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Chris Skinner
Chris Skinner
Articles (5983)  | Author's Website |

Germany's banks: Black Swans in White Feathers?

January 31, 2009

Over the past few months, the liquidity crisis storms have hit Germany as hard as any market. The German government had to bail out HypoReal Estate (HRE) and pumped €500 billion into the banks, a figure that is about to double.

The question this raises in my mind is whether there area some big shocks yet to come out of the German bank system - another Black Swan** - and, having investigated a little, it seems there might be one or two.

Germany’s banking system is unlike most, as there are few large commercial banks. The largest banks, such as Deutsche, Dresdner, Commerzbank, are known primarily because they have large overseas operations. Domestically, the banking system is mainly comprised of regional and private banks, and then there are the standalone savings banks, known as Sparkasse banks. Sparkasse banks are the German equivalent of American savings and loans institutions, except that they are owned by local governments rather than private investors. Hence, they are immensely trusted by Germans, and manage almost $1 trillion in deposits.

With 2,500 banks in Germany and 45,000 branches, Germany also has one of the densest banking networks in the world.

There are other differences in the German banking system and markets in that there are relatively few foreign banks. Although the number of foreign banks increased sharply during recent years, due to the growing globalisation of business activities, they cater mainly for firms from their home country.

For example, under the recent European legislation the Markets in Financial Instruments Directive, MiFID, any bank can offer investment services in Germany under a home-host passport. This means that the bank is regulated by their home country, with only their code of conduct of their branch operations regulated in Germany. This code of conduct relates to the advice they give to their client and the suitability of the products they provide to them in a German market context.

Therefore, there are few dealings in Germany where Germans are exposed to foreign bank dealings, and probably why only 1 in 10 Germans invest in the stock markets compared to half of Americans.

All of this paints a conservative risk avoidance society and financial structure.


Not at all.

Unfortunately, for many Germans, their biggest banks have leveraged themselves to the point of collapse in this liquidity crisis, similar to the American, British and other banks.

This is disputed by German's bankers, but the “big banks” such as Deutsche Bank, Dresdner Bank, HypoVereinsbank, Commerzbank and Postbank, are all merging and consolidating as a result.

For example, recent bank mergers in Germany include:

June 2005

Italy's UniCredit , pays €20bn for Germany’s HVB.

October 2005

Deutsche Postbank buys mortgage lender BHW for €1.8bn.

November 2005

Commerzbank pays €4.5bn to get Dresdner and Deutsche Bank’s stake in Eurohypo.

December 2005

U.S. PE firm Lone Star buys failing bank Allgemeine Hypothekenbank Rheinboden (known as Corealcredit).

June 2006

Deutsche Bank buys Berliner Bank for €680m and the branches of Norisbank for €420m.

June 2007

450 savings banks share a stake in acquiring Landesbank Berlin (LBB) for over €5bn, mainly to stop the bank being acquired by the private sector.

July 2007

Hypo Real Estate buys Depfa Bank for €5.5bn.

December 2007

LBBW acquires landesbank SachsenLB in an emergency rescue.

July 2008

Credit Mutuel pays €5bn for Citigroup's retail banking operations in Germany.

August 2008

U.S. PE firm Lone Star pays €100m for IKB , after a series of state-led bailouts costing some €8.5bn.

November 2008

Commerzbank takes over Dresdner Bank ahead of schedule for €9bn.

The last one is a particularly large transaction, supported by the government, and then we have another big one: the merger of Germany’s Deutsche Bank and Postbank.

