Ten days that changed the tune of IKB (FT.com)

IKB's warning that it faced a crisis from the fallout of the US subprime mortgage market came just 10 days after it reassured the market it would not be significantly impacted by weakening property loans.

The shock warning, followed by news that subprime-related losses would cost Commerzbank EU80m ($109m), spread fear among investors that other banks could spring negative surprises and sent shares in German banks falling.

On July 20, IKB said it had enjoyed "a successful start to the financial year", repeated its earnings forecast for the year and played down reports from the credit rating agencies flagging potential problems.

"Moody's analysis...does not have any impact on IKB's investments in international loan portfolios nor on the advisory activities," it said, adding that its exposure to debt tranches that had been put on watch for possible downgrade was "a single digit million figure".

It also said it was "in no respect affected" by an analysis from Standard & Poor's of the market for collateralised debt obligations, which may include exposure to mortgages. "It is worth noticing that the bulk of our investments are in portfolios of corporate loans," it said.

On Monday, the bank had to be rescued by its main shareholder, state-owned KfW.

The crisis reminded investors that many financial institutions far away from the fast-paced world of hedge funds and investment banks' trading desks can have large exposures to risky and complex financial instruments, such as the subprime mortgage market.

IKB's roots lie in an organisation founded in 1924 to collect a tax from business for reparations after World War One. It was re-established after 1945 to support private businesses, and to lend to small and medium-sized companies, which remains its main objective today.

More recently under chief executive Stefan Ortseifen, who stepped down on Monday, the bank has embraced innovations in capital markets to boost its returns.

IKB said on its website that it had invested in a "wide range of securitised assets, operating increasingly as an asset manager."

It has invested in asset-backed securities, collateralised debt and loan obligations, as well as derivative instruments backed by such assets, in order to "optimise its return on equity and loan portfolio structures."

The bank's warning sent shares in German financial services companies lower.

Hypo Real Estate, the property lender, fell 3.5 per cent to EU44.71.

However, Stefan Best, bank analyst at S&P, played down the risk of a sectoral crisis. "We do not expect significant credit losses for German banks because they have predominantly invested in high-quality assets and only marginally in assets hit by downgrades."

Deutsche Bank (NYSE:DB), which in the first quarter profited from betting on the subprime market weakening, was down 0.5 per cent at EU97.33. Germany's biggest bank will report second-quarter results on Wednesday.

Allianz, the insurance group that owns Dresdner Bank, traded 0.8 per cent lower at EU151.72.