VZCZCXRO3559
OO RUEHAG RUEHDF RUEHIK RUEHLZ RUEHROV
DE RUEHFT #0276/01 0290821
ZNR UUUUU ZZH
O 290821Z JAN 08
FM AMCONSUL FRANKFURT
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4490
INFO RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
RUCNMEM/EU MEMBER STATES  IMMEDIATE
RUCNFRG/FRG COLLECTIVE IMMEDIATE

UNCLAS SECTION 01 OF 02 FRANKFURT 000276 
 
SIPDIS 
 
DEPARTMENT FOR EUR/AGS 
TREASURY FOR LUKAS KOHLER/OFFICE FOR EUROPE AND EURASIA 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: EFIN ECON EU GM
 
SUBJECT: TREASURY DELEGATION MEETS WITH THE ECB AND GERMAN BANKS 
 
ENTIRE TEXT IS SENSITIVE BUT UNCLASSIFIED.  NOT FOR INTERNET 
DISTRIBUTION 
 
¶1.  A Treasury Department delegation recently visited Frankfurt to 
discuss global financial turmoil with the ECB, the Bundesbank and 
representatives of Germany's private banks.  The ECB bemoaned a lack 
of information on the full extent of the turmoil, but none of the 
interlocutors foresaw an impending credit crunch or a banking crisis 
in Europe spinning out of control, agreeing that conditions were 
tightening but the situation was manageable.  All sides agreed that 
banking regulation and supervision in Germany was in need of some 
adjustment but the system had worked well through the turbulence. 
Investors eagerly await fourth-quarter reports from German banks but 
no major disturbances are expected.  Helaba Bank executives said 
that the planned takeover of WestLB was only in its initial stages 
and would go forward after the Hesse state election. 
 
THE VIEWS FROM THE ECB AND THE BUNDESBANK 
----------------------------------------- 
¶2.  Treasury officials met with a senior official at the European 
Central Bank (ECB) on January 17 in Frankfurt to get his view on the 
subprime turmoil.  He complained that information on European banks 
was not up to date and that European statistics are unreliable and 
hard to compare between countries.  The official complimented the 
U.S. system for its precise reporting standards and deadlines and 
attributed the ECB's lack of information to the fact that 
supervisory authority remained with the national central banks, 
creating a situation where not all member states have the same 
standards.  He cited a study from September, which indicated that 
the fifteen biggest banks in Europe had a combined direct exposure 
of 27.4 billion euros ($40 billion) to subprime entities, 148.5 
billion euros ($217 billion) in entities with partial subprime 
components and 114 billion euros ($166.5 billion) in other 
off-balance sheet vehicles.  The ECB also pointd to private-sector 
estimates which put world-wie exposure between $200 million and 
$400 million. 
 
¶3.  The official worried about contagion to othr economic sectors 
such as corporate real estateand credit card debt, but saw no signs 
yet that he situation was unmanageable.  He said that lendig 
standards had tightened and were continuing to o so but that was 
"not a bad thing" after the exremely loose standards of last 
summer.  One posiive side was that U.S. banks came into the crisis 
in a relatively strong position after enjoying seeral years of high 
returns.  The official predictd 2% growth in the euro area for 
2008, based on he assumption of continued growth in emerging 
makets and high profitability among European corporaions.  He said 
the ECB would continue to pressur the private sector to contain 
wage growth and prdicted a "protracted, temporary surge in 
inflatin" ebbing at the end of 2009. 
 
¶4. The delegation discussed banking supervision in Germany with a 
senior official at the Bundesbank.  The official saw no need for 
further regulation in the wake of the turmoil saying that the 
Bundesbank and BaFin were able to react quickly and effectively last 
summer because supervisory power is held at the national level.  He 
felt that a EU supervisory authority would only slow reaction times. 
 He conceded that the Bundesbank and BaFin had overlapping 
supervisory responsibilities and it was often unclear which 
institutions had which competency.  The process of delineating 
responsibilities was "controversial" and therefore not likely to be 
resolved soon.  Commenting on the turbulence, the Bundesbank 
official foresaw more moderate growth in 2008 but no impending 
credit crunch and characterized the direct effects of the losses as 
manageable. 
 
