Germany Gets Tough with State Banks

Last week I wrote a post suggesting that the Germans were getting tired of bailing out their banks and had moved to more draconian solutions to 'fix' the banking sector. Nationalizing Hypo Real Estate (HREHY.PK) (HRE) this week will be the first move in that direction.

But the Germans are not nearly finished in their effort to clean house. Next on the list are the state banks, the Landesbanken.

The Financial Times reports:

The German government has issued an ultimatum to the country’s seven Landesbanken to agree by July to consolidate the troubled state-owned banking sector or face exclusion from Berlin’s plan to take toxic assets off banks’ books.

Government officials told the Financial Times that four of the banks held so many troubled assets that it was “impossible” to see how their owners – German regional governments and municipal savings banks – could save them without Berlin’s help.

For the first time, Berlin had “a very good chance” of forcing the Landesbanken to shrink their balance sheets and merge into “one, two or three” banks by 2012, an official said. They would be “German players with some European scope”.

The merger of the sector into one federally-owned Landesbank would create one of the world’s biggest banks by assets, although any resultant entity would have to shrink rapidly.

For those like me who have been very critical of the slowness of European governments to take matters in hand in this banking crisis, this should be viewed as good news. In a recently leaked document, it was HRE, the Landesbanken and Commerzbank with the lion's share of potentially crippling toxic asset exposure.

Now, it looks as if HRE and the Landesbanken, have been taken care of. Commerzbank is the only problem child left to solve.

Source: Berlin issues ultimatum to Landesbanken – FT.com

Disclosure: I have no financial stakes in any German banks.

Comments

[Positroll:]

I don't think we will get to a singular bank strictly speaking. The healthier states, especially Baden Wuerttemberg won't be ready to give up their independence in the banking sector (though they are quite ready to take over other Landesbanken, if the Federation pays for it ...).
At the utmost, I could imagine a system where we get some kind of federal bank owned by the Landesbanken, with the Landesbanken keeping their independence just like the local Sparkassen (co-owners of the Landesbanken) are doing right now.
The Landesbanken would then be managed very conservatively (just like the Sparkassen right now) and still be available for financing regional projects; huge projects + investment abroad would go to the federal level.

May 04 04:42 AM