A SENIOR Bundesbank auditor admitted yesterday that Depfa bank’s business model was risky even before the Lehman Brothers bankruptcy pushed it, and parent company Hypo Real Estate (HRE), to the brink of collapse last September.
A Bundesbank audit of Depfa’s books last year uncovered 49 violations of “proper business conduct and the functional capability of risk management”, 12 of which were considered “severe”.
A report outlining the concerns was forwarded to the federal government but was not shown to the finance minister or the responsible senior aide. No action was taken before Depfa faced a severe liquidity shortfall at the end of September.
To prop up Depfa and the HRE group, Berlin stepped in with state guarantees totalling €102 billion. Next week it hopes to take control of the HRE group at an extraordinary shareholder’s meeting.
Yesterday, the head auditor of a team that inspected Depfa/HRE’s accounts said that the Dublin bank would have remained risky even if his long list of recommendations had been implemented.
“The refinancing structure at Depfa wouldn’t have changed,” said Manfred Eder of the Bundesbank to a parliamentary inquiry. “Eliminating the shortcomings we discovered would have changed nothing in its business model.”
Bought by HRE in 2007 for over €5 billion, Depfa is a public-sector lender that refinances long-term borrowing through short-term loans.
After September’s collapse of Lehman Brothers, the inter-bank lending market seized up, leaving Depfa without liquidity to refinance its business.
“We never thought this was a real possibility. The results of our report would have looked very differently if we had,” said Mr Eder, describing the effects of the Lehman collapse a “worse-case scenario”.
During the public sitting of the committee, Mr Eder declined to go into detail about the 19-man audit of the operations in Munich and Dublin, describing it only as “anything but business as usual”.
A memorandum of understanding signed by the Irish and German regulators allowed six auditors to head to Dublin in February. They were alarmed at what they found. “Many organisational guidelines didn’t represent in reality the way daily business was conducted,”their report noted. Daily liquidity reports failed to show “all relevant inflows and outflows” and some transactions were booked a day late.
In March, a so-called “stress test” was run to examine the effect on Depfa of a 20-day total collapse in interbank trading. The test revealed that, under theoretical conditions that just six months later became reality, Depfa would survive just a few weeks.
German regulator BaFin filed reports from March to August last year expressing concern about HRE/Depfa. In the last, weeks before the Lehman collapse, it warned that a recent downgrade of the bank’s rating would “burden the group’s already strained liquidity situation”.
