WESTDEUTSCHE LANDESBANK GIROZENTRALE - Company Profile, Information, Business Description, History, Background Information on WESTDEUTSCHE LANDESBANK GIROZENTRALE



4000 Düsseldorf
Herzogstrasse
15
Federal Republic of Germany

History of WESTDEUTSCHE LANDESBANK GIROZENTRALE

Westdeutsche Landesbank Girozentrale is the central bank of West Germany's most populous region, North Rhine-Westphalia, and the clearing bank for its 250 savings associations. Because of this, it is a major force in the German economy and a strong competitor of the Big Three German banks. Its strength is in part the result of its structure--joint ownership between the state government, regional banks, and local authorities--a structure that can be traced to its origins in two 17th-century provincial banks.

In 1818 the Swedish government stunned Europe by offering 160,000 taler to the German province of Westphalia as reparation for the damages incurred when Swedish and Dutch soldiers marched through the province during the Napoleonic Wars. This money was decreed the property of all Westphalia by its president, Freiherr von Vincke. The funds were used to develop the region's economy and pay for public-works projects, but some formal policies were needed to distribute the money. In 1832 the Westphalian Provinzialbank-Hülfskasse was founded to accomplish this task. The bank was the first hilfskasse, or assistance bank, in Prussia and played a pivotal role in developing the region's economic potential throughout the 19th century.

Frederick William IV, the king of Prussia, was impressed by the advantages the hilfskasse offered Westphalia and ordered that a similar bank be created in the Rhineland in 1847. Its government, influenced by the economic success of the Aachener Union already in business within the province, founded the Provinzial-Hülfskasse of the Rhineland in 1854.

The two banks were instrumental in making the Rhine-Westphalia region one of the biggest and most productive industrial areas in Europe by the time World War I began. Both banks became landesbanks before the end of 19th century, which greatly increased their range of services, since hilfskasse banks had more restricted charters. Their new names were Landesbank für Westfalen Girozentrale, M&uuml#ter and Rheinsche Girozentrale und Provinzialbank, Düsseldorf.

Both landesbanks endured the boom-bust economic cycle of Germany during the military buildup of the World War I years, the hyperinflation of the Weimer Republic, the second buildup as the Nazis assumed power in 1933, and the economic chaos of the immediate postwar years. Finally, with the Marshall Plan and the currency reforms of 1948, Germany's postwar recovery began. At about this time both banks expanded their services to include clearing transactions for savings banks, thus adding the generic term girozentrale to their names. With the economic miracle of the 1950s, there was talk of combining the two landesbank girozentrale institutions, since the North Rhine and Westphalia provinces had become politically unified under the British occupation. For political reasons, however, this merger was not feasible until the late 1960s.

On January 1, 1969 the two local banks were combined at last, ostensibly to fight the economic domination of the Big Three banks--Deutsche Bank, Dresdner Bank, and Commerzbank. The new institution, based in one of Germany's most populous and wealthy states, could hope to rival the leading international banks and pose a challenge to the Big Three, which exercised overwhelming economic control over West Germany and showed relative insensitivity to regional needs, especially for capital for the large export industries in the region.

Thus the Landesbank für Westfalen Girozentrale, M&uuml#ter and the Rheinsche Girozentrale und Provinzialbank, Düsseldorf, became a new entity, the Westdeutsche Landesbank Girozentrale, and Ludwig Poullain was named chairman of the management board. He committed the bank to a policy of growth and expansion that would enable it to challenge, and occasionally surpass, the Big Three banks in total assets.

During its first few years WestLB prospered. Because of its unusual flexibility, the bank could, for instance, offer tailor-made long-term loans to customers. Also, because of the increased capital which WestLB controlled, its commercial-loan operations expanded to include larger companies, which meant larger loans and greater profits.

In 1970 WestLB made international news by joining the Chase Manhattan Bank and two other banks in starting up Orion Bank Ltd., an international merchant bank. The bank, in which WestLB held a minority interest, had an initial capitalization of US$24 million.



In 1973 WestLB made news when it posted more than US$150 million in foreign-exchange losses, the result of unauthorized speculative trading by employees who were subsequently fired.

During the mid-1970s WestLB did indeed reach its goal of joining the Big Three banks, becoming Germany's third-largest lending institution in 1976. That year WestLB proposed a merger with the troubled Hessische Landesbank. The resulting firm would have been Europe's largest bank, but the merger eventually fell through for political reasons. But a drawn out scandal soon began to tarnish the bank's image. It began when Ludwig Poullain, the bank's founding chairman, announced his resignation in December, 1977, claiming that his chairmanship was untenable. The WestLB supervisory board refused his resignation and fired him for "gross neglect of his duties." Poullain successfully sued to force the bank to pay his remaining contractual wages of US$230,000 a year for six years.

Over the next several years Poullain was charged with bribery, fraud, and malfeasance regarding a US$465,000 consulting fee he received from Josef Schmidt, a financial broker who himself was charged with embezzlement, tax evasion, breach of trust, and criminal bankruptcy.

