A takeover of Aareal Bank by Landesbank Hessen-Thüringen (Helaba) would create another heavyweight in German real estate financing – alongside BayernLB and LBBW. But whether this is a value in itself – keyword economies of scale – seems questionable. It could instead create a cluster risk for Helaba – which it had only just reduced by cutting the weight of real estate financing in its total loan portfolio to around one-fifth. In combination with Aareal Bank, it would roughly double.

Aareal Bank would have a lot to offer in the Helaba real estate lending business. Additional types of use and new markets offer diversification effects. Wiesbaden-based Aareal is strong in hotel financing, and wants to establish itself in Asia. Both banks are active in the difficult US market, but with different areas of focus.

At least as interesting as the loan financing business for Helaba is likely to be Aareal Bank's housing industry payment services business, such as property and tenant deposit management processes, which should fit in well with Helaba's transaction banking activities, where the Frankfurt-based bank is one of Germany's top players.

Frankfurt-based Helaba could be trusted to integrate the Wiesbaden-based bank well, and form a powerful real estate financing business. But of course, the takeover could still fall through. Helaba will probably only acquire Aareal Bank at well below book value. After distributing most of the proceeds from the sale of its IT subsidiary Aareon, the Wiesbaden-based bank's equity amounts to 3.7 billion euros. However, as they have already recouped most of the purchase price of around 2 billion euros through the sale of Aareon, the owners of Aareal Bank, the Atlantic BidCo consortium, may be prepared to sell below book value.

The merger of Aareal Bank into the Landesbank would be one of a series of farewells by independent real estate financiers in recent years. Deutsche Hypo merged with NordLB, and Berlin Hyp was taken over by LBBW. The only major independent player remaining would then be Deutsche Pfandbriefbank. But once its US business has been restructured, it too could become an attractive takeover candidate again.

One reason for this trend, in addition to volatile interest rates, is likely to be regulatory pressure. It is becoming increasingly expensive for banks to grant real estate loans – not only because they have to provide more and more equity capital (Basel III/output floor), but also because of excessive documentation requirements.

Not all market participants have this problem. Non-banks do not have to follow such regulations, which is why debt funds have been on the rise for years. They could carve out an increasingly large share of the (real estate) financing pie. In the long term, regulated banks could be increasingly marginalised in this business.

Banks have a well-developed risk management system that, having been tempered by many crises, should be able to weather any future turbulence. Regulatory requirements and supervisory practices, including stress tests, have contributed to this in recent years. However, the screw may have been tightened too far. To maintain the competitiveness of European banks in comparison to the regulatory rollback in the US, this would be necessary – and based on the understanding that lending should (also) remain a core banking business.