000 jobs of the current 67,000 jobs in both companies, with 6,500 of these located in Germany. It also plans to close a third of the combined total of 1,894 branches.
IKB, a subsidiary of the KfW state-owned development bank, was facing collapse as a result of its exposure to sub-prime mortgages and was saved when it was taken over in August 2008 by Lonestar, a private equity company. This was the third rescue package to try to save the company after earlier measures proved insufficient. Germany’s Finance Minister, Peer Steinbrück, stated that the country could ‘not afford’ for IKB to become insolvent. As part of the deal, KfW is committed to putting €1.25 billion into IKB; nonetheless, confirmation of the rescue package will depend on the approval of the European Commission.
KfW itself was directly hit by the Lehman collapse. Two of its directors were made redundant when it emerged that a €350 million transfer to Lehman was processed only hours before its collapse.
Further merger plans
Further consolidation of the banking sector is likely as Deutsche Bank has built up a stake of almost 30% in Deutsche Postbank. In the cooperative sector, two major national institutions – DZ and WGZ – that provide services to local cooperative banks are reported to be contemplating a merger.
Call for extensive reform of banking system
Finance Minister Steinbrück has called for mergers across the public sector among the regional banks and a review of the German banking system. The government initiative of setting up a substantial rescue fund for the financial sector can be considered as a starting point for reviewing Germany’s banking system and initiating a consolidation process regarding the Landesbanken.
Meanwhile, the International Monetary Fund (IMF) argues that the whole sector needs reform. It called into question the viability of some institutions, including the regional banks where it said that Germany’s ‘ad hoc approach to public mergers’ might not work. IMF pointed out that the fiscal costs of the country’s bank rescues had increased in recent months. The fund also emphasised that Germany needed ‘stronger incentives for prudent management through the dilution of shareholders’ equity in recapitalised or intervened banks’.
Richard Pond, Working Lives Research Institute