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Co-op banks’ shotgun wedding

Last month's announcement of a merger between DG Bank and GZ Bank was a long awaited step in the consolidation of the top level of Germany's cooperative banking sector.

DG, GZ and WGZ act as regional central banks for 1,966 local cooperative banks, the Volks- und Raiffeisenbanken - a job that could be as well be accomplished by one top institution.

But when the three banks started merger talks in February, it was the need to restructure the troubled DG Bank, rather than an urge to enhance efficiency in the sector, that provided the impetus.

Frankfurt-based DG Bank, the biggest of the three, has always been a problem child. It has a horrendously high cost-income ratio of 75%, a lending business focused mainly on small and medium-size companies and no retail customer base to speak of. "The bank never really recovered after its near collapse in 1991," says Karlo Fuchs, analyst at credit-rating agency Standard&Poor's in Frankfurt.

Alarm bells started ringing again last year when DG Bank suffered a 30% fall in income, and risk provisions were put at Dm1 billion ($453 million) - up from Dm570 million in 1999 - after a second auditor revalued DG's loans.

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