Hypo Real Estate: 600 billion in off-balance sheet assets

There is quite a buzz in the German press about Hypo Real Estate.  But, what should really get one’s attention is its massive off-balance sheet exposures (hat tip Ulrich).  The long and short of  reports is that Hypo Real Estate has assets valued at 1 and 1/2 times its entire balance sheet in off-balance sheet vehicles. This would bring total exposure to German taxpayers to a cool one trillion euros (1,000,000,000,000).

While there have been numerous reports of HRE’s imminent nationalization due to the recent law enacted in Germany allowing such, these reports raise the stakes considerably.  If you recall, HRE almost brought German banking to its knees during the Panic in October after Lehman collapsed (See my post “Germany: banking system collapse possible due to Hypo Real Estate“)

At the bottom of this post are a number of media sources in the German and Austrian press on this subject.  Here’s how German blogger Egghat puts it:

So far, here and there, one could read that the balance sheet of HRE was a measly 400 trillion euros. This would make HRE, according to balance sheet assets at the end of 2007, the eight largest bank in Germany. The largest balance sheet total for 2007 belonged to Deutsche Bank, with a little more than two trillion euros.

Yesterday, according to the Hannoversche Allgemeine, several financial experts from the Bundestag confirmed that HRE credit and credit derivative transactions amount to one billion euros, especially in “off-balance sheet activities.” This would put HRE, when we return to the balance sheet rankings fom 2007, basically to 2nd place amongst the largest banks in Germany. Alleluia! Quite amazing that this message has received so little attention in the media so far.

Update 20 Feb 2008 1536EST: Hypo Real Estate has issued a press release in regards to the reports about its off-balance sheet derivatives exposure(hat tip egghat). The text reads as follows:

Hypo Real Estate Group clarifies facts regarding hedge transactions

Munich, 20 February 2009 – Hypo Real Estate Group has clarified facts regarding media reports on its derivatives positions. Hypo Real Estate Group said on Friday that these reports showed a misinterpretation of the Group’s derivatives positions. The Group explained that in fact, the clear majority of these derivative transactions had been concluded in order to hedge against credit and market risks, pointing out that such transactions were regularly disclosed in the annual report.

In line with current practice adopted by other banks and market participants, Hypo Real Estate Group uses derivatives to hedge against credit and market risks arising from fluctuations in interest rates and foreign exchange rates, for example. Such hedges are connected to underlying transactions: the purpose of hedging is to avoid risks, not to enter into additional risk exposures.

Hypo Real Estate Group currently has derivative transactions in its books with an aggregate nominal volume of approx. one trillion euros. In line with accounting standards, the market value (as opposed to the underlying nominal amounts) is carried on the balance sheet. Hypo Real Estate discloses nominal values of derivatives in its annual report. In accordance with accepted market practice, derivatives positions are backed by additional collateral. Only mark-to-market changes in value impact on liquidity; there is no need to refinance nominal amounts of derivatives. “

Sources Milliarden-Geschäfte stehen nicht in der Bilanz – Standard Austria Hypo Real Estate erschreckt Berlin: Eine Billion verliehen – HAZ HRE-Bilanz außer Kontrolle? – ARD Boerse HRE Bilanzsumme eine Billion? – egghat Hypo Real Estate Group clarifies facts regarding hedge transactions – Hypo Real Estate, pdf

Related Reading:

Financial & Managerial Accounting
Hypo closes $442m construction loan for Trump project.(FINANCE): An article from: Real Estate Weekly
Disreputable History of Frankie Landau-Banks, The
Germany (Country Guide)
Rick Steves’ Germany and Austria 2008

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Originally published at Credit Writedowns and reproduced here with the author’s permission.