August 3, 2007 / 1:21 PM / 12 years ago

IKB subprime shockwaves continue to rattle Germany

FRANKFURT (Reuters) - State prosecutors said they were monitoring IKB as the troubled lender continued to send shockwaves through Germany’s banks after racking up billions in potential losses in risky U.S. subprime mortgages.

German commercial property financier Hypo Real Estate struggled to calm jittery investors by insisting it would be unaffected by the U.S. subprime fallout.

Its shares skidded more than 6 percent while Commerzbank — which owns a property financier — saw its stock fall over 4 percent.

Investor confidence was further dented as it emerged that French insurer Axa had also temporarily closed two subprime funds after sudden losses.

And the German Pharmacist and Doctor’s Bank said it had up to 115 million euros ($158 million) of subprime exposure. Of that, 75 million were in AAA-rated investments with six months to maturity, and another 40 million in a collateralized debt (CDO) transaction that was partly exposed to the subprime market, the bank said.

Earlier in the week, it emerged that banks backing an IKB rescue expected it to lose up to a fifth of its roughly 17.5 billion euro ($23.99 billion) subprime investment.

The revelation of the scale of the problem, which followed IKB’s assurances that it would barely be affected by property difficulties in the United States, prompted the head of the German central bank to call repeatedly for calm in the market.

On Friday, state prosecutors in Duesseldorf, where IKB is based, said that they were keeping a close eye on the bank.

“We are monitoring the case,” prosecutor Peter Lichtenberg told Reuters. “But no legal proceedings have been launched.”

The statement came as it became clear that German banking watchdog Bafin would not probe IKB further, as its chief executive recently quit. Any criminal probe would now fall to state prosecutors.

Meanwhile, German’s biggest group representing small investors said it was also considering suing IKB over the shambles that has wiped out roughly half of IKB’s market worth over the past week.

IKB, which was founded 80 years ago to handle German industry’s post-war reparations and now lends to small- and mid-sized companies, has become Europe’s highest-profile casualty so far of the U.S. subprime crisis.

EMERGENCY RESCUE

Deutsche Bank, worried about IKB’s subprime exposure, cut a credit line to the bank last week, a move which sparked the IKB crisis and spurred watchdog Bafin into action.

To stop IKB unraveling, German banks clubbed together to provide 3.5 billion euros to cover the lender’s potential losses and stem what Bafin warned could snowball into the biggest banking crisis in Germany in more than 75 years.

Just 10 days before a shock profit warning on Monday, the bank had said it would be almost entirely unaffected by the problems in the property market.

Following a steep decline in its shares, the bank late on Thursday sought to soothe worries that it could collapse, saying it had enough liquidity to keep it going for the next 12 months. It also hired accountants PricewaterhouseCoopers to check its books.

IKB looked set for a soft landing after a rocky week — its shares were broadly stable as the market turned down, and closed 4 percent up on the day.

Default rates on mortgages to high-risk, or subprime, borrowers in the United States have been creeping up, leading to problems for lending banks as well as those sharing the risk.

Bafin brokered a deal with the German government that state bank KfW would guarantee 8 billion euros of obligations for IKB stemming from an investment fund IKB managed.

This was designed to prevent the bank being forced into a firesale of its investments.

Subsequently KfW put up the lion’s share of the 3.5 billion euro rescue fund set up to cover IKB’s likely losses when IKB does sell its investments.

For five facts about IKB, please double click on

For a chronology about how the subprime crisis unfolded at IKB, double click on

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