Commerzbank Taps German Bailout Fund

Commerzbank, Germany's second-largest bank, announced it will make use of the government's rescue fund, news that made investors happy

Commerzbank has become the first major German private sector bank to tap the government's rescue fund, and its share price surged on Monday. The hesitance of banks to use the fund so far has worried the government, which is considering amendments to indirectly force banks to accept help.

Germany's second-biggest bank Commerzbank said it will draw on the German government's financial sector rescue package after sustaining a net loss of €285 million in the third quarter.

The bank said it would take an €8.2 billion injection from the state and another €15 billion in guaranteed funding to secure refinancing.

"We welcomed the government's packet of measures from the start," said Commerzbank Chief Executive Martin Blessing. "We are making use of the instruments of the package because doing so is good for the bank, its employees and its customers." The move would also protect Commerzbank's competitiveness, he added.

The government guarantees will apply for 36 months at most, the bank said. In return, it will submit to the conditions the government has attached to the package. There will be no dividend payouts for 2009 and 2010 and the fixed salaries of management board members will remain below the upper limit of €500,000 set by the government. In addition, no bonuses will be paid for 2008 and 2009.

Chief Financial Officer Eric Strutz declined to give a forecast for the full year in light of the financial crisis. "We always said it was likely to be very hard to reach the good result of 2007," said Strutz. The dramatic developments of recent weeks had shown that reliable forecasts for the full year 2008 weren't possible in the current environment, he said. "We also face challenges in 2009," he said.

Commerzbank shares responded by rising as much as 10 percent on Monday as investors welcomed the bank's move to strengthen its balance sheet.

"Given Commerzbank's weak capital ratio it's not surprising that it is drawing on the government fund and we assess it positively," said Philipp Hässler, an analyst at investment bank Equinet. The move would strengthen Commerzbank's capital base and protect the bank's competitive position, he added.

Commerzbank is the first of Germany's top private sector banks to use the rescue fund launched by the German government last month as part of an international effort to contain the crisis. So far only public sector bank BayernLB and troubled mortgage bank Hypo Real Estate, which was bailed out in a separate rescue deal last month, have used it. WestLB and HSH Nordbank, two other public sector banks, have also announced plans to use the fund. HSH said on Monday it had applied for government guarantees of up to €30 billion.

"Strong" Deutsche Bank Won't Tap Fund

Meanwhile Germany's biggest private sector bank, Deutsche Bank, reiterated on Sunday that it would not be asking for funds. Chief Executive Josef Ackermann told ZDF television: "From today's point of view we will not participate because we are strong."

Ackermann had been sharply criticized by the German government when he made similar remarks last month. Officials said his comments would put banks under pressure not to draw on the package for fear of taking a hit on the stock market.

The lack of response from private sector banks has angered Finance Minister Peer Steinbrück because it has put the package at risk of failing. As a result, the government is working on amendments that could be agreed to this week and which foresee indirectly forcing banks to use the fund.

The government envisages following the example of the British government and requiring banks to maintain a certain core capital ratio -- the ratio of capital to lending. In Britain, that ratio is 9 percent. Banks that fail to reach the minimum set by the government will have to tap the rescue fund to fulfil the new capital requirements.

Stigma Attacked to Plan

The voluntary nature of the package, though, isn't its key weakness, according to one management board member at a German bank. Rather, the main problem is the stigma attached to using it, he said.

Ackermann contributed to stigmatizing it with his remark last month that he would be "ashamed" if his bank had to draw on it.

"Whoever now draws on the package will be suspected of being in trouble," said Siegfried Jaschinski, the head of public sector regional bank Landesbank Baden-Württemberg and president of the Federal Association of German Banks. "A way must be found to remove this stigma."

Initially, the banks had hoped that the mere announcement of a government umbrella for the financial system would suffice to stabilize markets and to kick-start stalled inter-bank lending which had ground to a halt because banks no longer trusted each other.

But the lack of confidence persists. "The inter-bank trade still isn't taking place," said one money market dealer in Frankfurt. The banks evidently fear that things are going to get worse.

cro -- with reporting by SPIEGEL staff and wire reports

    Before it's here, it's on the Bloomberg Terminal.