Time To Bust Up The Club; An obscure deal to sell off Berlin's Landesbank could herald revolutionary changes for German banking.

Byline: Stefan Theil

On the face of it, he's a most unlikely free-marketeer. A card-carrying socialist, Thilo Sarrazin is Finance minister for the city of Berlin, whose government includes the successor party of the former East German communists. But bankrupt Berlin needs cash, and Sarrazin is determined to get it. So determined, in fact, that he's preparing to break one of Germany's longest-standing political and economic taboos--by selling off Landesbank Berlin, the city's public-owned bank, for some [euro]8 billion.

Ho-hum? Not in Germany. The move has sent a tremor through one of the coziest clubs in the land--the state-owned banks that control almost half the country's banking assets. Germany may be Europe's largest economy, home to some of the world's most successful companies, yet the basic structure of its banking system is unchanged since the 1800s--fragmented, inefficient, cosseted from competition. In Berlin's Landesbank sale, some see the coming of a whole new era, freeing up hidden wealth and powering new growth across the economy. "This is the biggest event in European markets this year," says Dirk Becker, a bank analyst for Kepler Equities in Frankfurt. "In 10 years we'll have a completely different German financial landscape and look back on this as the catalyst that set it off."

To see why, just look at once mighty Deutsche Bank. Twenty years ago, it was Europe's biggest bank. Today, ranked by market value, it no longer makes it into the top 10, far behind British and French giants and even new Spanish and Italian competitors. All over Europe, deregulation and consolidation has created profitable banking conglomerates and unleashed new economic dynamism. But German banks just lumbered along, frozen out of two thirds of their own home market by 460 inviolable public banks and an additional 1,300 cooperative S&Ls. That's one reason why London has marginalized Frankfurt as Europe's undisputed financial capital--even though Britain didn't even adopt the euro.

If Becker and others are right, and Landesbank undoes this hidebound status quo, the benefits could indeed be enormous. According to the International Monetary Fund, bringing inefficient public banks up to the average profitability of European banks would generate increased profits worth almost half a point of GDP annually. The market value for their owners--German taxpayers--would rise by a whopping 17 percent of GDP, roughly a quarter of the national debt.

In the past, a chummy coalition of politicians and lobbyists has managed to fend off deregulation. Lots of pigs feed off the public banking trough: bank managers who don't have to worry about profits or competition; politicians routinely rewarded with nicely paying jobs on their boards; ...