The Landesbanken: Inside Germany's trillion euro banking blind spot
By Laura Noonan
HAMBURG (Reuters) - Many Germans feel that whoever wins Sunday's election, they should not fund any more bailouts of fellow European countries, whose errant banks are a particular bugbear for Berlin.
But a cornerstone of Germany's own banking system, which has already received state bailouts, is facing fresh challenges, increasing the need for reforms which will be very hard for any new government to deliver.
Founded in the 19th century to promote regional development, the publicly-owned Landesbanken play a hallowed role as low cost lenders to local projects and the 'Mittelstand', the small and midsized firms central to the eurozone's most resilient economy.
With combined assets of a trillion euros, they account for 12 percent of the country's total banking assets, and 3 percent of Europe's as measured by the European Central Bank (ECB).
The eurozone's steps towards banking union have triggered the toughest stress tests banks have ever faced and new global regulations impose higher capital demands particularly difficult for low-margin banks like the Landesbanken to achieve.
At the same time, their core business is threatened by increasing competition from international banks like France's BNP Paribas, which want a bigger part of the action in Europe's economic powerhouse.
Experts from the Organisation for Economic Cooperation and Development (OECD), ratings agencies and German academia say the best Landesbanken solution is restructuring to leave as few as two players with well-defined businesses.
The prospect appears remote, undermining Berlin's reputation as the driver of European banking reform. Continued...