Boring-Is-Sexy Credo Won't Spare German Private Banks New Rules
German Chancellor Angela Merkel
Michele Tantussi/Bloomberg
German Chancellor Angela Merkel’s Cabinet approved measures on Aug. 25 requiring German banks to contribute to a bailout fund aimed at shifting the costs of future bank crises from taxpayers to the lenders.
German Chancellor Angela Merkel’s Cabinet approved measures on Aug. 25 requiring German banks to contribute to a bailout fund aimed at shifting the costs of future bank crises from taxpayers to the lenders. Photographer: Michele Tantussi/Bloomberg
Germany’s private banks, which trace their roots back as far as the 16th century, survived two World Wars, the Great Depression and the financial crisis. Now they face a different challenge: increased regulation.
M.M. Warburg & Co., Berenberg Bank, Bankhaus Lampe, Hauck & Aufhaeuser Privatbankiers and B. Metzler seel. Sohn & Co., the country’s biggest independent private banks, say conservative investment strategies helped them through the credit crisis. That performance won’t exempt them from proposed rules aimed at improving market stability and limiting risk-taking at larger competitors such as Deutsche Bank AG and UBS AG.
“All banks, regardless of how much they contributed to the crisis, will be affected,” Volker van Rueth, a partner at Hauck & Aufhaeuser, said in an interview in Frankfurt. “At the moment, it’s not clear how regulators will differentiate between banks that are systemically relevant and have riskier models.”
Chancellor Angela Merkel’s Cabinet approved measures on Aug. 25 requiring German banks to contribute to a bailout fund aimed at shifting the costs of future bank crises from taxpayers to the lenders. Under the bill, banks will calculate fees payable into the new fund according to their assets and risks. It foresees banks contributing about 1.3 billion euros ($1.7 billion) to a new fund each year.
Private banks may also face higher capital and liquidity requirements as well as new limits on how much they can borrow, under rules proposed by the Basel Committee on Banking Supervision, a body of regulators and central bankers from 27 countries that sets capital standards. Lenders may need to set aside more capital for business transactions and spend more on information technology and staff to fulfill regulatory requirements, hurting profits.
Return on Equity
“Regulation is a challenge, especially for smaller banks,” said Andreas Becker, a Bad Homburg-based partner at EGC Eurogroup Consulting AG who published a study on private banks in March. “It’ll hit the cost-income ratio, which is already an issue at private banks.”
Twenty of Germany’s private banks averaged 2.1 percent in pretax return on equity, a measure of profitability, in 2008, less than the 8.2 percent in Austria and 9.1 percent in Switzerland, according to the study. German banks’ cost-income ratio, a gauge of expenses as a proportion of revenue, widened to 87 percent that year, the study showed.
“Regulation will lead to higher costs, no doubt,” said Christian Olearius, spokesman for the general partners at M.M. Warburg. “Government interventions tend to help large banks which can bear the cost and are considered systemically important.”
‘The New Sexy’
The Association of German Banks, which represents more than 220 financial companies, including the private banks, is seeking new capital and leverage requirements that would be based on the level of risky assets rather than the total.
Because the top executives of the private banks are often personally liable partners, they may be averse to risk. While that approach may generate lower profits during boom times, it may have helped avoid the writedowns on complex financial products that caused more than $1.7 trillion in losses worldwide.
“Boring is the new sexy,” said Friedrich von Metzler, a partner at his family-owned bank, founded in 1674. An increasing number of private-banking clients appreciate the fact that the firm only invests in stocks, bonds and cash, not derivatives, and has “no toxic assets,” he said.
Metzler occasionally speaks to Merkel on subjects such as financial-market regulation, and has a steady dialogue with politicians at various levels, according to spokesman Joerg- Matthias Butzlaff.
‘House, Car, Everything’
Germany’s top five private banks have wealth management businesses that cater to individuals and families. They also advise institutional clients in asset management and offer investment banking services such as takeover advisory and equity research.
“We don’t deal in products we don’t understand,” said Hans-Walter Peters, spokesman for Berenberg’s managing partners. “We’d rather forgo a little profit in exchange for safety. We are liable with all our personal property: house, car, everything.”
Not all German private banks made it through the financial crisis unscathed.
Sal. Oppenheim, the country’s largest private bank and family run for seven generations, put itself up for sale after reporting its first loss since World War II in 2008, hurt by soured investments in property and insolvent retailer Arcandor AG. Deutsche Bank, based in Frankfurt, agreed in October to buy Sal. Oppenheim for 1 billion euros.
Boosting Assets
M.M. Warburg, Berenberg Bank, Bankhaus Lampe, Hauck & Aufhaeuser and Bankhaus Metzler, which are subject to fewer disclosure rules than publicly listed firms, all said they boosted assets under management last year, helped by new clients and a rebound in market values.
Berenberg Bank’s earnings were the best in its 420-year history in 2009 as assets under management rose to 21.9 billion euros. Warburg, founded in 1798, said assets under management climbed to 32.3 billion euros and pretax profit grew 31 percent to 61.3 million euros. Both banks are based in Hamburg.
“Warburg survived the 1920s inflation and crash; we survived the Nazi era; we survived the wave of German private bank bankruptcies in the 1970s and 1980s,” said M.M. Warburg’s Olearius. “Today, we’ve not only survived the global financial crisis but have won new customers.”
‘Relative Winners’
Frankfurt-based Metzler’s asset-management unit oversaw 37 billion euros in assets last year, up 23 percent from 2008. Hauck & Aufhaeuser’s managed assets rose by 2 billion euros to about 20 billion euros in 2009, and profit climbed 37 percent, it said. The firm was founded in 1796.
Bankhaus Lampe, the Bielefeld, Germany-based bank controlled by the Oetker family, returned to a profit of 12 million euros last year as assets under management rose 33 percent to 12 billion euros.
“Germany’s private banks are relative winners of the financial crisis,” said Jan Hagen, a banking expert at the European School of Management and Technology in Berlin. “The crisis showed how vulnerable banks can be and the small private banks can portray themselves as being safe havens and less aggressive with risky capital market instruments.”
Germany’s five biggest independent private banks had an average Tier 1 capital ratio, a measure of a lender’s ability to shoulder losses, of about 11 percent in 2009. That compares with the 4 percent ratio required by BaFin, Germany’s financial watchdog.
“We have survived several storms -- war time and economic crises,” said van Rueth of Hauck & Aufhaeuser. “Because private banks have been around for so long and enjoy the trust of their clients, they are in an excellent position.”
To contact the reporters on this story: Leon Mangasarian in Berlin at lmangasarian@bloomberg.net; Aaron Kirchfeld in Frankfurt at o akirchfeld@bloomberg.net
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