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German bad banks – links

2013/07/14

First reactions to my last blog post on German bad banks gave me the idea that the following little link list with background information might be a useful addition.

In December 2011, the IMF published a detailed Technical Note on Crisis Management Arrangements in Germany including the establishment of two public bad banks, EAA and FMSW, under the general oversight of the Financial Market Stabilisation Authority (Bundesanstalt für Finanzmarktstabilisierung) FMSA.

In contrast to its peers, WestLB was described as keen to be one of the first German banks to use the country’s bad-bank scheme.  In several articles, the Financial Times commented on the transition from WestLB to Portigon and EAA which was quite a challenge. As James Wilson wrote: “The multiple separation of WestLB’s assets and risk positions is one of the largest efforts made in Germany to implement an orderly winding down of a bank.”

Tracy Alloway illuminated the role of HRE in the covered bond market and of its two subsidiaries Deutsche Pfandbriefbank and Depfa. Her article includes a chart illustrating the Pfandbriefbank collateral switch involved. The chart is part of an analyst/investor presentation of Pfandbriefbank which can be found here.

Tracy Alloway also quoted financial consultant Achim Dübel. He is the author of a detailed comment, with many annotations and links, on the reform of financial regulation in Germany including the bad bank concept, which was prepared for a hearing of the German parliamentary finance committee.

From the beginning of the euro crisis, exposures of German bad banks to periphery countries and other risks limited the scope for policy crisis management. In German exposure to Greece, a bad bank tale, Joseph Cotterill pointed to shifts of Greek debt from the private HRE to FMS Wertmanagement, the sovereign agency, and its implications.

Chris Bryant described how German banks were resisting political pressure to take a bigger writedown on their Greek bondholdings so that Athens could get past a financing crunch. He wrote:

 “It is no small irony … that if German banks are ultimately required to take a larger writedown, the German state could end up being one of the biggest losers.

This is because some €10bn of Germany’s roughly €18bn exposure to Greece is held by two state-backed “bad bank” agencies set up during the crisis to deal with legacy assets belonging to troubled lenders Hypo Real Estate and WestLB.”

Bad banks’ activities are not limited to unwinding and searching for buyers for “toxic” assets. They may include considerable “hedging” activities as became apparent from reports by Spiegel Online and others about a “computational error” of €55 billion in FMS derivatives accounting. The FTD mentioned about 7,000 derivative positions at FMS with a default risk of almost €20 billion. In this context, Tagesschau.de drew attention to the following table of cumulated debt which was part of the answer to a parliamentary inquiry (p. 12).  There, the discrepancy had been documented, but without noticing the “error”. BörsenZeitung emphasized that this was not the only case, pointing to the overall poor data quality of  FMS.

Finanzmarktkrise_SchuldenstandSource: Deutscher Bundestag, Drucksache 17/6995

Among the internal bad bank solutions I mentioned in the text, Deutsche Bank’s establishment of a Non-Core Operations Unit (NCOU) was widely noticed. There is a presentation by Stefan Krause, Deutsche Bank Chief Financial Officer, with many details.

Commerzbank announced the establishment of its Non Core Assets (NCA) segment in this press release.

Information about the Restructuring Unit (RU) of HSH Nordbank can be found here.

And here are some further links:

Deutsche Pfandbriefbank (PBB), the “healthy” remainder of HRE

FMS Wertmanagement

Portigon

Erste Abwicklungsanstalt (EAA)

Federal Agency for Financial Market Stabilisation (FMSA)

See also:

Black box German bank

Japan’s bad bank experience

From → Markets

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