German cabinet approves public 'bad bank' bill

11th June 2009, Comments 0 comments

Berlin wants troubled regional banks to consolidate into three institutions from seven at present by the end of next year.

Frankfurt -- The German cabinet on Wednesday approved draft legislation to shift risky assets from state-owned regional banks to a new "bad bank" in exchange for these lenders drastically slimming down.

Berlin wants troubled regional banks to consolidate into three institutions from seven at present by the end of next year.

The German bill would establish a federal agency for financial market stabilisation, or FMSA, to be based in Frankfurt.

The FMSA would take several hundred billion euros (dollars) in so-called "toxic assets" and non-strategic assets off the books of the regional banks, the Landesbanken.

But it would require the banks to present a "sustainable business model" and detailed plans for liquidating risky positions and non-strategic operations.

The government set up a "bad bank" for private banks last month but had to create a separate model for the Landesbanken, which are owned by regional governments and local savings banks associations.

Regional authorities have signed on to the plan and agree the banks need to be consolidated, a finance ministry statement said.

An agreement with the federal government has been submitted to the European Commission, which has called repeatedly for reform of Germany's banking sector.

The finance ministry stressed that Landesbanken shareholders carried the "entire responsibility" for getting rid of risky assets and any charges that occurred as a result.

But German municipalities, which control the savings banks, said they faced "unacceptable" inequality in treatment compared with private banks that have received public aid, such as number two Commerzbank.

"Savings banks must not be overburdened nor put at a disadvantage, to prevent their activity from being threatened in turn," a statement said.

Under pressure from European Union competition officials, regional banks lost public guarantees that allowed them to lend at favourable rates and turned to investments in areas such as the US market for high-risk mortgages.

The German vice-president of the European Commission, Guenter Verheugen, has said the banks proved to be "world champions in risky business transactions."

Heavy losses in such investments forced regional and federal authorities to draw up rescue plans, since the Landesbanken's role in local lending is still crucial to the biggest European economy.

Berlin's insistence on sector consolidation has been resisted by regional authorities, who are reluctant to give up control over the banks.

- Dow Jones Newswires contributed to this report -


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