February 20, 2009 / 6:54 PM / in 8 years

WestLB bad bank touches raw nerve in Ireland

4 Min Read

DUBLIN, Feb 20 (Reuters) - News on Friday that WestLB, one of Germany's biggest banking casualties of the financial crisis, has a bad bank in Dublin has highlighted Ireland as a possible destination for toxic assets.

A report in the Irish Times newspaper about WestLB creating a vehicle called Phoenix last year to park 23 billion euros ($29 billion) worth of problem loans and toxic assets off its balance sheet has sparked a debate in Ireland.

It comes at a time when the country's reputation as an investment destination has suffered from a string of recent bank scandals.

News of WestLB's bad bank will also rekindle memories in Germany of the start of the financial crisis -- it was off-balance sheet vehicles in Dublin that led to the near collapse of German state bank SachsenLB and small-companies lender IKB.

In a supplement to a prospectus for debt posted on the regulator's website, the German bank's Dublin-based unit WestLB Covered Bond Bank PLC said that WestLB ring-fenced a securities portfolio of about 23 billion euros in the first half of 2008.

"WestLB has been freed from most of the risks from the structured securities portfolios, which have now been ring-fenced off the balance sheet in an independent Special Purpose Vehicle (SPV)," the supplement said.

A spokesman for WestLB said on Friday: "Phoenix was set up a year ago to ensure that WestLB be able to play an active role in the upcoming consolidation of the Landesbanks in Germany." He did not did not elaborate.

The Irish government has pledged to quickly overhaul its regulatory system after a series of revelations about the now nationalised Anglo Irish Bank.

Ray Kinsella, professor of business at University College Dublin, said it was essential to quickly reform Ireland's regulatory system and to avoid Dublin's financial district acquiring a reputation as a "brass plate operation".

"Separating the central bank from the financial regulator was never a smart move," Kinsella said as an example of required reforms.

A report by Moody's Global Banking in September said setting up Phoenix had allowed WestLB to report a pre-tax profit in the first quarter of 2008.

"Without these effects, the bank would have recorded a loss in that quarter," Moody's said.

Dublin Best Qualified

Sources familiar with the situation told Reuters in January that WestLB was looking to hive off up to 100 billion euros' worth of risky assets.

The warehousing of such assets was seen as a precondition for mergers among the Germany's public-sector regional lenders, called landesbanks.

Calls for mergers in the sector intensified after several landesbanks were forced to make billions of euros in writedowns on structured finance investments.

WestLB had to be protected by state-backed guarantees in the wake of the global credit crisis.

WestLB's owners have agreed to provide 5 billion euros to cover risks on a 23 billion euro portfolio of assets.

The European Commission has demanded sweeping changes in WestLB's ownership structure in exchange for approving the protection.

The German state of North-Rhine Westphalia, part-owner of West LB, told the Irish Times newspaper there were several reasons for locating units in Dublin.

"For a business like this you need specialists and, worldwide, Dublin has the best qualified people for the task," the Irish Times quoted Stephanie Hagelucken, spokeswoman for the state's finance ministry, as saying.

"There were also tax advantages to locating in Dublin," she said. (Additional reporting by John O'Donnell in Frankfurt; editing by Karen Foster)

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