German cities brace for €500m in losses following Greensill Bank collapse

The impending collapse of Greensill Bank sent shockwaves through German municipalities, which held up to 500 million euros with the lender who was not subject to Imposed by the ECB negative interest rates — but not covered by deposit insurance.

Last week, German financial watchdog BaFin froze the operations of the Bremen-based bank and deposit a criminal complaint for potential manipulation of the balance sheet, a few days before the London owner Greensill Capital filed for insolvency.

People familiar with the matter expect a formal liquidation of Greensill Bank, one of the few German lenders to accept large deposits without charging negative interest rates, within days.

Public sector customers of Germany’s private sector banks ceased to be covered by the country’s deposit insurance system in 2017 in a change prompted by costly bailouts of municipalities that have done business with defunct lenders such as Lehman Brothers and Maple Bank.

Verena Göppert, deputy director of the German Association of Towns and Villages, said the decision was “a mistake because it cannot be properly justified”.

German municipal Greensill depositors include Hessian state capital Wiesbaden (€20 million), university town of Giessen (€10 million), Cologne Opera (€15 million) and the wastewater treatment plant for a suburb of Hanover (8.5 million euros).

They are also one of the 16 federal states of Germany. Thuringia, in eastern Germany, deposited 50 million euros.

Heike Taubert, Thuringia’s Social Democrat Finance Minister, said the state had used Greensill Bank as part of liquidity management “to avoid the high fees imposed by the ECB”.

The ECB has since 2014 cut interest rates into negative territory in a bid to revamp the lackluster eurozone economy.

Many banks – including local savings banks or municipally owned Sparkassen – have started charging institutional depositors 0.5% per annum. However, unlike public sector deposits in private banks, those in savings banks are insured against the bankruptcy of the lender.

“If we deposited all our cash of €200 million with our local savings bank, it would cost us €1 million a year,” Axel Imholz, the treasurer of Wiesbaden, told the Financial Times. He added that Greensill Bank had unqualified audits, a high credit rating and was supervised by BaFin. “We can’t send our own auditors to the banks,” Imholz said.

The situation in Cologne is particularly bad because the money deposited with the Greensill Bank was borrowed for the construction and renovation of the local theater and opera house – a 600 million euro project which should be completed by 2024.

City at the end of last year received a €100m tranche of the loan, which was parked with several different lenders as it was not immediately needed, she told the FT.

Thomas Fillep, the treasurer of Osnabrück who has 14 million euros in deposits at the Greensill Bank, is already calling for a bailout from the federal government.

“We hope Berlin won’t leave us out,” he told the FT, saying Greensill Bank’s problems appeared to have been caused by internal misconduct and the city needed to be able to rely on the banks. “We can’t put the money in a safe,” he said.

Fillep also pointed to the fact that Greensill Bank was supervised by BaFin, which should have ensured that its internal workings were in good faith and that the bank’s probability of default was in line with that of “the best lenders at the time”.

For Osnabrück, losing 14 million euros would be nothing short of a “catastrophe”, he said, adding that the heavily indebted city had “saved and saved” for years to put its house in order. his finances.

Monheim, a town of just 44,000 people north of Cologne that faces a loss of 38 million euros, is trying to organize a political initiative coordinated by Greensill’s public sector clients.

However, Thiess Büttner, professor of economics at the University of Erlangen-Nuremberg, refutes the idea of ​​a bailout of municipalities.

Pointing out that the exclusion of public sector customers from the private banking sector deposit insurance scheme “was communicated well in advance,” he said cities had “tried to get higher returns by accepting higher risks” and now have to pay the price.

BaFin said strict confidentiality rules prevented it from disclosing Greensill Bank’s special audit sooner than it did. The watchdog also pointed out that the new rules were “clearly stated” in 2017. Asked by the FT if it was willing to help municipalities suffering losses in the Greensill debacle, the German finance ministry pointed to the current regulatory framework.

Many municipalities are already strapped for cash. “German cities are already under enormous financial pressure from the Covid-19 pandemic,” Göppert said, pointing to falling tax revenues and rising spending.

Emmerich, a town of 30,000 near the Dutch border in western Germany, is worried about 6 million euros, or about a third of its entire cash. “City Council has already begun to assess whether certain planned expenditures for 2021 can be postponed,” a spokesperson said.

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