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Germany’s banks: Black Swans in White Feathers?

Over the past few months, the liquidity crisis storms have hit Germany as hard as any market. The German government had to bail out HypoReal Estate (HRE) and pumped €500 billion into the banks, a figure that is about to double.

The question this raises in my mind is whether there are some more surprises yet to come out of the German bank system – another Black Swan** – and, having investigated a little, it seems there might be one or two.

Germany’s banking system is unlike most, as there are few large commercial banks.  The largest banks, such as Deutsche, Dresdner, Commerzbank, are known primarily because they have large overseas operations. Domestically, the banking system is mainly comprised of regional and private banks, and then there are the standalone savings banks, known as Sparkasse banks. Sparkasse banks are the German equivalent of American savings and loans institutions, except that they are owned by local governments rather than private investors. Hence, they are immensely trusted by Germans, and manage almost $1 trillion in deposits. 

With 2,500 banks in Germany and 45,000 branches, Germany also has one of the densest banking
networks in the world.

There are other differences in the German banking system and markets in that there are relatively few foreign banks.  Although the number of foreign banks increased sharply during recent years, due to the growing globalisation of business activities, they cater mainly for firms from their home country.

For example, under the recent European legislation the Markets in Financial Instruments Directive, MiFID, any bank can offer investment services in Germany under a home-host passport. This means that the bank is regulated by their home country, with only their code of conduct of their branch operations regulated in Germany. This code of conduct relates to the advice they give to their client and the suitability of the products they provide to them in a German market context.

Therefore, there are few dealings in Germany where Germans are exposed to foreign bank dealings, and probably why only 1 in 10 Germans invest in the stock markets compared to half of Americans.

All of this paints a conservative risk avoidance society and financial structure.


Not at all.

Unfortunately, for many Germans, their biggest banks have leveraged themselves to the point of collapse in this liquidity crisis, similar to the American, British and other banks.

This is disputed by German's bankers, but the “big banks” such as Deutsche Bank, Dresdner Bank, HypoVereinsbank, Commerzbank and Postbank, are all merging and consolidating as a result.

For example, recent bank mergers in Germany include:

  • June 2005        
    • Italy's UniCredit , pays €20bn for Germany’s HVB.
  • October 2005    
    • Deutsche Postbank buys mortgage lender BHW for €1.8bn.
  • November 2005 
    • Commerzbank pays €4.5bn to get Dresdner and Deutsche Bank’s stake in Eurohypo.
  • December 2005 
    • U.S. PE firm Lone Star buys failing bank Allgemeine Hypothekenbank Rheinboden (known as Corealcredit).
  • June 2006         
    • Deutsche Bank buys Berliner Bank for €680m and the branches of Norisbank for €420m.
  • June 2007        
    • 450 savings banks share a stake in acquiring Landesbank Berlin (LBB) for over €5bn, mainly to stop the bank being acquired by the private sector.
  • July 2007
    • Hypo Real Estate buys Depfa Bank for €5.5bn.
  • December 2007
    • LBBW acquires landesbank SachsenLB in an emergency rescue.
  • July 2008         
    • Credit Mutuel pays €5bn for Citigroup's retail banking operations in Germany.
  • August 2008     
    • U.S. PE firm Lone Star pays €100m for IKB , after a series of state-led bailouts costing some €8.5bn.
  • November 2008
    • Commerzbank takes over Dresdner Bank ahead of schedule for €9bn.

The last one is a particularly large transaction, supported by the government, and then we have another big one: the merger of Germany’s Deutsche Bank and Postbank.

Postbank is Germany's largest retail bank, whilst Deutsche Bank is Germany’s largest commercial bank with over €2 trillion in assets:

Bank founded in 1870 in Berlin
Total assets: €2.02tn ($2.83tn)
Net profit: €6.51bn ($9.12bn)
Total revenues: €30.7bn ($42.3bn)
Employees: 78,291 (27,779 in Germany)
Customers: 14 million (9.7 million in Germany)

Bank founded in 1990 in Bonn, with a controlling shareholder stake owned by Deutsche Post
Total assets: €203bn ($284bn)
Net profit: €870mn ($1,220mn)
Total revenues: €4.25bn ($5.95bn)
Employees: 21,500
Customers: 14.5 million

Data from end 2007

The deal was originally announced in September 2008, but times changed dramatically after the collapse of Lehman Brothers a few days later. For example, the New York Times  printed this chart last October (doubleclick to see large image):


This shows the leverage ratio for each major country, representing the risks for each nation’s banking system. The leverage ratio is “the ratio of total bank assets to the net worth of the bank. That could be misleading if the assets are very safe — government bonds, for example, versus subprime mortgage loans — but in general the higher the ratio the smaller the margin of safety.”

Leverage ratios are part of the discussions at Davos this week, with the FSA pushing for the use of leverage ratios alongside Basel II for capital adequacy management.

This might trouble Germany as, according to this chart, their banks have the most leveraged position of all nations, with a leverage ratio of 52 compared to an average of 12. In theory, this means that should Germany’s banking assets fall by just 2%, then the whole of Germany’s net worth of the banking system would be wiped out overnight.

Oh dear.

What this may imply is that Germany's banks are quietly shielding the next wave of this crisis, as demonstrated by Deutsche Bank's recent losses, the largest in their history and first annual losses for over five decades.

I've written an in-depth on this subject over at Bank Stocks, and recommend we watch Germany's banking markets carefully, as this could be a Black Swan in White Feathers.

Stock symbol DBK.DE
Performance last six months, courtesy of Yahoo!



I wrote this a few days ago, as part of the Bank Stocks article, and then noticed Deutsche Bank's share price spike upwards on Wednesday:



As with UK and American banks, things are looking up for them all on the back of rumours of the creation of a  'bad bank' to take over toxic assets for European and American banks in trouble.  This would benefit Deutsche Bank the most in Germany.

Meanwhile, a White Swan seems to be the Spanish banks of BBVA and Sandander

More on these guys later.

** Nassim Nicholas Taleb's Black Swan theory refers to a massive, hard-to-predict event that is beyond the realm of normal expectations but with major structural change as a result.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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