Poullain had not fully disclosed to WestLB management the terms of the consulting fee that Schmidt gave him, nor had he informed WestLB that he had granted Schmidt a loan for the coincidental sum of US$465,000 and had neglected to tell the WestLB management board that Schmidt was under investigative arrest when it granted him another loan for US$930,000, again at the behest of Poullain himself. Poullain later claimed that the charges against him were politically motivated because his steering the bank into an international presence had allegedly upset some state politicians. In 1981 he was found not guilty of the charges.

In 1980 the bank reported that it had made huge profits in foreign currency for 1979, in contrast to 1973. Even so, total earnings were down by almost 68% and the bank stopped paying dividends until 1986.

Profits were down by two-thirds for fiscal 1980, and some called for the resignation of Johannes Völling, who had replaced Poullain. WestLB was suffering from a rise in interest rates. The bank was forced to finance fixed-rate long-term loans with higher-cost short-term funds. Since WestLB is North Rhine-Westphalia's central bank and the clearing bank for the area's 159 savings associations, any dip in WestLB's profits affects the region.

Eventually Völling did resign, in July, 1981, stating that the bank's low profits had eroded confidence in his ability. Friedel Neuber, formerly head of the Rhineland Federation of Savings Banks, was appointed the new chairman. The 46-year-old Neuber's appointment drew criticism, as he had never worked at a bank. Neuber's priorities were to restructure, review operations for profitability, and expand the bank's international business.

In late 1981, WestLB sold its stakes in two industrial companies, Philipp Holzmann and Preussag, raising some DM700 million, part of it to cover anticipated losses for the year. In mid-1982, WestLB raised DM1.12 billion in new capital from its shareholders; the North Rhine-Westphalia state government contributed the most, raising its stake in the bank to its present 43%. This capital increase was designed to provide WestLB with capital for future growth and to help mitigate the higher degree of risk involved in its loans to Third World countries. WestLB began to strengthen its loan-loss reserves following Mexico's suspension of debt payments in August, 1981; by 1988, its reserves covered more than 50% of its exposure.

These measures soon paid off; WestLB's earnings rose sharply in 1982--enough to allow it to repurchase a 35% stake in Preussag.

In 1984 WestLB, along with four other German banks, combined forces to create a new venture-capital company. The same year at least one top credit official on the management board resigned because of his role in the bank's involvement with Deutsche Anlagen Leasing GmbH, a lending concern that lost huge amounts of money due to overextension, weak management controls, and devaluation of its assets. Nevertheless, WestLB again experienced high earnings in 1986 and that year was able to resume the payment of dividends.

During 1985-1986 WestLB increased its international business, as Neuber had long planned. In 1985 Owens-Illinois Inc. sold a 58% share of Gerresheimer Glas AG to the bank, which syndicated the glass manufacturer for other German investors. In 1986 WestLB dramatically heightened its international profile by taking part in an arrangement with the Japanese to sell securities on the Tokyo exchange. In exchange for access to the deutsche mark bond Europe market, the Japanese allowed WestLB and three other large German banks to deal securities under certain limited circumstances.

This strong international position allowed WestLB to lead a banking syndicate that bought a one-fourth share in the Deutsche Babcock AG engineering group from the government of Iran in 1987. And the bank again profited from selling the shares to institutional investors after syndicating its interest in the acquired firm.

As part of the improvement of economic and political relations between Eastern and Western Europe, in May, 1988 WestLB joined most of the other major German banks in offering sizable loans to the Soviet Union. WestLB also played a historic role in furthering open trade when a Swiss subsidiary of the bank brought Moscow's first foreign bond issuance since the 1917 revolution to market, in a formal acknowledgment of the close economic ties that exist between the two countries.

WestLB also revived its plan to merge with Hessische Landesbank. Though the proposed merger caused much excitement, the planned merger collapsed in December, 1988 and the state of Hessen, Hessische's home region, plans to sell its 50% stake in Hessische to the Hessen savings banks, which disapproved of the proposal.

Even so, WestLB's future looks bright. The unification of the European Economic Community in 1992 should help the bank, whose presence is mostly in European and other Western markets. In an effort to enhance its business, WestLB has been increasing its representation both abroad and at home. This increase includes a link-up with the British Standard Chartered Bank. WestLB has also benefited from a January, 1987 reorganization designed to strengthen its investment-banking operations.

For the most part, WestLB seems to have overcome the difficulties it experienced during the 1970s and the early 1980s, and is now one of the strongest as well as the fourth-largest West German bank.

Principal Subsidiaries: WestLB International S.A. (Luxembourg); Banque Franco-Allemande S.A. (France); Bank für Kredit und Aussenhandel AG (Switzerland); WestLB (Schweiz); WestLB Securities Pacific Ltd. (Japan); WestLB UK Ltd.

Additional Details

Further Reference

Pohl, Hans. Von der Hülfskasse von 1832 zur Landesbank, Düsseldorf, WestLB, 1982.

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