Postbank is Germany's largest retail bank, whilst Deutsche Bank is Germany’s largest commercial bank with over €2 trillion in assets:


Bank founded in 1870 in Berlin

Total assets: €2.02tn ($2.83tn)

Net profit: €6.51bn ($9.12bn)

Total revenues: €30.7bn ($42.3bn)

Employees: 78,291 (27,779 in Germany)

Customers: 14 million (9.7 million in Germany)


Bank founded in 1990 in Bonn, with a controlling shareholder stake owned by Deutsche Post

Total assets: €203bn ($284bn)

Net profit: €870mn ($1,220mn)

Total revenues: €4.25bn ($5.95bn)

Employees: 21,500

Customers: 14.5 million

Data from end 2007

The deal was originally announced in September 2008, but times changed dramatically after the collapse of Lehman Brothers a few days later. For example, the New York Times printed this chart last October (Click here to enlarge the picture)


This shows the leverage ratio for each major country, representing the risks for each nation’s banking system. The leverage ratio is “the ratio of total bank assets to the net worth of the bank. That could be misleading if the assets are very safe — government bonds, for example, versus subprime mortgage loans — but in general the higher the ratio the smaller the margin of safety.”

Leverage ratios are part of the discussions at Davos this week, with the FSA pushing for the use of leverage ratios alongside Basel II for capital adequacy management.

This might trouble Germany as, according to this chart, their banks have the most leveraged position of all nations, with a leverage ratio of 52 compared to an average of 12. In theory, this means that should Germany’s banking assets fall by just 2%, then the whole of Germany’s net worth of the banking system would be wiped out overnight.

Oh dear.

What this may imply is that Germany's banks are quietly shielding the next wave of this crisis, as demonstrated by Deutsche Bank's recent losses, the largest in their history and first annual losses for over five decades.

I've written an in-depth on this subject over at Bank Stocks, and recommend we watch Germany's banking markets carefully, as this could be a Black Swan in White Feathers.

Stock symbol DBK.DE Performance last six months, courtesy of Yahoo!



I wrote this a few days ago, as part of the Bank Stocks article, and then noticed Deutsche Bank's share price spike upwards on Wednesday:



As with UK and American banks, things are looking up for them all on the back of rumours of the creation of a 'bad bank' to take over toxic assets for European and American banks in trouble. This would benefit Deutsche Bank the most in Germany.

Meanwhile, a White Swan seems to be the Spanish banks of BBVA and Sandander.

More on these guys later.

** Nassim Nicholas Taleb's Black Swan theory refers to a massive, hard-to-predict event that is beyond the realm of normal expectations but with major structural change as a result.

January 31, 2009

Chris Skinner


About the author:

Chris Skinner
Chris Skinner writes a daily blog on banking at The Finanser

Visit Chris Skinner's Website

Rating: 4.0/5 (8 votes)


Buffetteer17 premium member - 11 years ago
A misuse of the term "black swan." The (periodic) failures of highly leveraged banks is quite predictable. Black Swans only seem predictable after the fact. But nobody predicts them.
Fxtrader - 11 years ago    Report SPAM
interesting, but on the other hand quite simplistic and therefore superficial. as the author stated himself, asset quality does matter a lot. if you look at the real estate market in germany there was no bubble at all. hence, these assets can be regarded as pretty safe and stable. private household debts are also pretty low and manageable. so their "leverage" of 52:1 could turn out in reality be much lower than say, Spain's 18:1 ! just look how spain's real estate markets and construction industry is imploding dragging the banks with it. they have little us-subprime exposure but they have their own "subprime" problem. go figure.

could there be trouble for germany's banks? sure. but i doubt that the simplistic leverage comparison provided here is any useful guide to nticipate future events. the "black swans" may instead show up in other, pretty surprising places
Sivaram - 11 years ago    Report SPAM

Good points. Asset quality matters. However, one should still be wary of the banking system in Germany for a couple of reasons.

First of all, I don't know anything about German banks but the problem with some European banks, particularly ones from Netherlands and Switzerland, is that they bought toxic American mortgages. So, with these megabanks, they may be exposed to foreign assets.

Secondly, leverage is dangerous no matter what. The high leverage of European banks is one thing I never understood. Maybe it's a characteristic of their business models but it is something that stands out. And this doesn't apply to banks only. Whenver I look at consumer staples or technology companies or whatever else, I see higher leverage in Europe. (For example, compare Diageo (2x) against Brown Forman (0.6x); or Total (0.4x) or Eni (0.4x) to Chevron (0.08x) or ExxonMobil (0.08x)).

Anyone have any thoughts on why European companies seem to have higher leverage?

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