Second largest bank in Germany on verge of collapse

After a long series of barely spun excuses and bad results, reliable reports are filtering in from Germany tonight that Commerzbank needs immediate State aid to stop it going under.

It has long been accepted by financial commentators that Commerzbank had one of the worst German exposures to ClubMed debt. At the end of September, it had €13-billion of exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. It raised €5.3-billion from shareholders in June, but since then Greek sovereign debt haircut proposals and tougher capital rules have made its position increasingly fragile.

Last Thursday, chief financial officer Eric Strutz said: “We stand by our intention not to make use of additional public funds”. But those words sound hollow tonight in the light of what are described as “frantic negotiations” taking place in Berlin.

This would appear, at last, to explain why Finance Minister Wolfgang Schauble made such a hasty exit from the Brussels bunfight last week: he has been working 24/7 on how to help the German giant out of its mess.  Sources confirm the bank wants to avoid a direct capital injection and would rather bolster its balance sheet by shedding liabilities. One option would be to transfer its loss-making units to a “bad bank” within Germany’s bank rescue fund SoFFin. In anticipation of this, the Bundesrepublik is already preparing to fully reinstate the SoFFin bank rescue fund.

Commerzbank received an €18.2-billion bailout in 2008. Its tier one capital ratio was 9.4% in Q3 2011, but the new European Bank Authority (EBA) insistence on declaring all ClubMed liabilities punched something of a whole in this, German banking sources said.

A week ago, several German newspapers reported Commerzbank as being ‘desperately in need of money’, but this was vehemently denied by Berlin at the time. In a Spiegel interview yesterday (Monday) European Banking Authority head Andrea Enria optimistically observed:

“Regarding the most difficult problem for banks — the problem of funding — German banks are better off than others….Banks are changing their behavior and their business models much more significantly than is publicly acknowledged.”

The Spiegel interviewer, by comparison, made these rather prescient points:

“The results for the German banking sector were shocking: Your calculations for capital requirements in Germany grew from €5 billion to €13.5 billion. Is the German banking system really that weak?….Banks like Commerzbank have made clear that they are going to downsize their business and their credit portfolios….you are not making the financial system any safer. Risks are only being shuffled around. ”

That last observation hits the nail on the head about so much surrounding the current global debt crisis. For example, the Wall Street Journal tonight carries a specific report confirming what The Slog has been saying for 15 months: that capital ratios, debt exposures and liquidity numbers disguise a whole host of eurobank problems to do with incestuous insurance policies to protect themselves from each other:

‘Dozens of banks across Europe have sold large quantities of insurance to other banks and investors that protects against the risk of ailing countries defaulting on their debts, the latest illustration of the extensive financial entanglements among the continent’s banks and governments.New data released last week by European banking regulators suggest the risks of banks suffering losses tied to European government bonds could be higher and more widespread than previously realized. The numbers show European banks have sold a total of €178 billion ($238 billion) worth of insurance policies, in the form of financial derivatives known as credit-default swaps’.

Yo, dem CDSs hmm? Doncha love ’em?

From The Slog last November 23rd: Bank failures will be the next big meltdown catalyst