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Banking: It's Brussels Vs. Berlin

The EC says German state banks have an unfair advantage

For years, Germany's state-backed Landesbanks have been a thorn in the side of the country's private banks. With the support of state and federal officials, they have expanded aggressively by lending to local communities and companies on terms that private banks couldn't match. Those balmy days are about to end. In July, the European Commission ruled that Dusseldorf's Westdeutsche Landesbank, Germany's fourth-largest bank by assets, must repay $860 million-plus in interest to its main owner, the state of North Rhine-Westphalia, which gave it a huge subsidy in 1992. Now, Mario Monti, the EC's competition commissioner, wants to end the privileged status of public-sector companies in general. If he succeeds, as seems likely, WestLB and Germany's 11 other Landesbanks will suffer a devastating blow.

Monti's plan, which the EC will review later this month, would eventually strip the Landesbanks of their state guarantees. Landesbanks are house banks to state governments, handle wholesale banking for local savings banks, and are usually owned in part by the states. As a result, they benefit from their owners' strong credit ratings. That means they can raise money up to 50 basis points cheaper than private rivals--and offer borrowers better terms. "The Landesbanks can do lots of big-ticket lending at knock-down rates," says Jens Schmidt-Bugel, associate director for financial institutions at rating agency Fitch IBCA in London. "They wouldn't be able to do that without their guarantees and credit ratings."