German banks suffer of nausea amidst rough seas

Dr Andreas Dombret, Bundesbank photographic library.

Earlier this week, Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank, 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.

According to Dombret the black spots over his own country’s financial system are caused from long exposure to the maritime sector. The German mercantile marine is Eurozone’s second largest shipping industry, only after the mighty Greek fleet. The German banking system has being traditionally offering strong support to the country’s shipping sector and as a result it has now accumulated a huge pile of such loans. Unfortunately the crisis that is now spreading over the world’s mercantile marine has transformed a large part of those debts into high risk assets.

The total exposure of Germany’s banking system to the shipping industry is estimated now by Dombret at €100 billion. Of course this exposure is not restricted only to German operators and ship-owners. As a result if the crisis continues engulfing the ocean-going fleet, the German financial system will be confronted with mounting problems.

As everybody knows, the merchant marine crisis is now fast spreading not only to all freight prices but touches by contagion the values of the ships itself. At this point it must be noted that during the last two decades the Greek ship-owners, by wholesale buying and selling entire fleets according to what they predict about the future developments of freight prices, have transformed the shipping industry into a bourse of ship values.

Consequently a down turn of freight prices is nowadays instantly transmitted to ships’ values. Given however that ships are being used as collateral for bank loans, the freight crisis is quickly transformed into a financial crisis for ship-owners, operators and of course the lenders. Today the German banks hold probably the largest portfolio of shipping loans in the world, with the country’s HSH Nordbank to be first in this. In the second place, as far as the exposure to the shipping industry is concerned, comes a Norwegian bank with the German Commerzbank being third in this list. More German banks hold smaller shipping loan portfolios.

In any case the exposure of the German financial system to the shipping sector is diminishing over time but still the issue remains a burning one. The German mercantile marine is the third largest of the world, behind the Japanese fleet which is second with 3,990 ships and the Greek fleet always in the first position.

The German banker who spoke in the Hamburg held responsible the same factors for both, the Eurozone sovereign debt crisis and the merchant marine loan problems. Those factors are the excessive indebtedness and the over optimistic expectations for the future. After the outbreak of the 2008 credit crunch with the bankruptcy of Lehman Brothers and the subsequent spreading of the financial crisis to the real economy, naval freights took a steep downward path and they are still losing grounds.