German state-backed bank Landesbank Baden-Wuerttemberg agreed on Sunday to buy subprime victim and fellow lender SachsenLB, as pressure mounts for further mergers among German state banks.
As part of the sale hammered out at the weekend, LBBW will inject immediately 250 million euros (US$340 million) in capital to prop up SachsenLB, which ran into trouble this month over investments linked to risky mortgages in the United States.
LBBW is also expected to pay SachsenLB's owners, the German state of Saxony and its regional savings banks, at least 300 million euros in cash and shares, with the final price fixed at the end of this year before LBBW takes control in early 2008.
"Who else besides us could have done it?" said Baden-Wuerttemberg Premier Guenther Oettinger of the emergency rescue by LBBW, the biggest of Germany's regional state banks.
Oettinger said the move was a step forward in the consolidation of the country's landesbanks, which are wholesale banks serving and partly owned by the hundreds of community-owned savings banks in their regions.
LBBW is also seen as a strong contender for a possible merger with another state lender, Duesseldorf-based WestLB.
Banking analysts have said consolidation among state lenders could boost efficiency and economies of scale, enabling them to better compete with more profitable exchange-listed rivals like Commerzbank or Deutsche Bank.
Greater profitability in their core business might also mean state-sector banks would not need to seek earnings from off-balance sheet operations like those that got SachsenLB into trouble.
Germany has borne the brunt of the European fallout so far from problems stemming from subprime home loans, with SachsenLB and small-company lender IKB, 38% owned by state development bank KfW, requiring high-profile industry bailouts.
Little Choice
SachsenLB's owners were left with little choice in seeking a rapid resolution of its problems, after one of its investment vehicles ran into trouble and required a 17 billion-euro credit line from a group of German banks, followed by trouble at a second vehicle that threatened to directly hit the bank's balance sheet.
"Financial market turbulence and the pressure that resulted from it on the bank meant continuing without a partner would not have been promising," Saxony Premier Georg Milbradt said.
The president of German financial watchdog BaFin, Jochen Sanio, made clear during the weekend negotiations that further delay in finding a solution would only increase the potential losses at SachsenLB, Milbradt said.
The IKB and SachsenLB debacles have also prompted calls for a closer look at financial market supervision and BaFin's role.
BaFin said on Saturday that SachsenLB's Irish subsidiary had already been investigated in 2005 and problems with its risk exposure had been found. BaFin at the time had asked the Dublin subsidiary to make changes.
A Finance Ministry spokesman said on Sunday the government was permanently examining the efficacy of banking supervision and that adjustments could be made if necessary. He added: "A functioning banking oversight is no insurance against wrong decisions being made -- which are often only seen as wrong decisions afterwards," he said.
SachsenLB will be run by LBBW as a subsidiary and LBBW secured the right to return it to its owners if losses turned out to be substantially larger than initially expected.
LBBW said it expected to see no credit defaults at SachsenLB and foresaw no net job losses as a result of the takeover.