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Business

German Banks Want to Pass Loan Liability to Government

Germany’s biggest banks have created controversy by allegedly calling upon the federal government to create a special company to take responsibility for their damaged credit ratings.

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A further shadow has settled over Germany's banking landscape.

Reports in the German press suggest that the heads of many of the country's biggest banking companies have met with high-ranking government officials to discuss the creation of an institution that will take on liability for loan risks.

According to a report in the German Sunday newspaper Frankfurter Allgemeine Sonntagszeitung, a recent meeting was held to discuss the creation of a "bad bank" company in which German banks with bad credit could store their debts. The report say that those present at the meeting included Chancellor Gerhard Schröder, Josef Ackermann, chief executive of Deutsche Bank, key cabinet ministers and officials from the banking and insurance sectors .

"Bad bank" would pass liability to the government

The creation of this "bad bank" would pass liability from the banks to the government and allow the banks to trade without blacklisted credit ratings that have been deterring potential customers.

Deutsche Bank Chef Dr. Josef Ackermann

Josef Ackermann.

The paper reports that Ackermann suggested that the federal government should take liability for credit risks in order to ease the pressure on banks. This special state-financed "company" should help rescue cash-strapped banks and take responsibility for their debts, Ackermann said.

The article states that banking officials present at the meeting reported that the "bad bank" was to take over risk provisions on debts worth € 7 billion ($ 7.6 billion) from Dresdner Bank, Commerzbank and Hypo-Vereinsbank.

According to Ackermann, Deutsche Bank itself does not want to get involved with a project made up of financially damaged banks. "We don’t want to catch the virus," he said. Deutsche Bank officials said Monday the bank intends to systematically hedge against potential losses on its loan portfolio in future after it was forced to raise risk provisions to record levels of € 2.1 billion last year.

Report is speculation say officials

Dresdner Bank Zentrale in Frankfurt

The Dresdner Bank headquarters in Frankfurt.

Meanwhile, both the Finance Ministry in Berlin and the Bundesbank in Frankfurt strictly dismissed the report as "speculation" and insisted the German banking sector was not in crisis. "We don't see it that way," a spokesman for Finance Minister Hans Eichel said.

Leading Frankfurt banking officials said they were shocked by rumors of the creation of a "bad bank". Calling for help from the state in a time of crisis would only indicate that the private German financial sector was unable to find solutions to homemade problems itself, one official said.

No need for government help

Bundesbank Director Edgar Meister was confident that the banks didn’t need a state-financed emergency plan and were able to manage on their own. "I'm not aware of a government plan and I don't think German banks have the need of one," he said in an official statement. Meister said he, too, saw no evidence of a banking crisis. "I'm confident regarding the capacity of German banks to overcome the difficulties on their own," he said.

Meister admitted that German banks had had "a bad year" and that prospects for 2003 were not much better. Banks were currently developing projects of their own to get themselves out of the danger of loan risks, Meister continued. "The banks are undertaking enormous efforts to stabilize their finances," he said.

Nationalization of credit liability "unacceptable"

An expert for banking and stock markets at the University of Erlangen/Nuremberg, Professor Wolfgang Gerke, said such a proposition for a nationalization of credit liability would be unacceptable, anyway. Not only did it go against the principles of the free market, but it would send a "fatal signal" because it would cast doubt over the stability of banks, Gerke argued. The professor also insisted there was no crisis in the sector and "no reason to panic."

Hans Eichel

Finance minister Hans Eichel.

In the wake of the discussion about Ackermann’s idea of a "bad bank", Germany’s Dresdner Bank came up with an in-house alternative to state liability for loan risks. Dresdner Bank announced Monday that it will leave out credit risks and strategically unimportant loans of € 17 billion from its books in a newly created "Institutional Restructuring Unit" (IRU). For more than 40 percent of these loans, no risk precautions had been taken.

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