German 'bad banks' head for Dublin

DUBLIN COULD become a bad bank capital as German financial institutions take advantage of local talent and light-touch regulation to store their toxic assets.

German state bank West LB has already set up a bad bank with €23 billion worth of bad assets under the name Phoenix; other Germans banks say they may follow suit.

The move has raised political concerns in Berlin that by setting up once more in Dublin, held in very low esteem by German government officials, the banks are returning to where their problems started.

As one leading government official remarked last week about Ireland: “I’m not surprised that they are heading to a regulation-free zone.”

West LB defends its decision to set up its bad bank in Ireland, although neither its spokesperson nor the conduit manager Pimco are prepared to discuss the details of the decision to locate there.

The state government of North-Rhine Westphalia (NRW), part-owner of West LB, said there were several reasons for choosing Dublin.

“For a business like this you need specialists and, worldwide, Dublin has the best qualified people for the task,” said Stephanie Hagelücken, spokeswoman for the NRW finance ministry.

“There were also tax advantages to locating in Dublin.”

She was unable to go into detail on the tax advantages, but added that this new conduit is completely separate from West LB and, unlike the vehicles operated by Sachsen LB and other Landesbanks in Ireland, Phoenix is “not profit-oriented”.

The lack of profit perspective for West LB’s bad bank has left German financial observers perplexed. “The tax argument is, in my opinion, only relevant for companies planning to make a profit,” said Konrad Becker, analyst at Merck Fink in Munich.

In addition, any losses generated by the Irish operation cannot be written off against the German company’s profit.

West LB’s owners say they pushed for the Irish solution to free them from having to keep pumping extra capital into the institution to compensate for ongoing revaluations of its toxic assets.

At the moment the bank is in the process of establishing a second structure for more than €80 billion worth of non-core assets, but this is unlikely to be located in Ireland.

Bank sector observers say that, after the drama surrounding Sachsen LB and Depfa, establishing German bad banks in Ireland could be politically delicate business.

“I can imagine there are good business reasons for setting up there,” said Dorothea Schäfer, analyst at the DIW economic institute in Berlin. “But even if there are the best reasons, Ireland is viewed so negatively that politicians will be worried about having the press pounce on them for allowing it.”