Publicly owned regional wholesale banks were part of the financial architecture behind Germany’s post-war economic miracle.
However, globalization and European integration – especially the advent of a stronger EU single market and competition framework – has rendered the Landesbanken increasingly obsolete. WestLB’s sub-prime losses and the later and longer rusting of northern Landesbanken’s shipping portfolios are the inevitable harbingers of the eradication of their independence.
Now, negative rates and the less partial supervisory policy of the banking union are further hastening their demise – above all the ECB’s increasing determination to bring down non-performing loan ratios across Europe. Indeed, the single supervisor, combined with state-aid rules, is behind a frantic search for capital at Hanover-based NordLB, before it properly recognises the worthlessness of its shipping book: perhaps blowing a hole in its 2018 results of more than €3 billion.
The Landesbanken must join together if they have a future as part of the third public-sector pillar of Germany banking, alongside cooperatives and private banks. Belatedly, the public-sector banks’ umbrella group in Berlin, the DSGV, and the federal finance ministry seem to have recognised this since coming under new leadership last year: Helmut Schleweis at DSGV, and Olaf Scholz at the ministry, alongside deputy finance minister Jörg Kukies (previously of Goldman Sachs).
Even if it seems a contradiction in terms, a quasi-federal Landesbanken might at least be nationally competitive in areas such as transaction banking. But reforming the system will not be much easier than the UK’s quest to get an agreement on exiting the EU.
How to align the interests of politicians in central and regional governments – rival Landesbanken – and hundreds of savings banks with their local powerbrokers, not to mention national and European banking supervisors?
The Landesbanken compete between themselves more now. Savings banks have less care than before for the ones they own, let alone those of other states, and the interests of other states’ politicians.
The first and easier phase of trying to form a mega-Landesbank sunk on its maiden voyage late last year, when Frankfurt’s Helaba reportedly exited a mooted merger with NordLB. This was the intended forerunner of other mergers, including LBBW, in Stuttgart.
Perhaps it was local savings banks’ desire to maintain influence that scuppered the deal. In any case, even offering to transfer ownership of asset management company DekaBank, the public-sector banks’ crown jewel, was not enough.
Private equity lurks in the background, the equivalent of a no-deal scenario.
A joint recapitalization by the state and private equity is, in fact, the most likely way out now for NordLB, according to Scope Ratings. This could involve Lower Saxony deploying billions of euros of public money, even while the private equity company – probably Cerberus – acquires the other half of the bank, as well as its shipping loans, at a huge discount to book value.
To gain its desired returns, Cerberus will push for swingeing cuts, just as it is doing at HSH Nordbank: the Hamburg and Kiel-based Landesbank it agreed to buy last year alongside JC Flowers, and which used to be the world’s biggest shipping lender.
Scholz, Hamburg’s mayor until 2018, knows what a waste of taxpayers’ money some of the Landesbanken have already become, and what a headache it is to fix them.
Rivals would look on with glee were it not for the knowledge they may be next. The Landesbanken all need to embark on drastic cuts to jobs and vast swathes of their loan books. Only this, alongside mergers, will make them viable in the longer term.No bank and especially no politician would ideally seek this, but if the public sector still believes in itself, they need to reach a compromise.