German banks agree to radical overhaul

THE HEADS of Germany’s largely state-owned Landesbanken have agreed to the need for a radical overhaul and consolidation of their institutions, after talks with finance ministry officials in Berlin.

A week after two of the largest Landesbanken, WestLB and BayernLB, agreed to merge and create Germany’s third-largest bank, representatives of the other banks appear open to further mergers before the end of 2011.

For years, Berlin politicians have called for reform of the banks set up originally as a source of state-level funding for smaller German banks and regional businesses.

Those efforts increased in recent years when many banks ran up huge debts on financial speculation. Attempts by Berlin to force reform were always blocked by regional politicians, happy to have a house bank at their disposal.

However, pressure for reform has been increasing from outside, thanks to new capital requirements under the Basel accord, and from the European Commission.

WestLB, based in Düsseldorf, has received several bail-outs, including €3 billion from the state bank rescue fund last year. As a condition of approving that aid, the EU insisted on the sale of the bank by the end of 2011.

With Brussels in its corner, Berlin is anxious to push through a thorough overhaul of the sector.

Some analysts have suggested the pressure coming from the European Commission may finally force radical change in Germany’s state-owned banking sector.