Financial Regulatory Forum

WestLB to shift 87 billion euros to first German bad bank

By Reuters Staff
October 7, 2009

The headquarters of WestLB is pictured before the annual news conference in Duesseldorf March 26, 2009. REUTERS/Ina Fassbender (GERMANY BUSINESS HEADSHOT) By Jonathan Gould and Matthias Inverardi
FRANKFURT/DUESSELDORF, Oct 7 (Reuters) – Germany’s WestLB will jettison at least 87 billion euros ($128 billion) in risky assets to the country’s first “bad bank”, a move other lenders are likely to follow.

The regional state-backed lender said it planned to start by next month off-loading some of the billions of euros in loss-making investments it racked up in the credit crisis.

While WestLB is still in talks with German bank rescue fund Soffin over the details of moving the assets, it won agreement for the transfer on Wednesday from the European Commission, which has demanded a radical restructuring of the bank in exchange for approving state help.

The Commission said that it had approved some 6.4 billion euros in additional aid from Soffin, which became necessary due to a change in conditions to set up WestLB’s bad bank and WestLB’s breach of regulatory capital requirements.

“The temporary additional aid is necessary to allow WestLB to set up a bad bank,” European Union Competition Commissioner Neelie Kroes said in a statement.

A number of German lenders, mainly the state-backed regional landesbanks like WestLB, are looking at the possibility of setting up their own bad banks, which would remove the risk of further writedowns on their investments and let them concentrate on rebuilding healthy banking business.

The country’s big stock-market listed lenders, such as Deutsche Bank, Commerzbank and Deutsche Postbank, have said they do not need to establish bad banks.

Earlier on Wednesday, Soffin’s head said he was surprised at banks’ reluctance to set up bad banks so far. He warned that the financial sector faced new challenges and the crisis was not yet over.

RADICAL REJIG
WestLB Chief Executive Dietrich Voigtlaender said on Wednesday that the EU’s approval of the bad bank scheme put WestLB on course for recovery and it would help it to meet the Commission’s demands to restructure.

“The bank is able to fulfil the requirements of the European Commission regarding the reduction of total assets and risk-weighted assets and at the same time successfully strengthen its business model,” Voigtlaender said in a statement.
“WestLB is on the right track.”

The Commission has said WestLB must focus on its core business, end risky business activities and cut its assets by 50 percent.

It has also said that WestLB must find new owners by the end of next year and be sold through a public tender.

The bank is owned by the state of North Rhine-Westphalia and the region’s savings banks.

Banking industry observers have suggested the country’s seven independent landesbank groups, which serve as wholesale banks for area savings banks, could be merged to form two or three big groups.

WestLB said that as a first step towards the bad bank, Soffin has guaranteed a portfolio of up to 6.4 billion euros of structured securities, for which WestLB’s owners have provided a 4 billion euro counter-guarantee.

The portfolio will be transferred to the bad bank by Nov. 30, it said. ($1=.6802 Euro)

(Additional reporting by Matthias Inverardi in Duesseldorf; editing by Karen Foster) ((Reuters Messaging: jonathan.gould.reuters.com@reuters.net; +49 69 7565 1242))

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