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Landesbanken look to a new life

After years of complaints from regulators and private-sector rivals that Germany’s state banks are taking unfair advantage of public guarantees, the issue is in sight of being resolved. The EC has decreed that the Landesbanken will have to do without this subsidy within three years. Most state bank officials are confident that they can find new ways to compete but others are not so sure.

"The Landesbank issue is a bit like the undead," the analyst sighs. "It seems to stay with us for ever." In July 2001, the European Commission ended years of complaints and evasions by ordering Germany to remove public guarantees from state banks. Created to do public finance business for their local governments, the states of the German federation, the Landesbanken have antagonized Europe's privately owned banks by using their funding advantage to move into commercial lines such as asset management, investment banking and derivatives, undercutting rivals to get market share. Now their funding advantage has to disappear within three years. And no-one is sure how the Landesbanken will compete without it.

All over bar the detail

The issue is still unsettled. Germany is in talks with the EC to settle important details. In a typical European bureaucratic tangle, the text, when translated into German, is unclear on whether the grandfathering arrangement that will continue to guarantee bonds issued by the Landesbanken before the ruling will also ensure timeliness of repayment. It's a real problem as far as rating agencies are concerned.

Gerry Rawcliffe

Nobody seriously expects major changes at this stage but the squabbling continues anyway, delaying still more the point when the banks will finally need to face up to change.

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