A "bad bank" set up by Germany's private sector banking association at the start of the year, designed to help wind down commercial banks that run into trouble, has just been used for the first time.
Handelsblatt has learned that it took over the remaining loan portfolio of Hamburg-based bank Wölbern on May 31.
Wölbern has been in liquidation since 2014. Transferring its loans to the bad bank, called EIS-Einlagensicherungsbank, or EIS deposit insurance bank, paves the way for the Hamburg bank to be dissolved.
The hope is that Germany's new private scheme will help prevent taxpayer money from being used in future banking collapses. It's also designed to bring some order to the wind-down process for the country's private banking industry.
The new bad bank is the brain child of the Association of German Banks, which represents more than 200 private commercial banks, including Deutsche Bank and Commerzbank. Other banking networks in Germany, such as savings banks and cooperatives, have their own form of common deposit insurance and schemes to help bail out their members, though neither of them has set up a “bad bank.”
In some cases, intervention ahead of time can make more economic sense than insolvency. In other cases, financial market stability dictates that banks be wound down in an orderly way. Dirk Cupei, German Banking Association
The accociation of private banks decided to set up EIS after it was forced to save several of its members that got into trouble in the wake of the 2008 financial crisis. When Düsseldorfer Hypothekenbank, a mortgage bank, was in serious difficulties about a year ago, the association provided warrants and liquidity assistance to avert a bankruptcy.
Wölbern focused on issuing shares in closed-end real estate funds. It dates back to 1816 and changed hands a number of times in recent decades, being owned by Credit Lyonnais of France until 1995, then by South Africa’s Absa Bank and then by Barclays Bank before it was acquired by a Hamburg doctor and entrepreneur, Heinrich Maria Schulte, in 2006.
One year later its fund business was split off and the bank got into trouble during the financial crisis when the banking sector’s deposit insurance fund, created more than a decade ago to secure customer deposits in case of bank defaults, had to step in.
Mr. Schulte continued the fund business until it transpired that the professor of medicine had withdrawn capital totalling almost €150 million, or $168 million, from 31 property funds between 2011 and 2013 and had allegedly used some €50 million of that to finance a lavish lifestyle. He was sentenced in April 2015 to eight-and-a-half years in jail for embezzlement.
When the deposit insurance fund took over the bank in 2009, it had a loan volume totalling €375 million. Its main purpose was to provide loans to private investors who bought shares in funds.
The loans that were transferred to the EIS bad bank on Tuesday totalled some €70 million. By taking on the credit, the EIS is fulfilling its role to help wind down banks efficiently and at minimum cost.
Even though Wölbern has been in liquidation since 2014, it’s expensive to run because it has to keep on fulfilling all the regulatory requirements covering banks. And it can’t be closed down while it still has business on its books. So transferring its loans is an elegant way to finally shut the bank down.
But the role of the EIS won’t be confined to such tasks. “In some cases, intervention ahead of time can make more economic sense than insolvency,” Dirk Cupei, head of the financial market stability division at the banking association, recently told Handelsblatt. “In other cases, financial market stability dictates that banks be wound down in an orderly way.”
In Wölbern’s case, fears over the stability of the banking market during the financial crisis prompted regulators to wind down the bank.
Frank Drost covers financial supervision and banks for Handelsblatt. To contact the author: [email protected]