German banking heading for crisis?

The US subprime lending fiasco is spreading to German banks, this story from Reuters yesterday:

Banks funding the rescue of Germany's IKB expect it to lose up to a fifth of its roughly 17.5 billion euro ($24 billion) investment in U.S. subprime mortgages, a source familiar with the plan told Reuters on Thursday.

The revelation of the scale of the problem prompted the Bundesbank president to make a statement to calm nerves over the affair, which watchdog Bafin had said threatened to snowball into the biggest banking crisis in Germany in more than 75 years.

To stop IKB unravelling, German banks clubbed together to provide 3.5 billion euros to cover the lender's potential losses from the subprime crisis. The source said this represented about a fifth of IKB's total exposure. "The worst case possible is, naturally, that the market collapses and nothing is realisable," said the source. "Or you might lose nothing. You can't be sure. But 20 percent is a realistic assessment." IKB, which specialises in lending to small- and mid-sized companies, has become Europe's highest-profile casualty so far of the crisis in risky U.S. subprime mortgages. Its troubles have sparked fears that other German banks might also be hurt. News of the scale of IKB's exposure sent its stock tumbling more than 40 percent. The shares closed down nearly 30 percent at 12.31 euros. Since the start of the week, the crisis has wiped out more than half of the bank's market worth. Its chief executive has left and late on Thursday a source familiar with the matter said its chairman would also quit.

PROFIT WARNING
Prior to a shock profit warning on Monday, IKB had not outlined its involvement in U.S. subprime lending. Only 10 days beforehand it had said it would be almost entirely unaffected by the problems in the American property market.

Germany's central bank chief once again tried to reassure investors, dismissing the possibility of a banking crisis. "The problems at IKB are of an institution-specific nature. They have been absorbed effectively by the support of (German state bank) KfW," said Bundesbank President Axel Weber. There had been signs earlier in the day that IKB's creditors were growing more confident after the rescue package put together by KfW -- which owns 38 percent of the company -- and Germany's banking association. "Everyone's calming down about the story," one debt trader said earlier. But others continued to fear the worst. "No-one knows what to make of the situation," Olaf Kayser, an analyst with German bank LBBW, had said earlier. "There is absolutely no information coming from IKB."

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. Deutsche Bank , worried about IKB's subprime exposure, had cut a credit line to the bank, said the source, a move which sparked the IKB crisis and spurred watchdog Bafin into action.