The looming collapse of Greensill Bank has sent shockwaves through German municipalities, which held up to €500m with the lender that was not subject to ECB-imposed negative interest rates — but also not covered by deposit insurance.
German financial watchdog BaFin last week froze the operations of the Bremen-based bank and filed a criminal complaint over potential balance sheet manipulation, days before London-based owner Greensill Capital filed for insolvency.
People familiar with the matter expect a formal wind-down of Greensill Bank, one of the few German lenders that accepted large deposits without charging negative interest rates, within days.
Public sector clients of Germany’s private sector banks stopped being covered by the country’s deposit insurance scheme in 2017 in a change prompted by the costly rescues of municipalities that banked with defunct lenders such as Lehman Brothers and Maple Bank.
Verena Göppert, deputy head of the German association of cities and towns, said that decision was “a mistake as it cannot be properly justified”.
Greensill’s German municipal depositors include the Hesse state capital of Wiesbaden (€20m), the university town of Giessen (€10), the Cologne opera (€15m), and the sewage plant of a suburb of Hannover (€8.5m).
They also number one of Germany’s 16 federal states. Thuringia, in eastern Germany, deposited €50m.
Heike Taubert, Thuringia’s Social Democrat finance minister, said the state banked with Greensill Bank in the context of liquidity management “to avoid the ECB-imposed significant fees”.
The ECB has since 2014 lowered interest rates into negative territory in an attempt to revamp the eurozone’s lacklustre economy.
Many banks — including the municipality-owned local savings banks or Sparkassen — have started to charge 0.5 per cent per year to institutional depositors. However, unlike public sector deposits at privately owned banks, those at savings banks are insured against the collapse of the lender.
“If we were depositing all our liquidity of €200m with our local savings bank, this would cost us €1m per 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 cannot dispatch our own auditors into the banks,” said Imholz.
The situation in Cologne is particularly bad as the money deposited with Greensill Bank was borrowed for the construction and renovation of the local theatre and opera house — a €600m project scheduled to be finished by 2024.
The city late last year received a €100m tranche of the loan, which was parked at several different lenders as it was not immediately needed, it told the FT.
Thomas Fillep, the treasurer of Osnabrück which has €14m in deposits at Greensill Bank, is already calling for a bailout from the federal government.
“We do hope Berlin won’t leave us out in the cold,” he told the FT, arguing that the problems at Greensill Bank seemed to have been caused by internal misconduct and that the town had to be able to rely on banks. “We cannot put the cash into a vault,” he said.
Fillep also pointed to the fact that Greensill Bank was supervised by BaFin, which should have ensured its inner workings were bona fide and that the bank’s probability of default was in line with that “of the best lenders around”.
For Osnabrück to lose €14m would be nothing short of “a catastrophe”, he said, adding that the highly indebted city had “scrimped and saved” for years to bring its finances in order.
Monheim, a city of just 44,000 people to the north of Cologne that is facing the loss of €38m, is trying to organise a co-ordinated political initiative by Greensill’s public sector clients.
However, Thiess Büttner, professor of economics at University Erlangen-Nuremberg, rebuffs the idea of a bailout for the municipalities.
Stressing that exclusion of public sector clients from the private banking sector’s deposit insurance scheme “was well communicated long in advance”, he said the cities had “tried to eke out higher returns by accepting higher risks” and must now pay the price.
BaFin said strict confidentiality rules barred it from disclosing the special audit at Greensill Bank earlier than it did. The watchdog also stressed that the new rules were “clearly pointed out” in 2017. Asked by the FT if it was willing to help municipalities suffering losses in the Greensill debacle, the German Ministry of Finance pointed to the current regulatory framework.
Many of the municipalities are already strapped for cash. “German cities are already under huge financial pressures from the Covid-19 pandemic,” Göppert said, pointing to falling tax revenue and rising expenditures.
Emmerich, a town of 30,000 people near the Dutch border in western Germany, is fretting about €6m — about a third of its entire liquidity. “The town council has already started to evaluate if some spending earmarked for 2021 can be postponed,” a spokesperson said.