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Continuing Concerns About German Banks, Another Shoe?

Germany still in credit crunch ‘danger’

By James Wilson in Frankfurt
FT.com

Published: August 10 2009 15:26 | Last updated: August 10 2009 17:30

Andreas Schmitz

Two years after the financial crisis began, Germany is still at risk of a credit crunch as banks face a wave of corporate downgrades, the head of the country’s main banking association has warned.

“Will there be a credit crunch? Clearly it is a concern and there is a real danger of this. I do not think it is entirely unrealistic to think there will be one,” Andreas Schmitz, president of the Federal Association of German Banks, said in an interview.

“I think we have reached the low point of the financial crisis. But it is obvious that every bank will have more to deal with in the next 18 months, in terms of defaults by clients and non-performing loans, than they have had up to now.”

His comments are one of the clearest statements of the risk of a credit squeeze from a German banker. Banks have been generally dismissive of complaints from other industrial groups that lending is already being reduced.

The warning could undermine fragile confidence that the worst of the recession may be over in Europe’s largest economy. It is also likely to fuel concern among from industrialists and politicians that banks’ reluctance or inability to lend will hamper the country’s corporate sector just as business confidence is rising.

Many analysts say Germany escaped the credit crunch that began two years ago. While many German banks were badly affected by the financial crisis, there has been little evidence of a reduction in credit to the “real” economy.

Bafin, the regulator, estimates German banks have about €800bn ($1,135bn, £680bn) in toxic and non-core assets on their balance sheets.

Mr Schmitz’s comments are likely to add to fears that Germany has failed to do enough to cleanse its financial system of problem assets and may yet face a damaging credit squeeze.

Germany is Europe’s biggest economy and its performance is important to the continent’s hopes of recovery. German companies are considered relatively more dependent on bank financing than on capital markets.

But many had been highly profitable going into the economic crisis and so have not immediately faced refinancing problems.

Mr Schmitz said banks were under pressure to reduce the size of their balance sheets and would have to set aside more capital if corporate customers were downgraded by credit rating agencies. “I think there is a substantial migration of ratings that will also come next year,” he said.

The European Central Bank has pumped unprecedented amounts of liquidity into the eurozone’s banking system and says it is waiting for signs that the extra liquidity is feeding through into bank lending.

However, Mr Schmitz, who is also chief executive in Germany of HSBC Trinkaus & Burkhardt, said the ECB’s liquidity was “not helping banks’ capital situations”, especially when they are concerned about ratings downgrades.

“There is ample liquidity in the system but this doesn’t say anything about banks’ capital positions,” he said. “It looks at the moment as if banks have satisfactory capital positions but if more risks were to arise in the remainder of the year one or the other will need more capital.”

Peer Steinbrück, the finance minister, has demanded that banks increase their lending and promised to take action if they do not comply.

Mr Schmitz said there was “no credit squeeze that we can detect at the moment”. He said: “It is more of a squeeze of creditworthiness and a squeeze of credit terms, which simply reflects the higher risks and more expensive refinancing facing banks.”

Commerzbank, the biggest private-sector lender to German industry, said last week it had maintained its lending to corporate customers at near constant levels and had €45bn in undrawn credit lines available for German companies. Deutsche Bank, Germany’s biggest, said its volume of loans to so-called ’Mittelstand’ companies was €3bn higher than at the onset of the financial crisis in 2007.

However Mr Schmitz said some foreign banks had cut back business in Germany.

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