The Problem Commerzbank-Dresdner Can't Solve

¡Guau! It is even worst than the Spanish system, where 50% of credit is in public or local-national political party hands. Definitly continental Europe is a different world, to old to be efficient or as effective as the European Commission, and some ordinary people, wanted. Another pity, boys!

Go Germany! Go Europe!

Its a good thing we still have capatilist nations like the US where banks arnt charged with providing the best deal for companies and retail competitors but are given vast indirect support through the discount window in order to protect shareholders and enable incompetent or greedy executives to receive huge salaries and bonuses.

Badly researched article. Since 2005 there is no government backing ("Gewährträgerhaftung") for the savings banks anymore. This is in fact the very reason why savings banks made such huge losses in recent years since they don't enjoy that old credit rating advantage anymore and struggle to find a new business model. And btw, North-Rhine Westfalia only had to pay 3 billion for WestLB because some of the bank's liabilities dated back to before 2005 and therefore still fell under the old rule. Such old liabilities will soon completely dissapear though.

This is Jack Ewing, author of the blog. Thanks to everyone for their comments. I would just like to respond to the comment by Mike Maurice. My assertions were based on a January report from Moody's on the Sparkassen which states that its rating is based in part on the fact that the "probability of support in the event of need is very high, both from the group’s public-sector owners – among them the
various German federal states and local municipalities – and from the government of the Federal Republic of Germany." In regard to WestLB, Moody's says that North Rhine-Westphalia's support is "further proof that public-sector shareholders generally provide the necessary backing in times of need, not only to avoid a default that would severely damage the standing and reputation of the whole SFinanzgruppe, but also to support regional and local political interests." I read this to mean that even if there are no longer formal guarantees for the Sparkassen, an implied guarantee remains.

Jack, what is the difference between these implied guarantees and those of any noteworthy financial institution in the rest of the developed world right now? Governments are not letting the senior creditors of any significant bank get burned. Do you think Commerzbank-Dresdner would be allowed to default on its debt any more than the German Sparkassen or Landesbanken? The same implicit debt guarantees are now effectively being granted to almost all banks now. Every financial institution would be paying higher funding costs without them.

Here is Jack Ewing again, responding to the comment by Karl Haeling: Point well taken, especially in light of the Fannie-Freddie bailout. I guess Lehman Brothers will be a test of how far the U.S. government is willing to go to protect a major bank.

Moody's actually has a rating system for the amount of outside support each bank can expect to receive should it run into financial difficulties. The top rating is 1 (on a scale of 1 to 5). It is my understanding that the German savings banks, Landesbanks and Commerz-Dresdner all have a rating of 1. Another point to bear in mind is that many small German companies do not have the balance sheets to qualify for loans at investment-grade interest rates under standard lending criteria. The only way the local savings banks are able to get comfortable with the loans they make to them is the personal familiarity factor.

As long as government-supported banks serve the public purpose they were mandated to serve and are accordingly regulated, they are very efficient in delivering benefits to society - specifically small business and low-to-middle class folk.
The Lehman question was answered. It is because there are government-sponsored banks that commercial banks can be allowed to fail. Fannie and Freddie were in the end inefficient because they were too lightly supervised and allowed to chase "efficiency" as measured by profit.