Today what we are going to be taking the advice of the Jam and Going Underground. Specifically we are looking into the problems and travails of the German banking system. One factor in this is the deteriorating economic situation which the German IFO has kindly elaborated on this morning.
As you can see according to them the German economy has gone from strong boom to slight down swing and is now moving into down swing. That will not be good for the banking environment. Some wry humour can be provided by the comparison with Italy as a 0.1% fall for it put it in “deep recession” in the third quarter of last year but a 0.2% decline for Germany apparently only put it in a “slight down swing”! Also surely the French strong boom was in 2017 rather than last year, but we get the picture that generally there has been not only a slowing but an expectation of harder economic times across the Euro area which will affect international banking.
Landesbanken
The Frankfurt Rundschau looked at things back on the 24th of May last year.
Most of the Landesbanks belong to the federal states and savings banks associations, with the exception of Landesbank Berlin, which is the sole property of the savings banks.
The ownership structure is complicated by they are mainly owned by German states and cities. Also the credit crunch ending up crunching some of them.
Before the financial crisis, there were still eleven central institutes of the savings banks and the central savings bank fund provider Deka in Frankfurt. In the meantime there are only seven – after the privatization of HSH Nordbank six – and the Deka.
Even back then one of them was in particular trouble.
The capital base of Nord LB is rather modest. CEO Thomas Bürkle therefore stated in April that the bank and its owners – the states of Lower Saxony and Saxony-Anhalt as well as three savings banks associations – were examining “various options” in order to get fresh money. This includes the inclusion of a private investor. For if the state owners inject capital, that would be an aid case and would call the European Commission on the plan.
I do not know if they meant outright modest or in comparison to the troubled loan book but we do know the situation was already worrying enough that a road to Damascus style move as in accepting private capital was looking likely.
So we move on with a reminder that whilst there were hopes that ownership structures might influence banking behaviour. But just like the hopes for the mutuals were dashed in the UK the state backed Landesbanken continue to be trouble.
NordLB
The particular case of Nord LB has gone from bad to worse in 2019. On January 3rd the Financial Times reported that a regular establishment gambit had come something of a cropper.
Frankfurt-based public lender Helaba has terminated merger talks with stricken state-owned rival NordLB, reducing the possibility of a public sector rescue of the Hanover-based lender that aims to raise €3.5bn in additional capital………A merger between Helaba and NordLB would have created a lender with about €320bn of assets and could have been a first step towards a wider consolidation of Germany’s Landesbanken — the regional lenders co-owned by federal states and local savings banks.
So as my late father would have put it, that would have muddied the accountancy picture for a couple of years. As to what they would have been trying to cover up and hide?
With €155bn in assets, Hanover-based NordLB is the fourth-largest German Landesbank and was singled out as the weakest link in Germany’s banking system in the European Banking Authority’s stress test in November. Its balance sheet is creaking under €7.3bn in toxic shipping loans.
The reminds us of how we got here which was via some disastrous lending to the shipping sector and also a reminder of the size of NordLB. This is a problem for the local area.
The state of Lower Saxony, which holds a 59 per cent stake in NordLB, is negotiating with three different private equity investors — including Cerberus and Apollo — over minority investments that would also include the state authority putting more money into the bank.
Apparently it is always just about to turn a corner, which is a familiar theme.
“I am confident that we will find a solution in January,” Lower Saxony’s finance minister Reinhold Hilbers said in a statement on Thursday. His initial plan was to fix the issue by the end of 2018.
Oh and whilst we are thinking in terms of groundhog days, the bits which aren’t losing money are always okay.
A person close to the bank stressed that all of NordLB’s units besides shipping finance are profitable,
What has happened now?
As ever big developments often happen at a weekend and the one just passed was one of those. From the Shipping Tribune.
Germany’s NordLB will be bailed out by public-sector savings banks and the state of Lower Saxony at a cost of as much as 3.7 billion euros ($4.2 billion), thwarting a bid by Cerberus Capital Management and Centerbridge Partners for a stake in the struggling lender.
The restructuring package, which Lower Saxony Premier Stephan Weil called “the best of all possible options,” involves as much as 1.2 billion euros from the savings banks group and up to 1.5 billion euros in capital from Lower Saxony. An additional contribution from the state — NordLB’s main shareholder — could add another 1 billion euros.
In this situations “could add” is invariably a done deal as the news is doled out in bite-sized chunks. As to the significance of this Johannes Borgen is on the case on Twitter.
That’s obviously state resources, but is it state aid ?
He sums up the case for it being state aid here.
Arguing for state aid is the fact that they are owned by the Lander, the cities etc. So fully public owned and this has been the case forever. It’s easy to argue that they serve a public policy goal.
But that is awkward for the German and Euro area establishments for this reason.
I honestly don’t know where this will end. But if the Sparkassen end up being consider public entities for state aid rules, it’s an enormous pack of worm because every single loan they grant could be considered state aid!
Thus there will be a large effort to avoid this is in the way that the ECB calls itself a “rules-based organisation” as it indulges in monetary policies which suggest it instead does “Whatever it takes”.
A possible route is to argue that this has taken place on market terms. That is not really true because the state has offered better terms than the two US hedge-fund alternatives but if we return to the Shipping Tribune maybe the effort has already begun.
