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July 30, 2014 6:16 pm
The deputy finance minister for Schleswig-Holstein sighs and gets to his feet. On a whiteboard in his office, he draws a diagram explaining the state’s complex bailout of what is probably Germany’s most distressed bank, the publicly owned HSH Nordbank.
For Thomas Losse-Müller, the burden to the taxpayer that the bank poses is the largest financial threat to his state. It is a problem faced across the country. Bailed out, merged or run down since the disastrous lead in to the financial crisis that saw ill-advised investments in US mortgage-backed securities, Germany’s state-owned Landesbanks are facing an identity crisis.
The remaining five main banks – Helaba in Frankfurt, LBBW in Stuttgart, BayernLB in Munich, NordLB in Hannover and HSH in Hamburg – are trying to return to the type of regional lending that sustained them for more than 100 years before their disastrous foray into global investing. If they do not return to those founding principles, they may not survive.
“We don’t want what we had in the past with global aspirations; that’s gone, that’s history,” says the chief executive of one bank.
Yet this year European officials are breathing down the Landesbank’s necks. The European Central Bank has put the five institutions on its list of systemically important eurozone banks. As the ECB prepares to take over banking supervision duties in November, the banks’ balance sheets are being stress tested. If the stress tests reveal a threat to the lenders, German taxpayers will be on the hook again. For a politically charged sector where change can usually only ever be made by Brussels, extra attention is bad news.
Landesbanks were established in the 19th century as regional central banks for Germany’s vast network of local savings banks, the Sparkassen. They were traditionally closely tied to the Mittelstand, the regional small- and medium-sized businesses that form the backbone of the German economy.
But this changed after 2001. The European Commission’s decision to cancel what it deemed to be unfair state guarantees for the Landesbanks ended a period of high credit ratings and easy profits for the state-owned lenders. Most piled into high-yield assets to keep profits inflated.
When the crisis struck, the Landesbanks’ big exposures to US mortgage-backed securities were revealed. WestLB, Germany’s largest Landesbank, collapsed completely, while others, including BayernLB, HSH and LBBW, had to be bailed out by their owners, comprised mainly of regional states and savings banks.
Since then, balance sheets have shrunk by nearly 40 per cent and
global lending has been curtailed, often at the insistence of the commission. Today, the sector employs 37,000 people and accounts for 20 per cent of all German corporate lending.
“Landesbanks have changed dramatically,” says Gunter Dunkel, head of Voeb, the Landesbank association. “I think we have to go further, one could say much further, but that holds true for the banking industry in Europe.”
Yet, as the Landesbanks grapple with the legacy of the past, their future remains unclear. Bankers, politicians and academics within Germany question whether enough has been done for all five big banks to survive this year’s stress tests.
Thanks in large part to state support, Landesbanks have common equity tier one ratios – a crucial regulatory measure of the health of a bank – that most private banks would salivate over. Of more concern is whether the ECB, or the commission, deem the banks to have viable business models.
“I think the European regulators will do their homework and make it hard for some of the Landesbanks to exist in their current set-up,” says a board member at one.
The bank in most trouble is HSH. Bankers privately agree it is the most likely Landesbank to fail the stress tests and be ordered to wind up – a view contested by the bank. “At this juncture we have done our utmost and with a solid common equity tier one ratio, we feel well prepared regarding the stress test,” says Constantin von Oesterreich, chief executive of HSH.
As the largest shipping lender in the world, HSH was hit particularly hard by the financial crisis and ensuing economic slump that hurt global trade. It was forced into an embarrassing volte face last year after it opted to reduce a €10bn bailout guarantee from the state – then had to ask for it to be restored.
Today, the bank is desperate to prove it has a viable business model, despite grappling with a downturn in shipping that contributed to its worst annual loss last year since 2008.
HSH’s tale of woe has created friction with its state owners. The relationship is strained at other banks, too. Taxpayer bailouts have not been popular, prompting politicians to take a frostier approach towards their Landesbank.
Politicians don’t have time to sit on supervisory boards. That gives the bank more freedom
- One former politician and board member
Yet politicians and Landesbanks are still closely intertwined. In Germany, companies have a two-board structure with a supervisory board comprised of non-executives who monitor management. At Landesbanks, these are often local politicians, mayors or heads of savings banks who may also be owners of the bank. In theory, this provides a level of independent monitoring. But critics say it creates an inevitable conflict of interests: politicians have historically wanted to use their Landesbank to further their own agenda.
“Politicians don’t have time to sit on supervisory boards,” says a former politician and board member. “That gives the bank more freedom, which is good and bad. And politicians aren’t bankers: they don’t have the expertise to hold the bank to account.”
The commission has been wise to this problem, insisting that both BayernLB and LBBW have less state representation on their supervisory boards. Politicians maintain a strong presence but not all of them view their role as Landesbank owners favourably. “If I were faced today with the question of whether I’d set up a Landesbank, I’d probably think twice,” says one.
Politicians are not the only source of strain. Critics argue the interests of the lenders and their Sparkassen owners are also not always aligned.
Savings banks’ main desire to have somewhere to park their liquidity at good rates worked well when Landesbanks still had top-quality credit ratings and were happy to be purely regional.
After the fiasco with mortgage-backed securities, the lenders are stressing their traditional regional values once more.
