Potential WestLB solution emerges

By Nikki Tait in Brussels, James Wilson in Frankfurt and Quentin Peel in Berlin

Published: February 16 2011 07:48 | Last updated: February 16 2011 16:54

A potential solution to long-running problems at Germany’s WestLB emerged on Wednesday after Germany’s government submitted to Brussels a restructuring plan that would in effect break up the troubled bank.

European Union competition officials, who have been battling to secure a restructuring scheme for the bank which meets EU state aid rules, said they were analysing the outline submission as well as a much less radical but more detailed proposal put forward by the bank itself.

“I will be in contact with the federal government in the coming days to discuss the next steps,” said EU competition commissioner Joaquín Almunia, who warned last year of an increasing possibility that the bank would have to be wound down.

The German government proposals are believed to offer a basis from which the EU competition watchdog would be willing to work. They envisage that part of WestLB, with a balance sheet about one-quarter the size of the current €220bn, would become a bread-and-butter service provider to German savings banks, which would own the business and put in capital.

Remaining assets would be put up for sale – including the bank’s corporate banking business – or transferred to an existing “bad bank” scheme and wound down. WestLB as an entity would disappear, a government official said.

WestLB itself announced a plan to create four separate units under the existing bank umbrella, so they could be sold or merged with other banks later, and cut assets by about one-third.

Sources in Brussels as well as in Berlin believe the more radical restructuring plan is much more likely to satisfy Mr Almunia’s demands that WestLB be sustainably restructured. People close to WestLB said its proposal was “realistic” taking into account the limited chance of successful asset sales.

Steffen Kampeter, a deputy German finance minister, said he assumed the restructuring plan would meet commission demands and that the plan for WestLB to join the savings bank network could receive approval.

It is highly unusual – if not unprecedented – for Brussels to have been presented by any country with alternative restructuring proposals for a distressed domestic institution.

Germany was required to respond to a February 15 deadline set by the commission, which said WestLB benefited from more than €3bn of state subsidy when it offloaded about €77bn ($104bn) of assets into a “bad bank” for rundown last year.

The bank, whose need for repeated state bail-outs makes it a serial offender in the eyes of EU competition watchdogs, has been under orders since 2009 to cut its balance sheet by half and sell key subsidiaries as recompense for a bail-out. Its owners also agreed to a change of ownership by the end of this year.

However, an attempt to sell the bank whole has attracted only lukewarm interest and the sale of the its WestImmo property unit also had to be halted last year.

WestLB was once Germany’s most internationally ambitious state-owned bank, building up a substantial project and principal finance business, but has been lossmaking in five of the past eight years and Neelie Kroes, the EU’s previous competition commissioner, said in 2009 that it was time for the “saga” of the troubled bank to come to an end.

Germany’s Landesbanken, regionally-controlled banks have struggled to find profitable business and have no substantial deposit bases, making them vulnerable during the financial crisis. Many also racked up huge losses through investments in mortgage-backed securities that turned into “toxic” assets in the crisis.