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Capital Markets

Germany: Public sector banks leverage traditional strengths

Germany's public-sector Landesbanken and the savings banks linked with them have responded remarkably well to the removal of state guarantees. Like their peers elsewhere in Europe, the most successful of them are rapidly developing new business

The financial cornershop

Public sector banks leverage traditional strengths for a new style of profitability

BE CAREFUL WHAT you wish for. When a number of private-sector banks in Germany launched their broadside against the Landesbanken in the mid-1990s, their agenda seemed clear enough. If the Landesbanken could be stripped of their Anstaltslast and Gewährträgerhaftung guarantees, which amounted to state aid and which effectively protected their very high credit ratings, they would no longer have access to the artificially cheap funding that had allowed them to grow fat and lazy on the back of easy arbitrage-driven earnings.

As a consequence, the theory had it, they would be forced to slim down and reprice their loan books. That would in turn drive armies of Mittelstand and other borrowers into the welcoming arms of private-sector universal or investment banks more than happy to lend to them at more economic rates or guide them into the corporate bond market.

As an added bonus, the loss of state guarantees – and the scything of credit ratings that would materialize as a result – would force a wave of consolidation, and ultimately privatization, throughout the Landesbank sector.

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