GERMANY’S STATE-OWNED WestLB bank is facing an uncertain future after the collapse of merger talks with fellow state bank, BayernLB.
The board of BayernLB said it halted the talks to create Germany’s third-largest lender when it became clear the yield of the merged banks would fall short of that generated by the two banks independently.
News of the collapse is a setback for long-threatened reform of the country’s state-owned banking sector, the Landesbanks, after multi-billion bailouts from the German public purse.
The Bavarian state government has kept BayernLB afloat with nearly €15 billion in cash and guarantees while WestLB has received multiple state infusions, including €3 billion from the Soffin bank rescue fund.
As part of EU conditions attached to that package, WestLB was forced to agree to sell itself by 2012.
After six weeks of preliminary talks, however, BayernLB said yesterday it was pulling out.
“The board of BayernLB came to the conclusion that the efforts and challenges involved in a merger of this size bore no relation to the economic advantages such a merger presented,” the Munich-based bank said in a statement.
WestLB in Düsseldorf shot back in a statement, criticising what it saw as the “premature” end of talks.
The Landesbanks were founded after the war to provide cash to banks and services to businesses in their respective federal states.
For decades they operated under state guarantees, allowing them to borrow money on preferential terms.
When the EU ruled that this gave the banks an unfair advantage over their private competitors, banks were stripped of this privilege, forcing them to find new lucrative business to cover the lost income.
Many of the banks, including BayernLB and WestLB, opened Dublin subsidiaries as their base for new international investment business. Another Landesbank, SachsenLB of Saxony, was ruined in 2007 after multi-billion gambles by its Dublin subsidiary went sour.
BayernLB’s chief executive resigned in 2008 after it was revealed the bank was operating a similar Dublin scheme, leading to a radical slimming down of its international business.
