The crisis in the US sub-prime mortgage market looks as though it is going to result in a sequel to the Savings and Loan crisis of the early 1980s. This time, though, it looks as though it is happening not in America but in Germany.

These days, the similarities between the Landesbanken and the S&Ls seem disconcerting.

The German banks, which date back to the 19th century, traditionally served as state-backed lenders of last resort to regional industry and local savings banks. The original S&Ls, or thrifts, also started operating in the 1800s as community-based lending institutions taking deposits and offering mortgages. After the war, the state-backed Landesbanken were seen as critical to the reconstruction of Germany, the financial arteries of the Wirtschaftswunder. As a result of the Depression, the federally chartered S&Ls came under the umbrella of the State, which imposed tighter regulation on deposit-taking and lending.

After the Carter Administration deregulated the S&L sector, they herded into the booming real estate market, making adventurous lending decisions that they had neither the balance sheets nor the business acumen to justify. And, it seems, after the European Commission stripped the Landesbanken of their state guarantees, they sought new avenues of cheap funds by bundling into a bunch of risky hedge funds and investment vehicles that they could neither afford nor fully understand.

For the S&L institutions, the results were catastrophic. In the 1980s, thousands collapsed and the landscape of the US banking sector was redrawn. Now, it appears, the same is set to happen in Germany.

Not a minute too soon. The problems at Sachsen, the Landesbank of Lower Saxony, suggest that these state-owned banks have no business operating in modern, international financial markets. It has needed a €17 billion lifeline to bail it out. Another Landesbank, IKB, had to get $11 billion in emergency funding. The Landesbank Baden-Württemberg has started a process of consolidation that will, eventually, make the Landesbanken a relic of the past.

Such is the nature of globalised financial markets that it has taken a crisis rooted in America to expose a weakness in the German banking system. The Landesbanken have gambled publicly owned institutions on obscure foreign financial instruments because they have lost their business base at home and are desperate for revenues elsewhere. Their time has come and gone.

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