German Banks to Pool Loans to Free Up Capital

The country’s five top commercial banks, Deutsche Bank AG, HVB Group, Commerzbank AG, Dresdner Bank AG and DZ Bank announced on Wednesday they would pool up to €50 billion ($54 billion) in loans and would transfer them to a joint venture run by the Kreditanstalt für Wiederaufbau (KfW), Germany’s development bank.

The KfW will then sell bonds backed by the investment-grade loans. The process, know as securitization, is widespread in the United States and other European countries, but the market in Germany has been hampered by taxation of the vehicles used for such asset-backed securities.

The banks expect the initiative will help them recover from the worst financial sector downturn since World War II. For its part, the government hopes the banks will become more inclined to lend to the country’s companies that have suffered amid a credit crunch.

“We have to ensure that banks remain capable of granting new loans to small and mid-sized businesses. A major condition of that is to reduce their outstanding loans to improve their balance sheets,” said KfW Chairman Hans Reich.

Reliance on bank lending

German companies have traditionally relied more on bank lending than equity markets for raising cash. Much of Europe’s largest economy is made up of small to mid-sized firms, know as the Mittelstand. As Germany’s banks have suffered from mounting loan defaults and slumping share prices, they have become more hesitant to lend to Mittelstand companies, which in turn has hampered economic growth overall.

“What we want to ensure is that we can continue to fulfill the credit wishes of our customers,” said Commerzbank board member Nicholas Teller.

By securitizing the loans, banks would free up funds because they would no longer be required to back the credit risk of the loans with equity. But some fear the endeavor could also end up being a state-backed “bad bank” that would deal with the sector’s growing bad loans.

Questions on KfW support

Steffen Kampeter, parliamentary spokesman for budgetary affairs for the opposition Christian Democrats, said on Thursday the banks didn’t need the KfW’s support for securitizing credit-worthy loans. Because it is backed by the German government, the KfW has the best possible AAA credit rating.

“It is completely naive to assume that such a venture will only deal with good loans,” Kampeter told the Reuters news agency. “Maybe at the beginning that will be the case, but down the road naturally bad risks will also be securitized.”

Earlier this year, Germany’s top commercial banks proposed the idea of spinning off billions of euros in bad loans to a government supported bank, which would free Deutsche, Dresdner and the others from being dragged down by the non-performing loans.

The German Finance Ministry, Reich from the KfW and the commercial banks have all denied that the joint venture would deal with anything less than investment-grade loans.