Dublin used by three other German 'conduits'

Three other German banks use Dublin as the base for managing investment funds similar to the high-risk "conduit" that nearly collapsed SachsenLB, the state bank of Saxony, write John McManusand Derek Scallyin Berlin

WestLB, DZ Bank and Helaba all manage conduits from Dublin, according to Moody's Investors Service, the international credit rating agency.

Conduits are arms-length funds set up by banks that invest in long-term assets using short-term borrowings.

SachsenLB's conduit, called Ormond Quay, got into difficulties when it was unable to refinance its short-term borrowings due to the global credit crunch triggered by problems in the US mortgage market.

A group of German saving banks had to step in with a credit line of €17.3 billion over the weekend to avert a collapse.

WestLB operates a conduit called Compass from Dublin and, according to Moody's, the bank has guaranteed it a credit line of €6.2 billion.

DZ Bank manages a conduit called Coral Capital with a credit facility of €3 billion, while Helaba has a Dublin-based conduit called Opusalpha, with credit facilities of €1.5 billion.

A spokeswoman for DZ bank said there were no refinancing problems with Coral Capital. It was involved in a different type of activity to Ormond Quay, and was not an off-balance sheet instrument.

Calls to the Dublin offices of Helaba and WestLB were not returned yesterday.

SachsenLB is, meanwhile, not expected to survive as an independent bank, and leading politicians and bankers in Germany have called for the fusion of the country's 11 Landesbanks to create a new "superbank".

"We could well do with a third big player to rival Deutsche Bank and Commerzbank," said finance minister Peer Steinbrück to the Frankfurter Rundschau newspaper.

The German Savings Bank Association (DSGV), which bailed out SachsenLB, is also anxious to see changes.

"When the situation has calmed down we're going to have to have serious talks about structure," said a DSGV spokesman in Berlin yesterday. He declined to comment on speculation that a condition of the loan to SachsenLB was to agree to a merger with another Landesbank.

Germany has 11 Landesbanks, regional state banks charged with financing and developing the economies of the country's federal states. Their unusual ownership structures, usually holdings of the state and public savings banks, boosts the influence of regional politicians and has long attracted the ire of Brussels.Helaba and WestLB are both Landesbanks.

In 2005 Germany lost a long-running battle with the European Commission which had claimed for years that the Landesbanks had unfair advantages over private competitors.

It said that state investment in these banks represented illegal subsidies, and the banks had to pay back €4.7 billion in cheap state loans received in the 1990s.

As a consequence, Germany's federal states were forced to end their practice of acting as guarantor for Landesbanks loans, a practice which until then had boosted the banks' credit ratings and allowed them to borrow money cheaper than private banks.

Losing these privileges has proven a big financial blow for the relatively small Landesbanks and, according to analysts, explains why many ended up in the risky conduit business.

"If you have a relatively small franchise, to earn money you have to take bigger risks," said one Landesbank official yesterday.

Encouraging the practice is a transitionary agreement state governments reached with the Landesbanks after the EU ruling, promising state guarantees until 2015 for debts taken out between 2001 and 2005. SachsenLB's Dublin subsidiary falls under this arrangement.