RESEARCH PAPER

Why does the German tax payers money

cover the loss of the IKB bank?

Submitted at May 31, 2008

Jens Geukler

Bastian Hartlieb

Fachhochschule Bielefeld - Business Economics (FB5) - Summer term 2008

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Why does the German tax payers money cover the loss of the IKB bank?

INDEX

INDEX OF TABLES II

1 INTRODUCTION 1

2

VISUALIZE DIRECT LINK OF LENDING (IKB & KFW) 2

2.1 IKB 2

2.1.1 GENERAL VIEW OF THE IKB 2

2.1.2

BUSINESS ACTIVITY OF THE IKB 2

2.1.3

SHARE STRUCTURE .2

2.1.4

IKB STOCK EXCHANGE 3

2.2 KFW BANKING GROUP 4

2.2.1

KFW IN BRIEF 4

2.2.2

BRANDS OF THE KFW AND THEIR FUNCTIONS 4

2.2.3

CAPITAL SPLITTING OF THE KFW 5

2.2.4

KFW´S ALLIANCE TO THE IKB 5

3

RISK BUSINESS & SPECIAL PURPOSE VEHICLE 5

3.1 SUBPRIME CRISES 5

3.2 RISK BUSINESS 5

3.3 SPECIAL PURPOSE VEHICLE (SPV) 6

3.3.1 CONDUIT AND ABCP 6

3.3.2 ADVANTAGES AND DISADVANTAGES OF A CONDUIT 7

3.3.3 RHINELAND FUNDING 7

4

ANALYSIS IKB ANNUAL REPORT 9

4.1 PUBLISHED INFORMATION 9

4.2 BLANACE SHEET FACTS 10

5

INTERVENTION IN THE IKB CRISES 11

5.1 CAUSES FOR THE INTERVENTION OF THE STATE 11

5.2 CAUSES FOR THE INTERVENTION OF THE BANKS 12

6

GENERAL CAUSES FOR AN INTERVENTION 12

6.1 DIRECT EFFECTS 13

6.2 INDIRECT EFFECTS 13

6.2.1 BANK RUN 13

6.2.1 LOSS OF RECEIVABLES IN THE INTERBANK BUSINESS 14

7 FORECAST 14

8 CONCLUSION 14

9 APPENDIX III

APPENDIX A: ENQUIRY; THE ASSOCIATION OF GERMAN BANKS III

APPENDIX B: MODIFIED ANNUAL BALANCE SHEET OF THE IKB IV

REFERENCES VI

I

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Why does the German tax payers money cover the loss of the IKB bank?

INDEX OF TABLES

Figure 1: Shareholder diagram of the IKB

3

Figure 2: Overall trend of the IKB shares during the past twelve months 4

Figure 3: Outstanding ABCP-volumes of German Sponsors by the end of 2006 5

Figure 4: The Conduit "Rhineland Funding" 8

Figure 5: Summary balance sheet IKB 2007-03-31 in 10

II

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Why does the German tax payers money cover the loss of the IKB bank?

1 Introduction

Due to the subprime crises in the USA, initiated in 2007 and the illiquidity of the ABS-bonds

and ABCP-papers, the IKB and the Sachsen LB are now under threat. Therefore the banks

were unable to refinance their purchased receivables. Over and above some notoriously well

known German banks, other banks are also involved in this monetary dilemma. It is needful

to mention the Deutsche Bank, West LB and Bayern LB and international banks such as UBS

(Switzerland), Northern Rock (Great Britain), Bear Stearns (USA).

The general assumption could be that the cause of this was due to the misplaced speculation

on the US money & capital market by the IKB and the above named banks, leading to their

involuntary awareness in the public eye. Also innumerable hedge-funds have been closed

down and liquidated.

True Sales have livened up, securitisations are in tendency and record on securitisations of

credit risks hit the headlines of the economic press. The press called attention to the new

financial instrument of the German economy, which was totally unknown 15 years ago in

these parts1.

This financial instrument has been established within German and European credit services

sector. By the end of the year 2005 more than 80% of quoted European credit institutes had

transacted a securitisation action, including all German major banks2.

The aim of this research paper is to distinguish why the German taxpayers´ money should

cover the losses of the IKB bank? General acceptance could be since the IKB is a "normal"

bank, thus it is independent as an enterprise. However this research paper has established that

the taxpayers are connected to the losses of the IKB.

