A number of Landesbanken raised additional liquidity before state guarantees were discontinued – liquidity that was then urgently in search of higher yield and finally flowed into comparatively risky investments. As time went by, some Landesbanken increasingly shifted their line of business to the capital markets, into international financing and into credit substitution business. This made it more difficult to control risks.
And, like other banks as well, they relied too much on external ratings. In the end, the financial crisis revealed how dangerous this was. With business models that focus strongly on lines of business like international financing and credit substitution, the asymmetric information problems, as economists call them, cannot be ignored.