GERMANY PRIVATE BANKS PREPARE 4Q REPORTS 
---------------------------------------- 
¶5.  At Deutsche Bank, senior executives asserted that their bank 
"had no skeletons in its closet" which would be reflected in their 
February 7 fourth-quarter report.  (NOTE: This conversation took 
place before the bank's announcement of a $760 million default on a 
loan in Las Vegas.)  They claimed that Deutsche Bank currently held 
30 billion euros ($41.1 billion) in asset-backed commercial paper, a 
third of which was already on balance sheet and half of which 
Deutsche Bank had originated.  Going forward, they argued that banks 
should modify the originate-and-distribute model by always retaining 
a piece of the original asset.  In so doing, the banks would show 
investors that they had confidence in their own products.  The 
officials also felt that the ECB should relax its collateral 
standards, but the ECB had only promised so far to consider this. 
Seeing no impeding credit crunch, they described current lending 
standards as normal after a period of excessive looseness. 
 
¶6.  Dresdner Bank executives told the delegation that their bank had 
misjudged the subprime turmoil, which would be reflected in the 
banks fourth-quarter report.  They criticized what they saw as 
 
FRANKFURT 00000276  002 OF 002 
 
 
fraudulent lending practices in the U.S. mortgage industry and 
failures in the rating agencies.  In the troubled 
collateralized-debt obligation (CDO) market, they faulted the U.S. 
rating agencies, echoing comments by others that investors like 
Dresdner could not conduct their own analysis on products they held 
for such a short period.  However, this problem has been overcome 
now that CDOs are no longer tradable assets.  Responding to reports 
of trouble in Dresdner's K2 special investment vehicle, they said 
the bank would "manage it down" but that the bank itself had only a 
3% stake in the vehicle it managed.  On January 25, Dresdner 
preemtively announced an annual profit of 8 billion euros ($11.8 
billion) to calm market worries.  The officials weighed in on recent 
reports of losses at the Bavarian-based German bank Hypo Real Estate 
saying that the losses were not so great, but rather the poor 
communication by the bank had destroyed investor confidence.  They 
worried about wage increases in Germany saying an overall increase 
of even 4% would be too high.  They also saw further bank 
consolidation in Germany as unlikely because severance costs were 
too high. 
 
HELABA: SITES SET ON WESTLB 
--------------------------- 
¶7.  Helaba Bank senior executives expressed confidence in their bank 
and its proposed takeover of troubled state bank WestLB.  Helaba has 
the second-best rating of any German state bank as it has pursued a 
model based in retail and wholesale banking.  They characterized 
WestLB as overly ambitious in its attempt to act like an investment 
bank.  The executives said that Helaba has only 200 million euros 
($294 million) in exposed off-balance sheet conduits and no direct 
exposure to subprime debt.  Negotiations on the takeover would 
resume after the January 27 Hesse state election, but they were 
still in their initial stages.  Helaba wants to see a risk 
assessment carried out by WestLB, but the biggest issue at the 
moment is that WestLB has not accepted that this will not be "a 
merger of equals."  Not only will WestLB have to accept Helaba's 
preeminence, but the bank will also have to align its investment 
strategy with that of Helaba.  On bank regulation, Helaba wants to 
see supervisory authority remain at the national level, but the 
executives complained about the division of responsibilities between 
the Bundesbank and BaFin, saying BaFin should have primacy.  They 
also talked about ECB dollar-operations in December, saying small 
German banks needed dollars after dangerously issuing off-balance 
dollar credit lines. 
 
¶8.  This cable was coordinated with Embassy Berlin and cleared with 
the Treasury Department. 
POWELL