$51-bn prop for biggest German bank failure

Hypo Real Estate Holding AG, the lender whose 2009 implosion was Germany’s biggest bank failure since World War II, is to get another € 40 billion ($50.9 billion) of state guarantees to safeguard restructuring efforts. The infusion will swell government guarantees to the Munich-based lender to €142 billion, Germany’s Soffin bank-rescue fund said a statement late yesterday.

The German government took over Hypo Real Estate in 2009 after the lender’s Dublin-based Depfa Bank Plc unit couldn’t raise financing when the bankruptcy of Lehman Brothers Holdings Inc froze credit markets. It was one of seven banks to fail stress tests conducted on 91 of Europe’s biggest lenders in July.

“The executive committee at Soffin came to this decision to avoid any liquidation bottlenecks during the planned transaction,” the fund said. Liquidity problems could occur due to “unfavourable” market developments, Soffin said. Hypo Real Estate won approval on July 8 to establish a so-called bad bank to house as much as € 210 billion of “non- strategic assets.” The amount represents more than half of Hypo Real Estate’s total assets at the end of 2009.

Stress tests
Two weeks later, Hypo was named as the only one to fail the European Union-wide stress tests out of 14 German banks. The bank’s Tier 1 capital ratio — a measure of financial strength — dropped to 4.7 per cent in a test scenario that simulated a sovereign-debt crisis and economic recession below the 6 per cent minimum required, the Bundesbank and Germany’s financial regulator, BaFin, said on July 23.

Hypo said it would have passed the test if it had received all the capital it requested from Soffin. The bank said it had applied for a €10 billion recapitalization, of which €7.87 billion had then been approved.

Hypo Real Estate was formed in 2003, when Munich-based lender HVB Group spun off its commercial real estate operations to help shield itself from loan losses and boost its capital ratio. Following HVB Group’s takeover by Italian lender UniCredit SpA in 2005, Hypo Real Estate replaced its former parent in the German benchmark DAX Index.