A German court on Tuesday ruled that a small bank linked to a collapsed British finance company was insolvent, causing losses in dozens of small German cities.
Greensill Bank AG was deemed insolvent by a local court, leaving the cities as creditors likely to suffer losses. In Germany, at least 12 cities with a combined € 200 million, equivalent to about $ 238 million, in deposits are in the same situation. Individual depositors are covered by insurance.
Among them is Mengen, a small municipality in southwestern Germany. Like most cities that put money in the bank, Mengen was trying to avoid the small losses that negative interest rates bring.
Bremen-based Greensill Bank, formerly known as NordFinanz Bank AG, was acquired in 2014 by Greensill Capital, which was declared insolvent on March 8. The bank offered slightly positive interest rates, outperforming the negative rates offered by an increasing number of German banks. .
Mengen Mayor Stefan Bubeck said the city was not trying to get a high interest rate, just avoiding negative rates. The town “did not want our deposit to decrease,” he said. Bubeck fears that most of the money invested will be lost. “We are shocked.”
The city said it switched 6 million euros to three banks offering slightly positive interest rates. It made a deposit of € 3 million, a third of its total reserves, at Greensill in November. The bank offered an interest rate of 0.6%, compared to a rate of minus 0.5% offered by other regional lenders used by the city.
Other cities have said they moved reservations to Greensill to get even lower rates to avoid guaranteed losses from negative rates. Schwalbach am Taunus, a municipality on the outskirts of Frankfurt that has € 19 million deposited in Greensill, estimated that negative rates could cost its taxpayers half a million euros a year.
Deposit fees have also forced an increasing number of individual customers to seek better rates elsewhere. Many are even parking their money outside of Germany, in countries like Bulgaria and Latvia, using platform service providers. The European Union has national guarantees on retail deposits of up to € 100,000. Greensill’s retail clients will have additional coverage of up to € 75 million each through a separate deposit insurance plan provided by commercial banks.
BaFin, the German financial regulator, froze all bank accounts in Greensill earlier this month after an audit could find no evidence of certain collateral that a large client used to borrow money. BaFin has filed a criminal complaint against the bank with prosecutors, who will decide whether to launch an investigation. On Tuesday, the regulator said a local court initiated insolvency proceedings against the bank after BaFin ruled that the bank will not be able to refund all customer deposits.
A person familiar with the bank said it is currently estimated that up to € 700 million in deposits totaling € 3.6 billion will not be covered by insurance. Most are likely to come from local governments.
Cities have their deposits guaranteed if they put their money in local and regional quasi-public banks that charge negative rates. Their deposits with commercial banks like Greensill were protected until 2017, when the insurance was canceled after a costly bank failure in which many depositors were cities.
Local governments say they couldn’t see Greensill’s problems coming and felt reassured by the bank’s investment grade rating from rating agency Scope Ratings.
“Due to the rating of this bank, we had to take on a very safe investment form for term deposits,” said the mayor of Schwalbach am Taunus, Alexander Immisch.
In a statement, Scope said that it now suspects that relevant information about Greensill’s business and risks was withheld from analysts, and that incorrect information was provided. A Greensill spokesperson referred the questions to Greensill Capital’s insolvency administrator Grant Thornton, who declined to comment.
In Giessen, a university city north of Frankfurt, Mayor Dietlind Grabe-Bolz said the city took all appropriate measures to deposit 10 million euros, about a fifth of the city’s reserves, in Greensill, including the assessment of bank offers presented by different brokers. The money was intended to help cover future expenses such as road repairs and school projects.
Ms Grabe-Bolz has disagreed with BaFin, which began conducting a forensic audit at the bank in the summer of last year, but whose investigation was only made public this month. Giessen transferred its deposits to Greensill Bank in October and December of last year to earn interest of 0.09% and 0.1%.
“While BaFin had already begun hiring special investigators without the knowledge of investors, Greensill’s offers were still in effect,” the mayor said. “All of this shows that BaFin has let us down.”
A BaFin spokesperson said that due to its duty of confidentiality, it cannot inform municipalities and other investors about a special audit or other oversight measures. He added that cities knew very well that their deposits in commercial banks are not guaranteed.
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