German banks loaded with 816 billion in toxic paper

On Friday, the German daily Süddeutsche Zeitung (SZ) leaked a bombshell – a confidential report by Bafin, the Federal Financial Supervisory Authority, found that German banks were sitting on over 800 billion euros in toxic assets. Just three months ago, the reports coming out suggested the problem was only half as large, 400 billion euros.

This new account has been all over the news in Germany because Germans are becoming quite frightened about the health of their banking system and are angry because the German economy was largely absent from the bubbles of the past decade. Germans are beginning to ask quite openly why banks like Commerzbank and the state-owned land banks as well as institutions like Hypo Real Estate are being rescued with taxpayer money. This is a debate now ongoing in a number of countries, the U.S., the U.K. and Ireland most prominent among them. In an election year in Germany, this issue is sure to have an impact.

The account in SZ reads as follows (my translation):

Giant Billion euro risk: The financial crisis has hit German banks far harder than was previously known. Loans and securities in problem areas add up to 816 billion euros, according to a Bafin paper made available to the Süddeutsche Zeitung.

The financial crisis has hit German banks significantly harder than was previously known. This news comes from an internal study from the Financial Supervisor Bafin. The paper first gives an overview of which loans and securities institutions own in the problem lines of business. Their risk adds up to 816 billion euros. Particularly affected are HRE, several Landesbanken Bank and Commerzbank.

At Commerzbank alone, according to the Bafin study available to the Süddeutsche Zeitung, there are securities and loans worth 101 billion euros affected by the financial crisis. This includes 49 billion euros from the balance sheet of the acquired Dresdner Bank. Commerzbank is, thus, similarly affected by the financial crisis as the Land Bank of Hamburg and Schleswig-Holstein, HSH Nordbank, for which Bafin tallies 105 billion euros.

In Westdeutsche Landesbank with 84 billion euros and the Landesbank Baden-Württemberg with 92 billion euros, the supervisors see risks of a similar magnitude. Much better are Deutsche Bank with 21 billion euros, as well as Postbank and Hypovereinsbank with five billion euros each. The worst according to the Bafin paper, prior to nationalization, is Hypo Real Estate (HRE), which holds 268 billion euros in problem assets.

Banks back out bill

Most of the 17 listed banks reject the figures as misleading. “We do not know who put the figures together and they cannot be verified,” said a spokesman for Commerzbank. HSH Nordbank said the bank auditors and Rescue Fund Soffin of HSH had sufficiently and adequately accounted for losses. Other institutions have referred to figures in their annual reports or that they had secured the facilities.

Commerzbank has received state aid of 18.2 billion euros to date. In its annual report the Bank itself had broken down risks and pointed to other “significant liabilities” that threatened different areas of the securities and credit business. However, among banks, investors and supervisors it is still controversial as to which paper can be understood as junk.

A Bafin spokeswoman said to SZ, that the figures do not deal with actual or potential losses. The data also could not be used “to draw conclusions about the creditworthiness of banks.”

Study of great significance

The internal study is of great importance for the government. The calculations by Bafin flow into the plans for the establishment of so-called Bad Banks — repository institutions for problem assets. According to the plans of the Ministry of Finance, only about one third of the assets listed in the document will come into question for removal into a bad bank. The government wants, with the help the Bad Banks, to restore the function of financial markets and lay the foundation for a rebound.

The figures from Bafin, are, therefore, no surprise for the government. Even in the documents that Finance Minister Peer Steinbrück had sent Chancellor Angela Merkel weeks before for the preparation of the banking summit on Tuesday, there was talk of 853 billion euros of potentially vulnerable assets. These figures from the beginning of the year, are no longer deemed up-to-date. The paper cites a new measurement date, the 26th of February.

This account should make clear how shaky many of Germany’s financial institutions are. Moreover, it is not altogether obvious which markets are deemed ‘toxic.’ German banks have a lot of residential real estate-related paper. But they also have assets related to the imploding European commercial property market and the Eastern European property markets. I suspect that the problem is even larger than is mentioned here.