The deal with the savings banks will, over time, cost the state less than if NordLB had accepted the offer from the private equity companies, said Reinhold Hilbers, the finance minister of Lower Saxony and head of the company’s supervisory board.
That is a familiar political strategy as by the time we catch up with this particular kicked can we my well have forgotten about this statement and its forecasts and anyway Herr Hilbers will probably have moved on. Oh and it is an implicit admittal that it is costing the state more now.
Comment
We see today that there is far more to the current German banking crisis than the decline or Deutsche Bank or to that matter Commerzbank. Also there are more similarities with the troubles in Italy than many would like to admit. But as we observe this from @macroymercados we are left wondering how the NordLB accounts have been approved for the last decade?
#nordLB – Agreed to sell loans to Cerberus Capital Management, according to a person familiar with the transaction, while the German lender expects a loss of about €2.7b for 2018.
If we move to the states involved then the figures quoted today will be a minimum for their involvement but that may take some time to be revealed as the proposed cash injection will oil the wheels for some time.
As to whether this will turn out to be a bailout or bail-in only time will tell? This looks like a bailout thus breaking the spirit at least of EU banking rules but we will have to see. We could see some wild swings in the price of Nord LB bonds. As to Germany as a whole even if this gets added to the national debt then there is a clear difference with Italy as it has a 0.17% ten-year bond yield and has reduced its gross national debt by around 52 billion Euros over the past year. Real trouble there would need involvement in Deutsche Bank.
Notayesmanseconomics's Blog 
I think that, if the money comes from the state and the terms are better (from the point of view of the bank), it is pretty hard to say that it isn’t state aid. I would make three comments:
1. Can you imagine the furore were this an Italian/Greek bank and the relevant government decided to do this?
2. If the injection is E3.5 billion and it lost E2.7 billion last year, it is rather unlikely that this will solve its problems;
3. These regional and state backed banks were fine as a method of producing long-term lending to the German industrial mittelstand. Once they get too big and diversify into, say, shipping, then the trouble starts. You only have to look at IKB (supposedly a long-term lender) which went bust in 2007 after deciding to invest heavily in, guess what, US sub-prime mortgages.
It does grate, there seems to be one rule for Germany (numerous examples as in this case with cash injections for their banks, new coal fire power stations when everyone else is being forced to close theirs and any EU rule or directive which clashes with the German constitution is ignored when we are told EU law is superior to British law, etc
Its no wonder the shine is coming off the EU outside of Germany
I meant add and one rule for everyone else
Hello Shaun,
One of the reasons I voted to leave the EU was that I saw on countless occasions that France and Germany were treated differently in this “club” as opposed to the other members . It’s one reason I refer to the EU as a Franco-German empire.
I know you don’t do politics but the economics of the EU are deeply entwined with the two main countries – its their club 🙂
So I posit that we will see “Whatever it takes” to infinity and beyond !
Forbin
Hi Forbin
We wait to see how the ECB responds to the Euro area slow down. A liquidity operation ( TLTRO) seems likely as an opener as it helps the “precious” and avoids restating QE straight after they had ended it! They do not want to cut the deposit rate ( -0.4%) either as it hurts the “precious”
Moving from the central bank to the banks there is quite a quagmire here as the new banking rules point towards bail-ins but we keep returning to bailouts. Time for some of your popcorn reserves….
“I honestly don’t know where this will end. But if the Sparkassen end up being consider public entities for state aid rules, it’s an enormous pack of worm because every single loan they grant could be considered state aid!”
Errm. This has been known for decades but studiously ignored. The ability of the mighty Mittelstand to borrow cheaply from the State has given them a huge competitive advantage down the decades both on the cost of doing business front and as a means of avioding being taken over by nasty foreign capitalists. Germany today is as ‘national socialist’ as it was under Bismarck.
Hi hotairmail
Isn’t there a military dictum that the best place to hide something is in plain sight? This has worked up to now for the German banking system but minds are focusing on it and I am sure the Italians will be pointing it out.
As to Germany there are also issues on the environmental front which even the Financial Times is now pointing it out. A bit different to making Angela Merkel person of the year…..
Of course, having state aided domestic banks over the decades has led to excessive risk taking and weakness amongst its biggest private banks such as Deutsche.
And in the FT news today – 1. German politician says Germany should set up a fund to fight off foreign takeovers (by the Chinese) 2. Germans and French are going to collaborate to try and change EU Competition rules to allow mega rail merger.
Same as it ever was.
Well it looks like a bail out and quacks like a bail out, I think it’s a bail out. It isn’t just the German banks though, the entire Eurozone banking system is insolvent and has been for a decade. I small QE Whatever it takes coming on.
When your bank’s had enough of QE
And I’m layin’ flat out on the floor
When you think I’ve bailed you all I can
I’m gonna bail you a little bit more
(With apologies to Dr Hook)
I wonder if the Germans and the rest of the EU tax payers are aware of what happened to their money…
The EU is a rules-based organisation, just ask M. Barnier.
used to be 1 rule for the Germans and French and 1 rule for everyone else
now its 2 rules for the Germans and French …… 🙂
forbin