Commentary: A Bank Breakup That's Just What Germany Needs

Germany's private-sector bankers are a pretty buttoned-down lot. But if you want to see them unleash some Teutonic rage, just ask what they think of Westdeutsche Landesbank. WestLB, as it's popularly known, has its hand deep in the state's cookie jar. It enjoys government backing from the big state of North Rhine-Westphalia and gets government guarantees on the debt it raises from the markets. These advantages have given rival bank executives fits.

So the news that broke on Nov. 3 is just what these bankers have been waiting for. That's when Jurgen Ruttgers, head of the Christian Demo-cratic Union in North Rhine-Westphalia, said WestLB should be broken up and partly privatized. Since the CDU controls WestLB's supervisory board, the bank may finally be transformed.

If so, the breakup will dramatically change the German financial landscape. Together with state-controlled savings banks, the 12 Landesbanken account for more than half of all bank assets in Germany. Breaking up WestLB--the country's fourth-largest bank with assets of $390 billion--would spur a much-needed restructuring of German finance and create a more level playing field between public- and private-sector banks. ''It would mean the disappearance of grave distortions in German banking,'' says Manfred Weber, managing director of the Federation of German Banks.

HOUSE BANK. Private-sector financiers complain that the Dusseldorf-headquartered leviathan has an unfair advantage because it is 43.2%-owned by the state of North Rhine-Westphalia. Like other Landesbanken, WestLB provides wholesale and investment banking services for local savings banks (which also own a big slice of it) and acts as house bank to the local government. In return, the government guarantees its borrowing.

As a result, WestLB has an AA1 credit rating but a financial-strength rating of D from Moody's because of the bad debt on its balance sheet. WestLB can raise money up to 50 basis points more cheaply than many private banks and use that capital to underwrite corporate lending at low rates. And the politicians on WestLB's supervisory board are far less demanding of high profits than their private-sector counterparts.

The same is true of the other Landesbanken. But none has exploited its privileges as vigorously as WestLB. It is the largest lender to industry in North Rhine-Westphalia and a potent force in the Frankfurt capital markets. Its close links to the state government mean it automatically underwrites most public-sector bond issues. Under long-serving Chief Executive Friedel Neuber--probably the most powerful man in North Rhine-Westphalia--WestLB has built up sizable stock and bond operations in London and New York, and has even moved into Indian trade finance. ''No wonder the private-sector banks want to see its wings clipped,'' says Ralf Dibbern, banking analyst at M.M. Warburg & Co., a private bank in Hamburg.

Successive German governments have refused to reform the Landesbanken because state governments count on them to finance pet projects, and the banks' supervisory boards provide lucrative jobs for retired politicians. So Commerzbank, Deutsche Bank, and other private banks complained directly to European Competition Commissioner Mario Monti, who has demanded that the Landesbanken lose their special privileges.

MORE SHAKEUPS? Ruttgers' CDU party is in opposition in North Rhine-Westphalia, but it got control of the WestLB supervisory board when a series of municipal election victories gave it control of local savings banks with seats on WestLB's board. Ruttgers wants to defuse tensions between the EU and Berlin over government involvement in the financial sector, so he's proposing to spin off WestLB's corporate and wholesale banking businesses. The rump of the bank would handle development projects and government business and keep its state guarantee. The plan will be discussed by the board later this month.

Other public-sector banks may get similar shakeups. The city of Frankfurt, which controls a savings bank called Frankfurter Sparkasse, could sell off all or part of it. That's revolutionary talk by German standards. Says Dibbern: ''We could be on the threshold of a period of seismic change.'' And not a moment too soon.

By David Fairlamb
Fairlamb covers finance from Frankfurt.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _


E-Mail to Business Week Online

Copyright 2000-2009, Bloomberg L.P.
Terms of Use   Privacy Notice