GERMANY:A planned bank levy and Hypo rescue are causing concern among experts, banks and consumers, writes DEREK SCALLYin Berlin
LEHMAN BROTHERS still haunts Germany, two years after the bank’s collapse. Despite the best of intentions, many of chancellor Angela Merkel’s promises from 2008 for radical regulation to prevent the same thing happening here are still works in progress.
Some regulations are close to completion, like a new law allowing the state to wind up problem banks of systemic relevance, but other initiatives are building sites with no completion date in sight.
Take this week, when a new sister company of embattled property lender Hypo Real Estate (HRE) opens for business. Unlike previous HRE companies, this one is not based in Dublin, but in Munich. Even from the Bavarian capital, however, FMS Wertmanagement is irrevocably linked to Dublin.
FMS is a bad bank created to store the toxic debt generated by HRE’s Dublin subsidiary Depfa after risky business practices meant it ran out of money following the Lehman collapse. That threatened to bring down HRE, one of Europe’s largest property lenders, and, in turn, the continent’s financial markets.
To prevent a Lehman-style meltdown in Europe, Merkel’s government cobbled together a last-minute, late-night rescue package with German banks and saved the Munich-based bank. Two years on, HRE has been nationalised and provided with €102 billion in loans and guarantees. Earlier this month, those guarantees were given a €40 billion top-up – reportedly temporarily.
A state stabilisation fund, Soffin, was set up and, apart from HRE, has issued further guarantees worth €50.6 billion to a mix of state-owned and private banks. Strip away the state guarantees and so far the Depfa/HRE debacle has cost the German taxpayer just under €10 billion. HRE is Germany’s Anglo Irish Bank with one important difference: despite the huge risks taken and the huge bill for the taxpayer, the complexity of the company’s business model meant its struggle for survival never got the same traction or generated the same level of public outrage as Anglo. That’s a lucky escape for Ireland, where the mess was made. And what a mess it is.
Gifted €200 billion in toxic assets from day one, FMS is intended to free up HRE’s new banking entity – Deutsche Pfandbrief Bank – to get back to what it does best in the hope of finding a buyer. The bank is financing a tower block in Paris’s La Défense business quarter and a shopping centre in Stratford.
HRE says that, with FMS up and running, the “healthy” part of the company could return to profit next year and, after a government recapitalisation, will even pass the European stress test it failed in July.
But analysts are unsure whether the FMS bad bank will have the desired effect. For one thing, it is an incredibly complex transfer of loans and securities in 60 jurisdictions with 3,600 counterparties. Secondly, HRE is not free of its liabilities: losses at FMS will eventually flow back to HRE.
The rescue so far has minimised the cost to taxpayers now, but senior finance ministry officials admit the rescue will not be “cost free”.
It is now a political matter as to when the real cost emerges and on whose watch. Dr Manfred Jäger of the German Economic Institute in Cologne calls the HRE rescue an example of what Germans call “trying to wash without getting wet”.
He worries that HRE will limp on as a zombie bank, listlessly managing its debts for years to come, while potential buyers are scared off by the terms of the sale. “Investors can read,” he says. “They’ll see that they are eventually liable for the debts of FMS and will walk away. Still, while the solution isn’t 100 per cent convincing, at least it’s a solution.”
For him, the government’s post-Lehman regulatory promises resemble a building site. The cabinet has signed off on new legislation forcing banks to give customers clear, concise information on the financial products they sell. The law also raises the level of information investors in a company have to declare in the hope of preventing silent takeovers.
The government also plans to force all those who sell financial products to register with the financial regulator.
Recent economic indicators suggest Germany has mastered the economic crisis triggered by the Lehman collapse relatively well at home. A key reason is that 60 per cent of Germans keep their money with local savings and co-operative banks, which have no exposure on international markets and have €1,073.3 trillion on deposit. A recent study by Allianz suggested that, thanks to the conservative saving culture, the losses sustained by German private investors after Lehman were not just lower than elsewhere, but were cleared by the end of last year. Total savings even grew by 2 per cent by the end of 2009.
Considering this, the savings and co-operative banks are annoyed at plans for a bank levy to cover the cost of future meltdowns. They do not see why they should finance the risks of business in which they’re not interested.
“The levy is unfair because it doesn’t achieve its aim, to reduce risk-taking as a consequence of the bank crisis and prevent new ones,” says Stefan Marotzke of the German Savings Bank Association. The government argues that the levy is not a judgment on past behaviour but insurance for the future.
Two years on, Germany’s private banks are lobbying against changes to laws on hedge funds, derivatives and the proposed banking levy, complaining that the levy would make banking in Germany prohibitively expensive.
The proposal foresees a levy calculated by a formula reflecting the bank’s risk profile, which cannot top 15 per cent of annual profit.
Consumer groups have the opposite concern of the private banks – that the new bank levy is a political sticking plaster that would raise €1.3 billion a year, what they see as a drop in a next HRE-style bailout bucket.
Even more controversial is the second part of the bank levy law, working its way through parliament. That will give the state the power in drastic circumstances to force the nationalisation of systemically important banks or their subsidiaries and even force them into orderly insolvency.
One final concern of the public banks is the growth, through mergers and takeovers, of Germany’s private banks, with market leader Deutsche Bank pursuing Postbank, Germany’s commercial bank with the most customers.
As a lesson from Lehman, the savings bank association is calling for the introduction of G20 proposals limiting the size of banks to prevent a private institution ever reaching a scale where it can blackmail a state for aid.
“These banks could do any business they like because they know the government would have to act,” Marotzke says. “It’s another kind of state liability.”
After the “never again” words in the immediate aftermath of Lehman’s collapse, Germany is still a financial market building site of good intentions. Merkel’s government lacks a majority in the upper house, the Bundesrat, meaning her well-intentioned laws may not emerge unscathed.
Germany’s bank levy, unique in Europe, could have unforeseen consequences. Some analysts predict that, to avoid paying their full levy, the banks will sidestep the regulation by moving capital to offshore special purpose vehicles abroad. Haven’t we been here before?
