Germany Feels the Crisis

The fallout of the US subprime mortgage market has hit German banks. IKB Deutsche Industriebank said in a statement that it was feeling the impact of the crisis.

IKB said Rhineland Funding, a fund it managed, had invested in credit portfolios which included US subprime real estate loans, the bank said.

"Towards the end of last week, IKB's creditworthiness was being questioned due to this exposure," the Düsseldorf-based bank said. "There was a risk that this confidence crisis would deteriorate further."

The bank's main shareholder, the state-owned KfW banking group, has come to the rescue. According to IKB, KfW assumed the bank's financial obligations to Rhineland Funding from Monday. KfW, which holds a 38 percent stake in IKB, will protect the bank from further risks to maintain its creditworthiness. This applied particularly to its main banking business, issuing loans to German medium-sized businesses.

IKB earnings expected to fall

Germany's second-largest bank Commerzbank said on Monday it expected the problems in the US subprime mortgage market to cost it 80 million euros ($109 million) in the second and third quarters of the year.

Allianz, Europe's largest insurer, has made financial provisions of 70 million euros to cushion any losses. Financial analysts are expecting further details from other German banks this week. Several institutions, including Deutsche Bank, will be publishing their half-year figures.

For IKB, the crisis will negatively impact its expected earnings of 280 million euros for the 2007/2008 financial year. The bank said the figures would be "significantly lower."

Subprime mortgage loans involve greater risk, as they are granted to borrowers with limited or tarnished credit histories. Falling housing prices in the United States have made it more difficult for borrowers to meet their long-term payments. This led to a strong rise in mortgage foreclosures and the subsequent bankruptcy of several major subprime mortgage lenders.