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| The removal of state guarantees prompted the merger of Hamburgische Landesbank and Landesbank Schleswig-Holstein |
IN JULY GERMANY'S 11 Landesbanken will finally lose their state guarantee, which has underpinned cheap credit and an easy life. While no-one is expecting a big bang after the guarantee is withdrawn, this change has already prompted consolidation and cost-cutting in the highly fragmented German banking sector.
The reform is long overdue. At last count there were 1,800 cooperative banks, 550 Sparkassen (savings banks), 15 insurance companies, eight leasing enterprises, 90 brokerages and more than 100 commercial banks in addition to the 11 Landesbanken.
"The Sparkassen and Landesbanken are deeply entrenched in their markets and it would take years to consolidate even if the private banks were allowed to buy them. It is this structure that is the main obstacle to change," says Oliver Wolfrum, an executive at the Bundesverband Deutscher Banken (BVD – the German banking association).
Germany's financial markets were therefore unsettled by the order to end the guarantees. A mild panic followed a leak from the ratings agencies in November 2003 that suggested Landesbanken ratings would fall below triple B in some cases after the guarantees were ended.