FRANKFURT (Reuters) - German state Schleswig-Holstein may face severe financial strain if lender HSH Nordbank [HSH.UL] fails the European Central Bank's health check for banks, a government official said on Friday.
Ship financier HSH, 85 percent owned by the states of Schleswig-Holstein and Hamburg, has acknowledged it could fall short in the ECB test of banks' ability to withstand financial shocks.
"HSH Nordbank is the biggest budget risk for our state," said Monika Heinold, finance minister in the federal state of Schleswig-Holstein.
One opposition lawmaker said the northern German state's independence could be at risk if the federal government had to help it to bail out HSH.
If it were unable to meet its own capital needs and required its local government owners to step in, the European Commission could order HSH to close down as it has already received 13 billion euros (10.47 billion pounds) in guarantees and capital from taxpayers.
In 2012, it reduced its state guarantees by 3 billion in expectation of an improvement in business. But as the shipping crisis dragged on, HSH had to ask its owners last year to restore the full level of guarantees.
EC regulators temporarily approved the move, but have not yet announced a final decision, which is expected in the first quarter of 2015, Heinold said.
"A negative outcome of the stress tests could have negative repercussions for the state aid proceedings," Heinold, a member of the Greens party, told parliamentarians in the northern German city of Kiel.
According to several people familiar with the matter, HSH and its owners are concerned that the Commission may not assess HSH's business model as viable as the lender continues to struggle to make money.
A major reason for the lack of profitability are the state guarantees for which HSH has to pay several hundred million euros annually.
For the heavily indebted state of Schleswig-Holstein, there is more at stake.
It has also granted guarantees on 20 billion euros in debt that HSH took on a decade ago, when it was a common practice that state-owned lenders receive such backing. That leaves it on the hook for its share of almost 30 billion euros of HSH exposure.
"We are confronted with a 30-billion-euro question," said Tobias Koch, a lawmaker representing the opposition CDU party. Problems at HSH could reach "existential" proportions that threaten the independence of the state, Koch said.
"No other question is as decisive as this for the future of Schleswig-Holstein," he said.
The ECB is reviewing how 130 of the euro zone's largest banks value their assets. The banks will then be tested on whether their capital is enough to allow them to weather future crises. The results will be published on October 26.
(Reporting by Andreas Kröner and Jan Schwartz; writing by Arno Schuetze; editing by Thomas Atkins/Keith Weir)