German bank probe looks likely

Date: 29/05/1997

By Tim Jones

PRIVATE-sector German bankers are increasingly confident that the European Commission will soon begin an investigation into the alleged payment of subsidies to a public-sector regional savings bank.

The Federal Association of German Banks hopes that the Commission will begin formal proceedings in June against the 'preferential' injection of 3.7 billion ecu of capital into the Westdeutsche Landesbank Girozentrale (WestLB).

The federation has long complained about the payment of so-called housing development funds by the government to the country's Landesbanken. These institutions act both as normal lending banks and also as central banks to each state's network of savings and loans.

“Under the terms of this capital injection, the Landesbank pays only 0.6&percent; in interest to the state while our members would have to pay between 8&percent; and 9&percent; to attract that kind of capital on the markets,” said a spokesman for the Bundesverband Deutscher Banken (BDB).

Frustrated at the lack of attention paid to the problem by the German state, the federation took its complaint to the Commission two years ago.

Since then, Competition Commissioner Karel van Miert has been reluctant to intervene in a dispute which he believes should be settled within Germany itself.

The opposing sides - the federation, its counterpart for the public-sector banks and the federal government - have held a series of meetings, but no solution has been found. At the last meeting, convened by German Chancellor Helmut Kohl himself in April, the private-sector federation declined to attend and claimed that no compromise could be reached. Instead, the federation argued that the Commission was now the appropriate arbitrator in the dispute.

In the meantime, officials in the Commission's Directorate-General for competition (DGIV) were making it clear that proceedings should begin, but still Van Miert held back.

German officials claim that the position is not as clear-cut as it appears at first glance. Banks such as WestLB have to carry out certain state-imposed obligations, including making loans to public-sector institutions. At the same time, they are unlike classic banks in that they have no savers and have to operate in the wholesale money markets.

“The business of the state banks is normal private bank business,” said the BDB spokesman. “They have the state as a back-up to carry this out.”

While not the subject of its formal complaint, the federation has also bemoaned the access which the state banks have to government-underwritten guarantees for the money they borrow in the markets.

In the event that the Commission finds against WestLB and the German authorities, the bank would be obliged to repay a proportion of the capital injection to take account of the interest or dividends it would have had to pay in the free capital market.

This is just the latest in a series of high-profile bank state aid cases which Van Miert is now trying to put on a more codified footing.

After Credit Lyonnais came begging for emergency cash last autumn, DGIV began drafting new rules for fast-track authorisation of bank aid.