Commission warns German bank over aid

Date: 04/03/1999

By Renée Cordes

GERMANY'S powerful regionally-owned banks will have to pay higher financing charges if the European Commission rules that a capital transfer to Westdeutsche Landesbank Girozentrale violated rules against anti-competitive subsidies, according to banking analysts.

The European Commission this week warned Düsseldorf-based WestLB that unless it provided specific “missing” information about the state underwriting of soft loans worth €3 billion in 1992 within ten days, it would rule the operation illegal.

Industry experts are increasingly convinced that Competition Commissioner Karel van Miert will rule against WestLB, Germany's largest Landesbank, and find that it gained an unfair advantage when it received a property transfer from the state of North Rhine-Westphalia.

“Maybe after the decision financing will be more expensive for the Landesbanken, but I think the banks will be able to live with the result,” said Manfred Piontke, an analyst at Deutsche Bank in Frankfurt. “It would be very helpful if Brussels would decide against Landesbanken and this kind of subsidising.”

Private banks have repeatedly complained that their state rivals, which have boosted their market presence in recent years, should pay interest rates on state loans which are closer to those they would pay on the capital market. North Rhine-Westphalia and other states normally provide a guarantee for all a Landesbank's liabilities.

Germany's regional banks, which originally carried out only wholesale banking, expanded into corporate activities in the Seventies, a move which resulted in huge losses for some. But with state governments offering them a lifeline, says Piontke, “the restructuring in Germany of the banking industry is not really taking place”.

Van Miert admitted recently that the WestLB case was “triggering a lot of difficulties with German authorities”. Indeed, former Chancellor Helmut Kohl felt so strongly about the issue that he tried to insert legal protection for state banks into the Amsterdam Treaty when it was negotiated in 1997.

The investigation was sparked by the transfer in 1992 of a local housing agency to WestLB, which had the effect of boosting the ratio of the bank's equity and long-term debt ('core capital') to risk-adjusted assets. This brought the ratio up to the 8&percent; required under then newly agreed EU banking laws.

Germany's association of private banks complained to the Commission, arguing that such state guarantees were a source of cheap financing for WestLB and other regional banks competing on the open market with private commercial lending institutions.

But WestLB rejects this argument, insisting that the bank pays fair, market-oriented rates on loans made by German regional governments.

A Commission official said this week that the case raised “great questions” about the “role of public guarantees and return on public investments”.

He added that the Commission's decision on the case would “certainly” have implications for other state banks, whose core capital increased in a similar fashion in 1992.

North Rhine-Westphalia is the largest shareholder in WestLB, with a 42&percent; stake. The rest is split among savings banks' associations and regional banks. Analysts believe that a ruling against WestLB would prompt Germany's banking supervisory authorities to toughen up the rules against subsidies.