Bundesbank warns of €90bn writedowns

Germany’s leading banks will have to wipe as much as €90bn off the value of securities and loans this year and next, the Bundesbank warned on Wednesday.

Hans-Helmut Kotz, a Bundesbank board member, called on German banks to use the “room to manoeuvre” created by public-policy responses and a return to economic growth to “put some fat on the ribs” of their capital bases. The 17 largest German banks made writedowns of just over €130bn in 2007 and 2008, according to the Bundesbank.

His exhortation came hours after WestLB, a lender owned by the state of North Rhine-Westphalia and local banks, agreed to a €3bn ($4.5bn, £2.7bn) capital injection from the government – a first for the troubled Landesbank sector.

Mr Kotz welcomed the agreement, which will see WestLB put €85bn in assets into a “bad bank”, as an “appropriate solution” to stabilise the bank and strengthen the sector as authorities prepare to end exceptional measures.

Mr Kotz declined to say how much new capital the large banks would need. But he said new capital would “not automatically” match looming writedowns, as banks could use profits and provisions to cushion their balance sheets.

“We are of the opinion that the situation is manageable,” Mr Kotz said, though he warned the German banking system still faced “major challenges”, especially if economic growth dipped.

The biggest challenge facing Germany’s banks is from recession-induced bad loans. The Bundesbank forecasts that writedowns of loans will hit €50bn-€75bn this year and next, much higher than the €40bn seen in 2007 and 2008.

But with the financial crisis waning, collateralised debt obligations and other securitised assets may not have to be adjusted much in value. Writedowns could fall to €10bn-€15bn from €90bn in the past two years, the central bank said.

The analysis suggests total writedowns by Germany’s biggest banks could hit €220bn between 2007 and 2010, a value approaching half of total adjustments, the International Monetary Fund recently forecast for the eurozone.

In September, the IMF said banks in the 16-nation bloc would have to write down $800bn (€530bn, £480bn) by the end of 2010 – with only 40 per cent of this value realised to date – and raise $310bn in new capital.

The findings will be scrutinised by the European Central Bank, which is pushing for a “timely” unwinding of its policies to cope with the crisis.

Additional reporting by Ralph Atkins