If you recall, there was a big dust-up in February over a leaked EU document which suggested there were 16.3 trillion in toxic assets amongst European banks. In my view, the Europeans have their heads in the sand regarding the magnitude of the problem. The banking situation is much worse on the continent than its citizens are led by government to believe.

In any event, Bafin is now seeking to obtain prosecutions for the damaging leak. Forget about the toxic asset problem, go after those who have brought it into the full light of day.

Bilanz des Schreckens – Süddeutsche Zeitung
Bafin erstattet Anzeige – Süddeutsche Zeitung

  1. Thomas says

    I find it a bit frustrating how the German press keeps tossing around meaningless numbers. In essence, the SZ article says: “According to a list, there are 816 bn € of problem assets, but we can’t really give you a breakdown, and we can’t really say how much of a problem those assets really are. Maybe a big one, maybe a small one. Heaven knows.”

    Take Hypo Real Estate as an example:

    Sure, the bank is a big mess, no doubt about that. But according to the list, it has 267 bn € of problem assets. Their latest financial statements (9/08) tell us that the bank has total assets of 392 bn €.

    So 70 % of their whole book (which mostly consists of loans, not subprime securities) is “problem assets”? Well, if you classify every loan that may possibly have to take some sort of haircut due to falling real estate prices as a “potential problem asset”, you may end up at 267 bn €. But it is quite inconceivable that HRE will incur losses that come anywhere close to 267 bn €. And because of that, the number as such is meaningless. All it does is tell the public: “The risks are huge.” Which they undoubtedly are, but you don’t need an arbitrary 816 bn € number for that.

    Having said that, I also think it is ridiculous that BaFin now wants to prosecute the people reponsible for the leak. Instead, they should make a full disclosure and tell people exactly what the list means, caveats and limitations and all.

  2. Edward Harrison says


    I share you sentiments about the prosecutorial zeal at Bafin. This is the second time in recent German banking history. You recall the IT-Vorstand at HSH Nordbank got the boot because he was leaking documents to the press. (,1518,619624,00.html)

    As for the figures, they are ridiculously high and they only represent the nominal book value of potentially problematic assets I suspect. What the eventual losses are is another question altogether. However, you should note that HRE has significant off-balance sheet exposure and I suspect the Bafin figure includes this.

    HRE has disputed the level of its off-balance sheet exposure, but you can bet it is enormous. I intend to write a tad more about HRE, hopefully later today.

  3. Thomas says


    valid point, thanks for pointing it out.

    After reading through your post and the various links, I am tempted to agree with Egghat who wrote (quote):

    “Viel Lärm um nichts” würde ich nicht sagen, sondern eher “Viel Lärm um aktuell noch wenig”. Beruhigend finde ich die Derivatepositionen aber trotzdem nicht …

  4. Edward Harrison says

    Thomas, the political side of this looks to be the more interesting because German politicians want to be positioned well in an election year. So how the electorate reacts to these reports will define the political reaction as opposed to the other way around in non-election years.

    By that I mean Germany is a country which Kohl took into the Euro without a single popular vote. So politicians have been able to get away with a lot without consulting the electorate. With these events happening now, the politics are going to be very reactionary and dependent on public opinion. Es wird ein sehr interessantes Jahr sein, nicht?

  5. bb says

    what a twist! do you squeeze lemons at the beach ed?

    ‘German banks loaded with 816 billion in toxic paper’
    ‘Loans and securities in problem areas add up to 816 billion euros’

  6. Stevie b. says

    “Es wird ein sehr interessantes Jahr sein, nicht?”

    Aber vielleicht nicht ganz so interessant wie letztes jahr…

  7. DoctoRx says

    The financial pandemic is far worse than the swine flu.

Comments are closed.

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