Abwicklungsanstalt: Germany cleans up an Irish mess

Get ready for the 1st word above to spring from Brian Cowen’s mouth in the Dail any day now. Or perhaps not.  Anyway, the context is that Ireland’s “light touch” regulation during the boom years resulted in a free-for-all not just for our friendly local banks but also for Dublin-based operations of foreign banks who were running some large balance sheet operations from here. 

Exhibit A is Germany’s Depfa Bank which had a large loan guarantee operation which turned sour during the crisis; it had to be taken over by another real estate lender Hypo which since then has been trying to decide what to do with all the bad assets that it acquired in the process.  Now today an announcement from them to various financial markets including the Irish Stock Exchange –

Dublin, 21 January 2010 - DEPFA BANK plc

On 21 January 2010, Hypo Real Estate Holding AG (HRE), in coordination with the German Financial Markets Stabilisation Fund (SoFFin), submitted an application to the German Financial Markets Stabilisation Agency (“FMSA”) for the establishment of a deconsolidated environment (“Abwicklungsanstalt”) aimed at reducing assets in a value preserving manner pursuant to section 8a of the German Financial Markets Stabilisation Fund Act (“FMStFG”). The HRE Group intends to transfer operations no longer strategically required for the Group’s realignment, as well as additional balance sheet items, to this deconsolidated environment; the establishment of the institution is within FMSA’s discretion. The transfer, which is set to cover assets worth up to EUR 210 billion, is scheduled to take place during the second half of 2010, once all necessary approvals have been obtained from the responsible corporate bodies and institutions. 

 Specifically, the Group contemplates transferring parts of the public finance and real estate finance portfolios of DEPFA BANK plc and Deutsche Pfandbriefbank AG. The transfer may also include assets currently held by other Group entities, particularly DEPFA ACS BANK (Dublin), Hypo Pfandbriefbank International S.A. (Luxembourg) and Hypo Public Finance Bank (Dublin), as well as structured products and trading positions that are exposed to increased default risks, which will have been written down if necessary or will have been included in the net trading result. 

So basically much of Depfa is being dumped into an internal “bad bank” whose accounting won’t impact the larger group  — hence the deconsolidation — and beyond that, the plan apparently is to wait and see what can be salvaged without having to rush into asset sales immediately.

A couple of observations.  First, one hopes that the German authorities will be involved in the year long banking inquiry in Ireland, because they will surely have some interesting things to say about the supervision of Depfa’s Irish operation — which our regulators will no doubt say was not their problem.  So let an inquiry sort it out.  Second, this scheme is reminder, yet again, that the “There is no alternative” mantra for NAMA is just not true.  There are all sorts of other operations out there like asset insurance (UK) and internal bad banks (Germany) which are no more or less approved by the European Commission, IMF etc than NAMA — and which don’t involve the same upfront commitment of billions of euro that NAMA does.   It’s especially telling when different governments take different approaches to Irish banking operations.   Let our overseas wise man do a compare and contrast.  Better late than never.