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Foreign Banks Wary of Loans to German Banks: WestLB

German banks face a critical situation because foreign banks are reluctant to lend to them after the joint rescue of small-company lender IKB, state-backed lender WestLB's chief executive said.

"We sense in the markets that the readiness of foreign banks to extend credit lines to German banks has become difficult," WestLB Chief Executive Alexander Stuhlmann told journalists late on Monday in remarks embargoed until Tuesday.

The country's lenders were in a "not uncritical situation" overall, he added.

German banks had created the impression abroad that the whole sector was facing problems by mounting a 3.5 billion euro ($4.7 billion) rescue of IKB after it ran into problems linked to U.S. subprime mortgage investments, Stuhlmann said.

Stuhlmann's comments underscore the credit worries that continue as rising delinquencies in the U.S. subprime market spill into other markets through pools of asset-backed debt products sitting on the books of banks and hedge funds.

German Finance Minister Peer Steinbrueck said on Tuesday he thought the country's bankers had the situation under control.

IKB's troubles focused early attention on Germany's banking system, followed by state lender SachsenLB, which last week revealed subprime problems and had to be propped up by fellow banks with a 17.3 billion euro credit line.

Some analysts criticised Stuhlmann's comments.

"I thought that it was irresponsible. A CEO simply does not make statements like that," said a senior bank analyst with a major European bank.

Investors worry that big damage may not be limited to the non-listed state-sector banks. IKB is 38% owned by state development bank KfW.

Financial stocks made up seven of the 10 biggest decliners on Frankfurt's large cap DAX index on Tuesday.

The Financial Times newspaper reported this week that Deutsche Bank had borrowed funds last week directly from the Federal Reserve via its discount window, a line of direct loans from the U.S. central bank.

The paper said the move came on Friday, shortly after the Fed delivered an emergency 50-basis-point cut in the discount rate to 5.75% to stimulate bank lending and fend off fears of a deeper credit crunch.

Deutsche Bank declined to comment on the report.

Germany's central bank has repeatedly called for calm, saying the nation's banks' exposure to the U.S. housing market was limited and lenders were healthy enough to absorb losses.

WestLB has said it has over 1.2 billion euros in overall U.S. subprime exposure, but Stuhlmann said the Duesseldorf-based bank could cover all its risks from its own liquidity. "We are not in a situation like IKB," he said.