A German court ruled on Tuesday that a small bank linked to a collapsed financial company in the UK was insolvent, causing losses for dozens of small German towns.
Greensill Bank AG was considered insolvent by a local court, leaving the cities as creditors who are likely to suffer losses. Around Germany, at least 12 cities with 200 million euros combined, equivalent to about 238 million dollars, are in the same situation. Individual depositors are covered by insurance.
Among them is Mengen, a tiny municipality in southwestern Germany. Like most cities that deposit money into the bank, Mengen tried to avoid the small losses that negative interest rates entail.
Bremen-based Greensill Bank, formerly known as NordFinanz Bank AG, was acquired in 2014 by Greensill Capital, which filed for insolvency on March 8. The bank offered slightly positive interest rates, outpacing the negative rates offered by a growing number of German banks. .
Mengen Mayor Stefan Bubeck said the city was not trying to get a high interest rate, but to avoid negative rates. The city “didn’t want our depot to shrink,” he said. Bubeck fears that most of the money invested will be lost. “We’re impacted.”
The city said it changed 6m euros to three banks offering slightly positive interest rates. In November, he deposited Greensill with a deposit of 3 million euros, a third of his total reserves. The bank offered an interest rate of 0.6%, compared to a rate of less than 0.5% offered by other regional lenders used by the city.
Other cities have said they changed reservations in Greensill to get even lower rates to avoid guaranteed negative rate losses. Schwalbach am Taunus, a municipality on the outskirts of Frankfurt that has deposited 19 million euros in Greensill, estimated that negative rates could cost its taxpayers half a million euros a year.
Greenshill Bank had attracted depositors by offering modestly positive interest rates, compared to the negative rates of many of its peers.
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Dominik Reipka / Bloomberg News
Deposit charges have also forced a growing number of private customers to buy better prices elsewhere. Many even park their money outside of Germany, in countries like Bulgaria and Latvia, which use platform service providers. The European Union has national guarantees on retail deposits of up to € 100,000. Greensill retail customers will be covered up to € 75 million each through a separate deposit insurance plan provided by commercial banks.
BaFin, the German financial regulator, froze all Greensill bank accounts earlier this month after an audit failed to find evidence of certain guarantees a large customer used to apply for loans. BaFin has filed a criminal complaint against the bank with prosecutors, who will decide whether to initiate 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 pay all customer deposits.
A person familiar with the bank said it is currently estimated at up to € 700 million in deposits totaling € 3.6 billion that will not be covered by insurance. Most are likely to come from local governments.
Municipalities have their deposits guaranteed if they allocate their money to quasi-public local and regional banks that charge negative rates. Its deposits in commercial banks like Greensill were protected until 2017, when insurance was withdrawn after a costly banking failure in which many depositors were cities.
Local governments say they did not see Greensill’s problems coming and felt confident in the bank’s rating rating quality rating agency Scope Ratings.
“Due to the rating of this bank, we had to take on a very safe form of investment for term deposits,” said Schwalbach am Taunus Mayor Alexander Immisch.
In a statement, Scope said it now suspects that relevant information about Greensill’s business and risks was withheld from analysts and that incorrect information was provided. A Greensill spokesman referred 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 had taken all appropriate steps to deposit 10 million euros, about a fifth of the city’s reserves, in Greensill , including the evaluation of bank offers provided by different financial institutions. runners. The money was intended to help cover future expenses, such as road repairs and school projects.
Ms Grabe-Bolz has had issues with BaFin, which began conducting a forensic audit at the bank last summer, but whose investigation was only made public this month. Giessen transferred its deposits to Greensill Bank in October and December last year to obtain interest of 0.09% and 0.1%.
“Although BaFin had already begun commissioning special investigators without the knowledge of investors, Greensill’s bids continued,” the mayor said. “All of this proves that BaFin has let us down.”
A BaFin spokesman 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 were well aware that their deposits in commercial banks are not guaranteed.
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