German Bank Bailout Demand Low

It’s a New Year, and now time for us all to head back to work. But I did want to call forth to the light an interesting article of 31 December 2008 from the Frankfurther Allgemeine Zeitung about the experience so far with the structures the German government put in place last fall to prop up its banks (Few banks seek State protection).

FAZ reporter Manfred Schäfers gives an interesting outline of the monetary amounts and structure involved there. First the former: the German government is ready to issue bank-guarantees in the amount of around €400 billion (the exact amount is unclear because Schäfers mentions two different figures even within the confines of this relatively-short article) and is making available an additional €80 billion in outright capital-injections. The program, run out of the federal Finance Ministry, is the Sonderfonds Finanzmarktstabilisierung (meaning “Special Fund for Financial Market Stabilization,” abbreviated as Soffin), headed by a three-person committee of banking worthies that includes Gerhard Stratthaus, former Finance Miniser for the state government of Baden-Württemberg and Schäfers’ main information source. Strangely, the participation on that committee of two other named individuals, who are supposed to be Stratthaus’ colleagues, is still up in the air.

I guess that’s OK, though, because the point of the article is that Soffin’s agenda is not really chock-full. “Up to now we’ve got 15 applications,” Stratthaus reveals, “and most [financial] institutions are interested in the guarantees.” Of those that are seeking a chunk of actual money – i.e. a piece of the €80 million budgeted for capital injections – their requests to this point add up only to less than €15 billion, and other indications point to Commerzbank as responsible for €8.2 billion out of that alone.

That’s real restraint that we see at the German government’s financial trough then, right? Turns out there is a good reason for it, for both the way the program has been set up and the general framework of applicable EU law (i.e. concerning lawful/unlawful state aid to enterprises) demand that aid applicants already have at least 7% of their own capital in place against their liabilities, in addition to a business plan they can submit to and defend before Soffin.

In other words: you get the money and/or the guarantee only when you don’t really need it! It’s good to see traditional banking practices that we all are familiar with from the past on the comeback-trail, at least in Germany. Or perhaps they were never away in the first place, since this type of bank-bailout program would seem to make a very suitable bookend to the German government’s refusal so far to offer much in the way of spending on the fiscal side to boost domestic demand, which this weblog has already had a couple of opportunities to discuss in the recent past. Together with that strange on-going uncertainty over whether two of the three figures on Soffin’s management committee will actually stick around to do the job, you begin to wonder just whose idea it is that there be so little demand for German bank bailout assistance: the banks themselves, or the government that is purportedly offering it?

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