The international financial system suffered fresh convulsions yesterday as it emerged that Germany’s IKB Deutsche Industriebank, one of the country’s leading small business lenders, has about £12 billion of exposure to high-risk sub-prime mortgages in the United States.

The extent of IKB’s exposure came to light three days after it issued a surprise profits warning from undisclosed losses on bonds backed by American sub-prime home loans, which only ten days earlier the lender had said posed no risk. Given the recent plunge in sub-prime bond valuations, analysts said that IKB’s exposure to high-risk home loans could easily lead to $5 billion of losses.

The German Government, fearful of the impact that such losses could have on IKB’s liquidity and credit rating, has helped to back and organise a €3.5 billion bailout and pledged to guarantee the lender’s loan obligations of more than €8 billion through the state-backed lender KfW – also IKB’s largest shareholder with a 38 per cent stake.

Shares in IKB closed almost 30 per cent lower as investors recoiled in shock at the extent of its exposure. IKB’s board called in Pricewaterhouse-Coopers last night to conduct a special audit and a management cull appeared imminent. It also postponed its annual meeting scheduled for August 30.

As nervousness about IKB spread across Germany Axel Weber, president of the Bundesbank, was forced to make a statement. “Fears of a banking crisis in Germany lack any foundation. The problems at IKB are of an institution-specific nature. They have been absorbed effectively by the support of KfW,” he said.

Elsewhere the fallout from the sub-prime crisis continued to gather pace. New data from Baring Asset Management revealed that 13 bond and loan offerings, representing a total of $43 billion, have been postponed or reduced in the past two weeks.

In the US, Accredited Home Lenders, the sub-prime mortgage company, unintentionally provided a new stick with which to beat the private equity industry, where the ability to do deals has been hit by the debt crisis.

Accredited, which agreed in June to a takeover by Lone Star, the US private equity firm, said it may have to stop making new loans as a result of tightening credit markets.

The disclosure sent the group’s shares down 39 per cent to $4.99 a share, well below the $15.10 agreed with Lone Star. Accredited said it planned to complete the transaction by October.

Meanwhile MBIA, the bond insurer, said that banks were becoming increasingly reluctant to put together so-called collaterised debt obligations, or pools of securities, as demand fell.

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