The German banks first to profit from public subsidies of trillions

Seminar organised by European Ombudsman Nikiforos Diamandouros: International Right to Know Day – Transparency and accountability in international development banks, (European Parliament photographic library).

The German banks in the north of the country seem to face grave problems. Yesterday the European Commission was forced to approve more state aid to Norddeutsche Landesbank Girozentrale (NORD/LB). This is a German Landesbank, one of the largest commercial banks in the country, which serves as central institution to savings banks in the German Länder of Niedersachsen, Sachsen-Anhalt and Mecklenburg-Vorpommern. According to the European Commission NORD/LB has received in 2011 and 2012 recapitalisation aid from the German taxpayers totalling to €2.6 billion in order to strengthen its core capital. Not to forget that Moody’s, the US rating agency, has downgraded all the major 10 German Landesbanks towards the end of 2011.

More problems

NORD/LB however is not the only German bank in the north of the country having problems. HSH Nordbank, with its major shareholders being northern German federal states, has already asked and given taxpayers’ support to the tune of €1.3 billion. There is no end though to the problems of the German lenders. The largest one, the ‘mighty’ Deutsche Bank, has been boosting for years that it doesn’t need more capital. Last May it was forced to proceed to a capital increase with deplorable results. It raised around €2bn, just peanuts for this giant.

It’s not only the land problems haunting the German banks. Sea water floods are also threatening them. On 21 February 2013 the Sting writer Elias Lacon wrote: “Earlier this week, Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank (German national central bank), responsible for financial stability and risk controlling, delivered an open lecture in Hamburg, entitled “In the year 2013 – Challenges from a financial stability perspective” .

Apart from the burning questions he posed for a number of Eurozone countries’ sovereign debt, he went as far as to question the stability of the commercial banking system of Germany. The total exposure of Germany’s banking system to the shipping industry was estimated by Dombret at €100 billion. Understandably, if the crisis in the maritime industry continues, those banks will be in trouble.

But let’s return to dry land. The state controlled German Landesbanks account for almost one-quarter of the country’s banking system. This is much more than Deutsche Bank and Commerzbank, the two largest private banks of the country. The problem is that the largest of the Landersbanks that is the NORD/LB, HSH Nordbank, HELABA, BAYERN/LB and Landesbank Baden-Württemberg still have large exposure to toxic assets in the US and in the Eurozone.

The problems of NORD/LB are characteristic of the sector. In July 2012 the Commission approved a restructuring plan for it, which included dividend and coupon payment ban for the years 2012 and 2013. This was actually a restructuring programme, obliging the bank to accumulate enough profits in order to strengthen its capital position. The bank however didn’t apply its own part of the deal. It paid coupons without informing the Commission.

German banks are untouchable

This is a German bank though and the Commission had to find a way not to revoke the approval of the restructuring plan. Negotiations must have followed and Germany accepted some more commitments, just to give the Commission some ground to base an approval of the new terms of the programme as the bank wanted. In return the lender accepted to further reduce its risky ‘investments’ and prolong the dividend ban period until the end of 2016.

The whole process is only superficially similar to the restructuring programmes applied to entire Eurozone countries, like the over indebted Greece. In the case of banks however austerity is restricted to the ban of dividend payments in return to government capital injections. The banks are also receiving zero cost liquidity from the European Central Bank. This almost zero interest rate liquidity allows lenders to make hefty profits. They lend out those funds at an average rate of around 10%, thus usurping all the interest.

In this way the banks profit from both sources. The government capital injections and the ECB liquidity supply. That’s why the American banks recapitalised themselves so quickly after the credit crunch of 2008. Now it’s the turn of Eurozone banks to do the same, with the German lenders spearheading the operation. It has to be reminded that, according to Commission’s estimates, the Eurozone banks have already received public aid amounting to €4.5 trillion. And all of it for free.

At the same time Greece, Ireland, Spain and Portugal are obliged to borrow more in order to hand out more funds for free to their own banks. Only the Greek banks have received state aid of €48.5 bn at the expense of the impoverished Greek taxpayer. No wonder why unemployment has reached 28% in this country. The same is true, in varying degrees, for Spain, Ireland and Portugal. Even the German taxpayer is unduly burdened with the huge subsidies accorded to the country’s banks. Last but not least, all Eurozone citizens are burdened by the free trillions handed out by the ECB to bankers.

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