“The Landesbanks that even halfway remembered what their original purpose was have come through the crisis better than those that tried to turn a global wheel. Landesbanks have learnt that the hard way,” says Peter-Juergen Schneider, head of NordLB’s supervisory board and minister of finance for Lower Saxony.
But in an era of low interest rates, poor credit ratings and poor investments dragging down their profits, Landesbanks are still looking across regional and international borders for business. Helaba has an international property portfolio. HSH and NordLB are reducing their shipping loans but intend to keep it a core area.
BayernLB insiders talk about getting their Asian banking licence back – even if only to service German clients with business there.
“What the Sparkassen want does not give the Landesbanks a business model and that is the inherent conflict,” says one banker in the private sector.
Joerg Rocholl, a Berlin-based academic at the European School of Management and Technology, says the banks are restricted from the retail savings markets by the Sparkassen.
At BayernLB, for example, there is an agreement that its retail arm will not compete too strongly with the Bavarian Sparkassen, which own 25 per cent of the bank. Instead, the retail arm seeks to be more competitive outside the region.
NordLB insiders say there is tension with the Sparkassen shareholders over the lack of a dividend. With the savings banks trying to cope with lower margins as interest rates fall, they would like to see the dividend paid out.
Restrictions have also been placed on what the banks can do. NordLB was banned from paying out dividends or making acquisitions under the terms of its bailout. BayernLB has to sell its Hungarian bank MKB
. The only Landesbank not to receive state aid was Helaba, which has long been more risk-averse due in part to its
80 per cent savings banks ownership.
The commission-approved bailouts are crippling the banks’ ability to move on. HSH is paying hundreds of millions a year to its state owners simply in return for its bailout guarantee – last year the bill was more than €900m. BayernLB has to pay its owners back €5bn of the €10bn it received in emergency funds during the crisis by 2019. LBBW has paid back €1bn of the €5bn it received.
There is also a lack of solidarity among Landesbanks themselves. Board members are keen to argue that other Landesbanks are in a worse shape than they are. Insiders at HSH argue that the southern banks of LBBW and BayernLB still have to pay back billions in state aid.
Insiders at NordLB point to Bayern’s botched purchase of Austrian bank Hypo Alpe Adria.
Every bank argues that at least they are not HSH. This is partly strategic: while the banks are regionally owned, most are now trying to go beyond their borders and lend nationally, putting them in direct competition with each other. But the lack of solidarity is not helpful in a sector that needs to present a united front to Brussels.
Further consolidation of the Landesbanks is a solution that is often raised. This could take the form of one large centralised institution, or a northern and a southern Landesbank. Professor Reinhardt Schmidt at Frankfurt’s Goethe university points out that other European countries, such as France, Austria and Italy, have moved their savings or co-operative banks to a more centralised system. “We don’t need so many,” he says.
My fear is that the political attachment to these banks is often too high for consolidation to happen
- Joerg Rocholl, European School of Management and Technology
Combining NordLB and HSH, or LBBW and BayernLB, have been mooted in the German press but fiercely rejected by the banks. With combined assets of more than €1.1tn, some argue that one big Landesbank is completely contrary to the regulatory environment aimed at avoiding “too big to fail”.
One chief executive admits that this is not how the federal government sees it. “In Berlin the view is completely different: Landesbanks represent regional strength, and if you run a federal government you don’t like regional strength,” he says.
Most Landesbank watchers say that regardless of the merits of fewer Landesbanks, local politicians will not let them go without a fight.
“My fear is that the political attachment to these banks is often too high for consolidation to happen,” says Mr Rocholl.
In fact, board members agree that other Landesbanks should be merged – just not their own. “There should only be two or three Landesbanks,” says the chief executive of one.
All eyes are now on the ECB, which declined to comment on specific institutions. Whatever the outcome, however, many Landesbankers recognise that the brand is now broken.
“We’ve had to overcome these bad reputations,” says one chief executive. “We really want to be different. We don’t want to be a ‘Landesbank’ any more.”
Executives in the dock over risky bets
Angry German taxpayers who forked out billions to bail their Landesbanks out of the financial crisis have been rewarded with the spectacle of high-profile criminal trials of board members across the country.
Landesbank executives have been accused of failing to follow proper procedures when investing in risky assets such as US mortgage-backed securities during the run-up to the crisis, or even deliberately obscuring the risks involved.
Seven former or current board members of Stuttgart-based Landesbank LBBW, including the former chief executive and the current deputy chief executive, went on trial this year accused of failing to disclose the risks involved in buying certain asset-backed securities in 2005 and 2006. In April the case was settled after insufficient evidence was found. However, the pair was ordered to pay tens of thousands of euros each to charity as part of the deal.
Seven former BayernLB board members, including the former chief executive, were accused of breach of trust – mishandling other people’s money – at a trial in Munich this year. At issue was the bank’s purchase of Austrian bank Hypo Alpe Adria in 2007, which cost BayernLB billions of euros in losses after the bank was nationalised in 2009. The case continues, with the executives denying the charges.
The court cases have not always been successful for the prosecutors. This summer, in what was reportedly the first time an entire management board had been on trial, six former board members of HSH Nordbank were cleared of charges of accounting fraud, or trying to make the bank’s balance sheet appear stronger than it really was, during the financial crisis. The bank had to be bailed out by taxpayers in 2009.
“So far [these court cases] have not led to executives going to prison,” says Jörg Rocholl, a professor at the European School of Management and Technology. “If this trend continues, it means that the court-case activities are not matched by much actual evidence.”
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