Rhineland Funding, an asset-backed commercial paper conduit, was set up by IKB to invest in structured credit while keeping assets off IKB's balance sheet. But Rhineland's investors refused to renew its €14 billion in funding after the subprime crisis developed in July, which in turn raised the spectre of a funding shortfall at IKB. KfW, a state-owned bank that owns 39% of IKB, stepped in to bail IKB out at the head of a group of other German banks. IKB has since been criticised for inadequate supervision and risk controls.
The increase in provision implies the total losses from IKB could now be as much as €6.9 billion, assuming the other banks involved in the bailout have also increased their risk provisions proportionately (as part of the bailout agreement, KfW assumed 70% of the IKB risk and the other banks 30%). The announcement also means IKB represents the bulk of KfW's general bank risk fund, which contained only €5.3 billion at the end of October.
On October 30, KfW said it would "look seriously" at selling its stake in IKB, but no plans for a sale have yet been announced.