Germany risks zombie banks
Germany’s politicians seem to have rescued their bad bank. Pushing back the valuation date for toxic assets to before the Lehman collapse has made it more likely that banks will consign their dud investments to the voluntary scheme.
It had looked as if the banks might simply boycott it. However, while the government has scored a political goal, it is no closer to its aim of boosting lending to a credit-starved German economy.
The essence of the scheme is that banks will be able to transfer some 250 billion euros of toxic assets into “eine Bad Bank”. In exchange they receive government-backed paper that they can count towards regulatory capital.
In principle this will raise their lending capacity. However, because the Germans do not want to reward reckless banks, the banks will pay an annual fee to participate, and will be liable for any shortfall at the end of the scheme. In other words, there is no fundamental risk transfer from the banks and the uncertainty about their eventual liability remains.
The breakthrough this week is that the government has pushed the valuation back to before the collapse of Lehman last autumn — when valuations were much higher.
One of the perverse effects of the revision is that some banks may enjoy a gain on the value of their impaired bonds because they have already been written down. This explains why shares in Commerzbank
However, like the original plan, the amendment is simply a sleight of hand. The government is still putting no cash into the scheme. The German public is dead against bailing out reckless banks, and the government, mindful of September’s general election, is in no mood to trifle with voters.
All that this plan does is to buy the banks time. Indeed, by giving the banks a higher starting value, the government is increasing the annual charge that banks will have to pay.
The risk is that banks will behave according to this economic reality rather than to the accounting and regulatory fiction conjured up by the government. Under pressure from shareholders to return to health, they may shrink their balance sheets and curtail lending.
Merkel may have succeeded in avoiding a bailout of Finanzplatz Deutschland for now, but perhaps at the cost of financing Deutschland AG.
(Additional reporting by Paul Taylor)
(Editing by David Evans)