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Landesbanken face up to a harder life

The EU-induced removal of state guarantees to the Landesbanken has prompted mergers and other inter-bank arrangements. But competition remains a burning issue in Germany's overbanked market and there is room and a need for much more consolidation.

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 While no-one is expecting a big bang after the guarantee is withdrawn, this change has already prompted consolidation and cost-cutting in the highly fragmented German banking sector.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.

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