German Banks Loaded with Toxic Paper

On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell - a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets. Just three months ago, the reports coming out suggested the problem was only half as large, 400 billion euros.

This new account has been all over the news in Germany because Germans are becoming quite frightened about the health of their banking system and are angry because the German economy was largely absent from the bubbles of the past decade. Germans are beginning to ask quite openly why banks like Commerzbank and the state-owned land banks as well as institutions like Hypo Real Estate are being rescued with taxpayer money. This is a debate now ongoing in a number of countries, the U.S., the U.K. and Ireland most prominent among them. In an election year in Germany, this issue is sure to have an impact.

The account in SZ reads as follows (my translation):

Giant Billion euro risk: The financial crisis has hit German banks far harder than was previously known. Loans and securities in problem areas add up to 816 billion euros, according to a Bafin paper made available to the Süddeutsche Zeitung.

The financial crisis has hit German banks significantly harder than was previously known. This news comes from an internal study from the Financial Supervisor Bafin. The paper first gives an overview of which loans and securities institutions own in the problem lines of business. Their risk adds up to 816 billion euros. Particularly affected are HRE, several Landesbanken Bank and Commerzbank.

At Commerzbank alone, according to the Bafin study available to the Süddeutsche Zeitung, there are securities and loans worth 101 billion euros affected by the financial crisis. This includes 49 billion euros from the balance sheet of the acquired Dresdner Bank. Commerzbank is, thus, similarly affected by the financial crisis as the Land Bank of Hamburg and Schleswig-Holstein, HSH Nordbank, for which Bafin tallies 105 billion euros.

In Westdeutsche Landesbank with 84 billion euros and the Landesbank Baden-Württemberg with 92 billion euros, the supervisors see risks of a similar magnitude. Much better are Deutsche Bank with 21 billion euros, as well as Postbank and Hypovereinsbank with five billion euros each. The worst according to the Bafin paper, prior to nationalization, is Hypo Real Estate (HREHY.PK) which holds 268 billion euros in problem assets.

Banks back out bill

Most of the 17 listed banks reject the figures as misleading. "We do not know who put the figures together and they cannot be verified," said a spokesman for Commerzbank. HSH Nordbank said the bank auditors and Rescue Fund Soffin of HSH had sufficiently and adequately accounted for losses. Other institutions have referred to figures in their annual reports or that they had secured the facilities.

Commerzbank has received state aid of 18.2 billion euros to date. In its annual report the Bank itself had broken down risks and pointed to other "significant liabilities" that threatened different areas of the securities and credit business. However, among banks, investors and supervisors it is still controversial as to which paper can be understood as junk.

A Bafin spokeswoman said to SZ, that the figures do not deal with actual or potential losses. The data also could not be used "to draw conclusions about the creditworthiness of banks."

Study of great significance

The internal study is of great importance for the government. The calculations by Bafin flow into the plans for the establishment of so-called Bad Banks -- repository institutions for problem assets. According to the plans of the Ministry of Finance, only about one third of the assets listed in the document will come into question for removal into a bad bank. The government wants, with the help the Bad Banks, to restore the function of financial markets and lay the foundation for a rebound.

The figures from Bafin, are, therefore, no surprise for the government. Even in the documents that Finance Minister Peer Steinbrück had sent Chancellor Angela Merkel weeks before for the preparation of the banking summit on Tuesday, there was talk of 853 billion euros of potentially vulnerable assets. These figures from the beginning of the year, are no longer deemed up-to-date. The paper cites a new measurement date, the 26th of February.

This account should make clear how shaky many of Germany's financial institutions are. Moreover, it is not altogether obvious which markets are deemed 'toxic.' German banks have a lot of residential real estate-related paper. But they also have assets related to the imploding European commercial property market and the Eastern European property markets. I suspect that the problem is even larger than is mentioned here.

If you recall, there was a big dust-up in February over a leaked EU document which suggested there were 16.3 trillion in toxic assets amongst European banks. In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are lead by government to believe.

In any event, Bafin is now seeking to obtain prosecutions for the damaging leak. Forget about the toxic asset problem, go after those who have brought it into the full light of day.

Source

• Bilanz des Schreckens - Süddeutsche Zeitung
• Bafin erstattet Anzeige - Süddeutsche Zeitung

Disclosure: I have no financial position in the banks mentioned in this post.

Comments

[Positroll:]

"In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are lead by government to believe."
Bah, humbug! What U.S. commentators usually don't realize is the huge differences between toxic assets in the US and continental Europe, at least with respect to the residential sector: In the US, lots of debtors can walk away from their debts, leaving only the asset for the creditor to enforce into.
In Europe, on the other hand, 99% of debtors are personally liable for their home debts. Of course, given the current economic situation there will be defaults (consumer insolvencies) in Europe, too. But they will be way smaller percentage wise than in the US. Also, with the exception of Spain and Ireland, there was no big housing bubble in Europe. Homes might loose value, but not to the same extent as in the US (which means smaller losses on any given volume of loans).
Therefore, comparing the size of toxic assets in the US and Europe is comparing bitter lemons and oranges ...

Apr 27 05:28 AM

[Jesusonair:]

"The banking situation is much worse on the continent than its citizens are lead by government to believe"
Exactly. The other point is that governments have been trying to downplay it all along. When ordinary people come to grips with new reality - less credit, necessity to live within one's means and pay off their debts on top of that with less money available - there will be a lot of angst. What's a more riskier strategy - hide things until hell breaks loose or admit that the system is broken and needs to be re-made or replaced? Derivative-overgrown financials and credit-based consumerism both have hit the wall.

Apr 27 05:43 AM

[Edward Harr...:]

Postitroll, you make a valid point regarding the security underlying mortgage assets in Places like Germany versus the U.S. and regarding the size of the bubble. I would like to add two points.

First, Germany never participated in the bubble, yet the German banks did through their investments in U.S., Eastern European, Irish or Spanish securities markets. Depfa and the Land Banks come to mind here.

However, it should also be noted that we are probably talking about nominal dollars of assets at book value here. These numbers being bandied about in no way reflect the magnitude of eventual writedowns that will be taken - this is probably an order of magnitude less - as you suggest.

Apr 27 07:42 AM

[Positroll:]

re 1: Sure, but unlike US banks, their home markets are doing kinda ok on average, which means more earning power to carry them through the rough times (cf. what Buffet said re: WFC).

re 2: Exactly. That's why BaFin said (as cited): "The data also could not be used to draw conclusions about the creditworthiness of banks."

One should also keep in mind that the Landesbanken are just that - owned by the states and counties. While there is no formal guarantee of their continued existance (due to EU competition law - qurey whether that will change again in the future), de facto it is impossible for the states to let them go down the drain. Which means in turn there is no insecurity for the businesspartners of the Landesbanken - and therefore less economic impact of their "shakiness" (except for the drain on the budgets of the states ...).

Given the great numbers posted today by Deutsche Bank, and HRE being nationalized, the only real remaining source of worry in the German banking sector imO is Commerzbank ... (Austria is quite another story ...)

Apr 28 07:32 AM

[Edward Harr...:]

Positroll, you state the facts well. I would agree with your sentiments. Although I would give myself an out if the economic situation does not stabilize as it is seems to be doing right now.

Thanks for the contribution.

Apr 28 01:06 PM