Subprime Crisis Points Up German Banking System Weakness
The International Monetary Fund’s Annual Economic Health Check of Germany’s banking system finds the patient in need of reconstructive surgery. The near collapse of IKB and West LB last year point up significant structural and supervisory challenges, the Fund’s Jurgen Odenius writes in an article in the latest IMF Survey magazine.
The article blames German entanglement in the subprime crisis on an antiquated banking structure that unintentionally pushed banks such as IKB to bet on risky conduits such as subprime-mortgage-backed Special Investment Vehicles (SIVs).
“As a result of deep-rooted fragmentation, interest margins remain low by international standards, and Germany’s banking sector has made only modest progress in generating income from nontraditional services. Sector-wide profitability remains low and banks, therefore, may be inclined to take on excessive risks,” Odenius writes.
Further, the recent trend of consolidation in German banking (there has been a 25% decline in the number of German banks since 2000) has not occurred in the ideal sectors:
Moreover, the current policy of consolidating mainly from within the public pillar of the three-pillar banking system—comprising the private, cooperative, and public pillars—risks creating regional banks that may not withstand intensifying global financial sector competition.
To ensure that viability of business models is achieved, policy measures must ensure that market forces and private sector capital can play their legitimate role:
Broadening private sector investment opportunities in the public pillar—as was the case of HSH Nordbank in 2006—would be major step forward.
“Lifting of regional limitations on the business operations of the publicly owned savings banks is needed to enhance the efficiency of the public pillar. Where political compromises are made, these should not be at the cost of constraining future options,” Odenius writes.
The ultimate cause of the subprime crisis was similar in Germany as elsewhere: “While their operations were, at least in broad terms, known to the supervisory authorities, the risks posed by their conduits were underestimated, not unlike in other countries.”
The article concludes with recommendations for strengthening supervision and enhancing crisis prevention.
Further German bank consolidation seems likely based on the comments of Deutsche Bank’s Juergen Fitschen, who favors seeing the country’s four big commercial banks — Deutsche Bank , Dresdner Bank, Commerzbank and Postbank — form two big groups that could better compete internationally.
Meawhile FT Alphaville details Deutsche’s (Frankfurt: DBK)reported plans to raise capital and possibly report its first quarterly loss in five years.
Fitch Ratings says the performance of Germany’s major banks is expected to remain under significant pressure in light of the prevailing financial crisis. “However, Fitch believes the banks can absorb a reasonable level of adjustments, either through diversified revenues and/or capitalisation.”
“On the M&A front, the announcement that Postbank’s majority owner is considering a sale of its shares, as well as the recently announced split of Dresdner’s operating business segments, have revived discussions regarding possible consolidation steps among the major German banks,” Fitch notes in its Semi Annual Review of Major German Banks:
Fitch considers the prevailing crisis to be a potential catalyst for consolidation of the German banking market.
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