REGULATORY OFFICIAL REJECTS BUNDESBANK-BAFIN MERGER RUMORS

UNCLAS DUSSELDORF 000003

SIPDIS

E.O. 12958: N/A
TAGS: EFIN ECON GM
SUBJECT: REGULATORY OFFICIAL REJECTS BUNDESBANK-BAFIN MERGER RUMORS

Sensitive but Unclassified - Not for Internet Distribution


1. (U) Summary: A senior financial regulator at BaFin in Bonn
recently confirmed to us that plans to merge BaFin with the
Bundesbank have been dropped. He predicted that more
Landesbanken would merge, leading ultimately to only two or
three such banks nationally. He commented that WestLB, the
troubled state Landesbank for North Rhine-Westphalia, is in
better shape than its reputation, in part because its new CEO
has introduced more transparency in its operations. End
Summary.

Rejects Rumor of Bundesbank-BaFin Merger
--------------


2. (U) A senior BaFin official confirmed to Pol/Econoff
recently that its merger with the Bundesbank, rumored for
months, would not occur. The Bundesbank does not want to lose
its independence, which would occur if it were to take over
BaFin's regulatory functions, and he doubted that the Bundesbank
was interested in insurance regulation, one of BaFin's three
regulatory roles (the others cover banks and stocks). Asserting
that the division of labor between the two institutions is
working well, he added that ongoing efforts to develop a unified
EU-wide banking supervision system made a merger impractical
because EU standards were not yet set. He also stated that
Bundesbank President Axel Weber, who he speculated has the best
chance to replace Trichet as ECB head, would push for EU
standards after he takes over. In any case, a Deutsche Bank
official reminded Frankfurt Pol/Econoff, a merger would require
federal legislation, which is unlikely in view of the Bundestag
elections in September.

WestLB and the NY Fed
--------------


3. (U) On the crisis at WestLB, the state-owned Landesbank for
North-Rhine Westphalia, the BaFin official noted that the change
in CEO has brought much needed transparency. For example, there
is now such a close working relationship between the NY Fed and
WestLB that a Fed official works in the WestLB New York office,
with access to all internal communications and systems. He
suggested that if the State Department or Treasury wish to know
more about WestLB's U.S. operations, which he considers
important and rather successful, the NY Fed has better access
than even BaFin.

The Future of the Landesbanks
--------------


4. (U) Regarding the future of the German Landesbank system,
the BaFin official predicted that only two or three of the
Landesbanks will survive the current financial crisis, citing
Bavaria and Rhineland-Pfalz as examples. He raised the
possibility that one of the Landesbanks could fuse would with
DEKA, the umbrella bank jointly held by the savings banks
(Sparkassen) and the Landesbanks, but declined to elaborate.

Comment
--------------


5. (SBU) This is the most authoritative statement we have heard
that the rumored merger between BaFin and the Bundesbank will
not take place. Our BaFin interlocutor, however, may be biased
in favor of Germany's current banking supervision model, as he
was BaFin's chief negotiator in talks with the Bundesbank that
led to the division of labor between the two institutions. The
very close cooperation between WestLB and the NY Fed reflects
the new WestLB leadership's strategy of moving quickly to fix
its many problems.


6. (U) This message was coordinated with Embassy Berlin and
ConGen Frankfurt.

BOYSE