Beginning with a global overview and the structure of the IKB is a good start to gain an

insight into the complex sticking point. Hereafter it is illustrated how the KfW is connected to

the IKB as a "safeguard". After all, there is a need to clarify the capital split of the KfW to get

the idea of the connection to the taxpayers.

Further the paper highlights the function of the KfW and the business risk of the IKB within

the established conduit of the Rhineland Funding. Similarly the intervention of the IKB will

be highlighted, the present causes for the intervention in the IKB crises will be illustrated and

analysis will show why bankruptcy has been avoided so far. As a result direct and indirect

effects concerning the customers of a bank are mentioned briefly. Topically is to fathom out

the future of the IKB with reference to the present situation on the finance & capital market.

The selling wave is on going3.

1 Börsen-Zeitung 07.09.2006, No. 172, page 5; Handelsblatt 11.01.2007, No. 8, page 27; Frankfurter Allgemeine

Zeitung 15.03.2006, No. 63, page 21.

2 cp. Ricken (2007), page 147.

3 http://www.godmode-trader.de/de/boerse-nachricht/IKB-Neue-Verkaufswelle-laeuft-schon-Ziel-bei-

%2Ca861933.html.

1

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Why does the German tax payers money cover the loss of the IKB bank?

2 Visualize direct link of lending (IKB & KfW)

2. 1 IKB

2. 1. 1 General view of the IKB

Founded in 1924 the IKB4 - Deutsche Industriebank AG ­ is a credit institution, which is

primarily specialized in medium and long-term financing for medium-sized companies5. With

a balance sheet total of 63.5 billions on March 31, 20076 and more than 1,838 employees in

23 subsidiaries in Germany, Europe and USA7, the IKB is present in eight countries of the

world. According to the facts and figures the IKB distinguishes medium-sized structures. By

comparison with other involved German banks mentioned above, the IKB balance sheet total

in 2007 is of minor significance. In comparison other banks have a far greater balance sheet,

2,020 billion (Deutsche Bank)8, 295.9 billion (West LB)9, 576 billion (Bayern LB)10.

Moreover the IKB, as a market leader in that sector in Germany has more than 80 years of

experience. Customer Service and partnerships over decades is the settled direction of Dr.

Günther Bräunig, the present Chief Executive Officer (CEO) of the bank11.

2. 1. 2 Business activity of the IKB

Their business activity covers various kinds of international financing issues, such as long-

term credits, venture, equity and infrastructure financing. Further financial products of the

medium-sized bank are derivates, leasing, participations interests and asset-backed

securitizations, to mention a wide range of their area of operations12.

2. 1. 3 Share structure

Due to the IKB is quoted several enterprises holding shares in that business. With less than

the majority, the principal shareholder is the KfW13, which is a government banking group.

Thus the greatest interest belongs to the strategic partner of the IKB. The structure and

purpose of the KfW will be illustrated accurately at another point.

39.3 % is owned by institutional and private investors, which have the second biggest interest

in the IKB, such as private individuals′ respectively particular trade companies.

A foundation which undertakes industry research holds 10.7% of shares. Stiftung

Industrieforschung is a non-profit-organization with its place of business in Cologne14.

4 http://www.ikb.de/content/de/metanavigation/suchergebnis.jsp?query=gr%C3%BCndung&x=0&y=0

(IKB presentation, page 6.

5 http://www.ikb.de/content/de/.

6 http://www.finanznachrichten.de/nachrichten-2008-02/artikel-10137508.asp.

7 http://www.ikb.de/content/de/ueber_uns/die_bank/adressen/index.jsp.

8 http://geschaeftsbericht.deutsche-bank.de/2007/gb/lagebericht.html.

9 http://www.westlb.de/cms/sitecontent/westlb/ir/de/irreleases/ArchiveIRReleases/ArchiveIRReleases

/ir07.standard.gid-N2FkNDZmMzU4OWFmYTIyMWM3N2Q2N2Q0YmU1NmI0OGU_.html.

10 www.bayernlb.de/ar/Internet/de/Downloads/0100_CorporateCenter/1320Kommunikation/2007/

Einzelabschluss_07_D.pdf.

11 http://www.ikb.de/content/de/metanavigation/impressum.jsp.

12 http://www.ikb.de/content/de/produkte/inland/index.jsp.

13 http://www.ikb.de/content/de/ir/aktie/allgemeine_infos/index.jsp.

14 http://www.stiftung-industrieforschung.de/seiten/hauptframe_neu.html.

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