MOODY'S CHANGES TO NEGATIVE FROM STABLE THE FINANCIAL STRENGTH RATING OUTLOOKS OF WESTDEUTSCHE LANDESBANK AND FIVE OTHER LANDESBANKEN; ALL DEPOSIT AND DEBT RATINGS ARE MAINTAINED
London, July 12, 1999 -- Moody's Investors Service changed to negative from stable the outlook for the financial strength ratings of Westdeutsche Landesbank GZ (WestLB) at D, Bayerische Landesbank GZ at C, Norddeutsche Landesbank GZ at C, Landesbank Berlin GZ at C+, Hamburgische Landesbank GZ at C, and Landesbank Schleswig-Holstein GZ at C. At the same time, Moody's maintained all deposit and debt ratings of these six Landesbanken (long-term ratings ranging between Aaa and Aa2).
The outlook change reflects Moody's concerns regarding the potential impact on the intrinsic financial strength of these six Landesbanken arising from the recent WestLB-related decision by the EU Competition Commission following a formal complaint against an alleged capital benefit derived by these six Landesbanken from the transfer of regional residential housing associations in the early 1990s. In September 1997, the commission formally acknowledged the complaint lodged in December 1994 by the German Bankers Association (on behalf of that country's commercial banks), and subsequently the commission decided to initially investigate only WestLB's case. Moody's said that any ruling (and subsequent appeal) should be seen as a precedent for the other five Landesbanken as well.
The commission has ruled that WestLB must reimburse DM1.58 billion (EUR 808 billion or US$ 824 billion) of back interest. Moody's added that WestLB will almost certainly lodge an appeal with the European Court of Justice in Strasbourg. It further commented that the financial strength of WestLB and of the other five Landesbanken could be affected by their capacity to make the one-off payment for retroactive interest due (thereby taking into account the ability to mobilize any meaningful hidden reserves). Another element of potential concern is the fact that, if the ruling stands, a large annual interest payment may be necessary in return for the capital benefits going forward.
Moody's mentioned, however, the possibility that the respective Federal states could recapitalise their Landesbanken by transfering back , in a different form, the amount of payments disbursed to them and/or by changing the form of the capital contributions of the previously transfered housing associations. Regarding the latter option, however, changes in the actual ownership structure of the Landesbanken would require modifications to the respective Federal state legislation.
A bank financial strength rating reflects Moody's opinion of a bank's intrinsic safety and soundness and, as such, it excludes consideration of any external support elements. The Landesbanken's debt and deposit ratings are based on the support mechanisms of Anstaltslast and Gewaehrtraegerhaftung, which protect the credit quality of the bank even in the case of deterioration in intrinsic fundamentals. Moody's added that Anstaltslast and Gewaehrtraegerhaftung have not been challenged by the commission through its capital benefit ruling, but that this ruling may in time lead to a closer examination of these support mechanisms.
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