The World from Berlin 'German Banks Are on the Edge of the Abyss'

The German government is desperately trying to find a way to save the country's ailing banking sector. Can a so-called "bad bank" solve the problem by taking over toxic assets? German commentators aren't convinced, but they are certain that something needs to be done.

Several government rescue packages later, the troubled German banking sector is still showing no sign of recovering from the financial crisis.

WestLB is under a cloud.

WestLB is under a cloud.

The discussion over what to do with the hundreds of billions of euros worth of toxic securities the banks still have on their balance sheets has received fresh impetus in Germany after it became clear that the Special Fund for Financial Market Stabilization -- known as Soffin after its German acronym -- is not succeeding in its intended aim of helping out troubled banks and jump-starting financial markets. Günther Merl, the head of the agency that manages Soffin, announced Wednesday that he was resigning -- the second person to quit the agency's steering committee within the last three months. Insiders say that Merl was frustrated at having his authority usurped by government and Finance Ministry officials.

Now the talk is of setting up a so-called "bad bank" to take over banks' toxic securities -- an approach backed by a number of leading German bankers. Sweden was able to successfully use this model in the early 1990s to combat its own credit crunch. The state even made money when distressed assets were later sold.

According to a report in the Friday edition of the Süddeutsche Zeitung, the German government is considering setting up individual bad banks for each financial institution, instead of establishing a single bad bank for the whole sector. These bad banks could then be helped out by Soffin without the respective financial institution being absolved of its responsibilities, the paper wrote.

German media reported Thursday that Chancellor Angela Merkel's government -- a coalition of conservative Christian Democrats and center-left Social Democrats -- was considering ways of assisting banks without being saddled with the toxic assets themselves. Finance policy experts from both coalition parties on Thursday categorically ruled out setting up a national bad bank.

Graphic: The German government's response to the financial crisis.

Graphic: The German government's response to the financial crisis.

One regional lender appears to have already chosen the bad bank approach. On Friday, troubled German state-backed bank WestLB confirmed reports that it was considering spinning off its risky debt -- with a value of around €80 billion -- into a new bank. The remaining "healthy" bank would then be a more attractive target for a takeover or merger, observers said.

Commentators writing in Germany's newspapers Friday agreed that urgent action was necessary but were divided over the merits of the bad bank model.

The center-right Frankfurter Allgemeine Zeitung writes:

"The (German government's) rescue operations have so far not brought the desired results. The banks have been plugging up their worst holes with billions of euros of taxpayers' money, but their losses have been growing even faster. Meanwhile complaints from companies about increasingly restrictive lending practices are growing louder. Obviously the banks can not be helped just with money alone. The accounting principles and supervisory rules for banks also need to be examined.

"A vicious circle has begun: Forced sales of securities are pushing down prices, which leads to new rounds of write-offs, causing institutions' capital to shrink -- which in turn makes further sell-offs necessary. The government needs to break through this crisis. Then it will also no longer need to take over the bad risks of the all-too-careless banks."

The financial daily Handelsblatt writes:

"It is not easy to say this loudly and clearly: The German banks are on the edge of the abyss. This is the painful truth, and nothing but the truth. … All of them have been hit (by the financial crisis). We urgently need a 'bad bank' in which a large part of the toxic securities and loans which are still on the banks' balance sheets can be deposited.

"It doesn't matter whether each type of bank gets its own bad bank, or whether there is only one bad bank for all. The crucial thing is that the state is behind it. … If all other major industrialized countries are taking over their investment banks' toxic securities in one way or another, then Germany cannot simply stand by and watch. Otherwise, its own banks will fall far behind."

The Financial Times Deutschland writes:

"Soffin's facility for buying toxic securities from banks simply doesn't work. Not one single bank has reached an agreement with Soffin to do this, and there are no signs that this will happen in the future either. According to a ruling by the European Commission, the banks will have to take these risks back again after three years. Hence there is no real cleaning-up of the balance sheet and no such cleaning-up would be recognized by auditors. It is absolutely incomprehensible why Berlin accepted this EU condition.

"German politicians would be well advised to approach the European Commission again and to demand that this passage is corrected. Only in this way can Soffin fulfill its intended function as a 'bad bank'. If this doesn't happen, then the instrument will remain useless. And nobody needs that."

The conservative Die Welt writes:

"Taken as a whole, (Germany's) financial institutions have dead weight to the tune of hundreds -- or even thousands -- of billions on their balance sheets. This problem can not be solved simply by sitting it out -- action needs to be taken now so that the economic crisis is not exacerbated. In this respect, the government should follow two principles that are in no way contradictory: applying market principles on the one hand, and minimizing costs on the other.

"These principles rule out the setting up of a bad bank as the central repository for the toxic assets. Instead, each institution should set up its own repository. If the government then needs to get involved, it is important that it create mechanisms so that taxpayers should at least be able to benefit from a subsequent upturn. Otherwise, the foundation is laid for the state to suffer a concrete financial crisis of its own as a result of the banking crisis."

-- David Gordon Smith; 2:30 p.m. CET


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