Greensill Fall Brings Sub-Prime Echoes to Small-Town Germany

(Bloomberg) -- The rapid unraveling of Greensill Capital has brought global financial turmoil to small-town Germany once again, and this time the first victim is the municipality of Monheim am Rhein.

The town of about 40,000 just north of Cologne may lose the 38 million euros ($46 million) deposited at Greensill Bank, the lending arm of Lex Greensill’s trade-finance conglomerate, according to a spokesman for the municipality. Other such local governments may be facing similar losses.

Monheim parked its funds at Greensill to avoid incurring the negative interest rates on deposits that are widespread in Europe. But municipalities are not protected under Germany’s deposit insurance program, meaning the full amount is now at stake. The municipality is investigating whether the deposits violated investment policies, it said in a press release.

The announcement comes after Germany’s financial watchdog BaFin placed the bank under moratorium this week and asked law enforcement officials to investigate accounting irregularities at the lender. The episode is already serving up echoes of the financial crisis more than a decade ago when local German lenders suffered losses in complex U.S. sub-prime mortgage securities created far from their door.

Greensill Bank had been collecting deposits in Germany by advertising one of the highest interest rates among lenders based in the country. The majority of the roughly 3.3 billion euros in deposits that the bank had in 2019 -- the latest year for which an annual report is available -- are protected by the insurance schemes.

The German deposit insurance program is expecting to pay out less than 3 billion euros if Bafin decides depositors must be compensated, according to people familiar with the matter. That leaves several hundred millions of euros uninsured, much of it from further municipalities, the people said, asking not to be identified as the matter is private.

The German Banking Association, which runs the deposit insurance program, said Thursday it alerted BaFin to risks at Greensill Bank in early 2020. BaFin started probing the lender last summer, Bloomberg News reported at the time.

Greensill has seen his business empire rapidly disintegrate this week as investors cut ties with him over concerns about the creditworthiness of his borrowers and a key insurer backed out of covering companies he’d backed.

BaFin on Wednesday said it closed the Bremen-based lender for business after finding irregularities in how it booked assets tied to a key client of Greensill Capital, British industrialist Sanjeev Gupta.

Monheim will investigate the impact in a special session of its audit committee on March 9, it said in another press release. It will do everything it can to limit the potential damage, it said.

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