Germany might be an oasis of calm in Europe in economic terms, but the same cannot be said of the country’s banking sector.
Against the backdrop of successive bailouts from the European Central Bank (ECB) for peripheral Europe's banking system, and sovereign-rating downgrades left, right and centre, it's easy to forget the dysfunction in Germany's banking system, as noted in Euromoney magazine's June edition.
However, ratings agencies last week formally acknowledged Germany's systemic banking shortcoming, after Moody’s downgraded six of its banks due to the weakness of their capital buffers. The banks were cut by one notch each. This put Commerzbank, the country’s second largest bank, at A3, with DekaBank Deutsche Girozentrale and DZ Bank at A1. The country’s Landesbanks weren’t left unscathed: Nord/LB, LBBW and Helaba were also downgraded.
Problems in the German banking sector should not come as any great surprise – to put it kindly, German banks struggled through the crisis. Germany’s state bailout fund SoFFin (Sonderfonds Finanzmarktstabilisierung) was forced to provide equity recapitalizations and guarantees that amounted to €100 billion (4% of GDP) when it stopped offering new facilities at the end of 2010.
Ultimately, in spite of a decade of consolidation in the sector, it seems hard to reach any conclusion but one: Germany has too many banks – 1,919 at last count; 400 of those went to the ECB for funding at the last long-term refinancing operation.
Even senior Bundesbank officials find this hard to deny. "We would say there is still some overcapacity in the German banking market – to the extent there is consolidation that reduces overcapacity, that has economic merits," says Andreas Dombret, the man on the Bundesbank’s executive board responsible for financial stability.
Overcapacity
This overcapacity has been responsible for negative effects on the banks’ profitability. According to an International Monetary Fund report published last year, the mean return on equity from the German banking sector was well below the European average between 2000 and 2009.
The problems that the sector faced during the crisis cannot be put down to just overcapacity. Several of the Landesbanks, in particular, were very much the architects of their own decline.
A European Court of Justice decision in 2000 stripped the banks of their state guarantees with effect as of 2005. This gave the banks an opportunity to engage in a last hurrah of state-backed funding: bonds with a maturity shorter than year-end 2015 remained guaranteed.
This led to a spell of reckless asset purchasing that unfortunately coincided with the sub-prime bubble and the structured credit boom.
Deutsche Bank is the only German private-sector bank with sufficiently deep pockets to play a role in consolidation. And it has already been active, acquiring Postbank for €6 billion in 2010 – yet given that the bank can reach one-third of Germans, it seems unlikely it is keen for further expansion at the moment.
Perhaps the best hope for consolidation is that the Landesbanks can strengthen their balance sheets to the point where they can be the consolidators, or they become attractive franchises for others in a more benign economic environment.
The one thing that German banks seem to have going for them is the country’s strong economic backdrop. This is not a situation akin to Spain, where banks glutted on a housing boom in the midst of a drastically uncompetitive economy.
With a little consolidation, the German banking sector could see a dramatic improvement. However, judging from comments made to newspaper Handelsblatt by Gunter Dunkel, chairman of the management board at Nord/LB, that there are “no valid merger scenarios” at the moment for the Landesbanks, there might be a while to wait yet.