Analysis: Shaken by Greensill, German towns pull millions from banks

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Mayor Daniel Zimmermann works at the townhall of the North-Rhine Westphalian town of Monheim am Rhein, Germany

By John O’Donnell and Tom Sims

FRANKFURT (Reuters) – German towns and cities are pulling money from small, private banks, spooked after losing millions in the closure of Greensill Bank, an experience they said has shattered their faith in the country’s government and financial system.

Part of financier Lex Greensill’s insolvent Greensill Capital, the bank collapsed this month and triggered a 2 billion euro ($2.34 billion) bill for Germany’s deposit protection scheme.

But towns and cities are excluded from this shield and are nursing losses of hundreds of millions of euros.

They are also increasingly wary of the other smaller lenders that grasped an opportunity to win new business in Germany in response to European Central Bank (ECB) policies that increased the cost of banking with traditional savings banks.

“I’m devastated,” said Rainer Schnitzler, mayor of Poecking, a town in Bavaria that had 5 million euros on deposit with Greensill. He learned about the bank’s closure while scrolling through online news.

“We’ve decided we won’t put any more money into private banks,” he said.

Germany’s towns and cities began turning to banks such as Greensill after the ECB drove interest rates to below zero around the middle of the last decade as it sought to prop up the eurozone, one of the world’s largest economies.

The aim was to bolster spending, but the many Germans and the wealthy German cities and states intent on saving faced a dilemma: whether to pay fees for the luxury of storing their cash with traditional savings banks, or seek a more tempting deal among the little-known banks with branches in Germany.

Daniel Toepfer, mayor of Weissach outside Stuttgart who has since recalled his town’s holdings with Russian bank VTB and Dutch lender NIBC, said the ECB’s polices “make it unbelievably difficult for us”.

“We can’t buy gold bars. We can’t build a safe…This is fatal for the municipalities,” he said.

BACK TO THE STATE

Nine mayors and treasurers told Reuters they would withdraw savings from the commercial banks they had preferred as the way to avoid paying penalty interest charges on deposits, and put the money into state-backed banks instead.

Others said they were considering such a move.

The southwestern town of Boetzingen had 13 million euros with Greensill.

“We’re worried about the entire banking sector,” said Mayor Dieter Schneckenburger, criticising German authorities for failing to learn the lessons of the collapse of Lehman Brothers in the financial crisis of 2008 and of the payments firm Wirecard.

Thuringia, the eastern German state known for its sausages that had 50 million euros at Greensill, said it would no longer use private banks.

In total, German towns and cities had 500 million euros saved with Greensill, two people familiar with the matter said, on condition of anonymity.

But far more is at stake, with more than 220 billion euros of deposits held by public authorities in Germany, an important part of the country’s 2.5 trillion euro plus savings market.

Foreign banks with subsidiaries in Germany have been especially successful in luring investors who sought to avoid paying fees, with deposits up 14% over the past year, accelerating a trend of the last decade. (Graphic: Parking cash: Investors turn to German subsidiaries of foreign banks, https://graphics.reuters.com/GERMANY-BANKS/azgpodxwlvd/chart.png)

Although the public officials did not name all the banks they had withdrawn their money from, one also singled out Volkswagen Bank.

Volkswagen said it saw no change in investor behaviour and enjoyed the trust of customers, while VTB and NIBC did not respond to requests for comment. Insolvency managers for Greensill Bank and its parent Greensill Capital declined to comment.

‘A MISTAKE’

The largest loss for a single town was 38 million euros for the northwestern town of Monheim am Rhein, whose mayor Daniel Zimmermann has been leading a movement for towns to join forces for a united response.

“Most of the deposits, about 30 million euros, were put in in December. It was a mistake. But we didn’t even have a hint of anything being out of the ordinary,” Zimmermann said.

Giessen, a university town north of Frankfurt known for its U.S. military presence during the Cold War, was keeping 10 million euros of its 60 million with Greensill when the bank collapsed. “The money was a cushion for bad times,” said Dirk During, chief of staff at city hall.

Giessen has since withdrawn all such deposits “just to be safe,” During said.

Vaterstetten, outside Munich, started placing its extra proceeds with Greensill well before Leonhard Spitzauer became mayor last year. When Greensill went bust, the town of nearly 25,000 people had 5.5 million euros there.

“At first I thought, uh-oh, it’s like Lehman,” Spitzauer said. Spitzauer pulled its funds parked with Volkswagen Bank, he said, to avoid what he saw as a similar risk.

Fears other problems are lurking are widespread.

A Reuters analysis of supervisory data shows that Germany has spawned one of the biggest banking centres in Europe, with more than 1,000 lenders.

    One official put the tally of banks under special observation at over 100. Concerns include low profitability, exposure to sectors hit by the pandemic and big property portfolios.

    “It is possible that there are other problem banks out there that may be lurking and not on the radar of regulators,” said Volker Weinreich, a lawyer who advises towns.

The episode has also reignited a debate about central bank money printing and how that devalues savings.

“As a kid, I went to the bank with my piggy bank, said Schnitzler, the mayor of Poecking. “I got gifts for my money. Now I have to apologise if I want to deposit money.”

($1 = 0.8534 euros)

(Editing by Barbara Lewis)

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