German lawmakers approve "bad bank" scheme

11th July 2009, Comments 0 comments

Bank owners would pay for the costs of the measures, which let them transfer risky and non-core assets to a separate institution, cleaning up balance sheets and paving the way for fresh lending to the recession-hit economy.

Berlin -- A German bill enabling the creation of "bad banks" to help commercial and state-owned banks recover from the financial crisis cleared its final hurdle Friday with a vote in parliament's upper house.

Bank owners would pay for the costs of the measures, which let them transfer risky and non-core assets to a separate institution, cleaning up balance sheets and paving the way for fresh lending to the recession-hit economy.

The plan approved by the Bundesrat involves exchanging financial instruments including asset-backed securities and collateralised-debt obligations for state-guaranteed bonds, for which banks will pay a fee.

Up to 230 billion euros (320 billion dollars) worth of such so-called toxic assets held by private banks could be covered by the law.

A separate "bad bank" model designed for regional state-owned banks would allow them to offload troubled activities to a structure that could then liquidate them.

The so-called Landesbanken invested heavily in complex instruments that collapsed when the US market for high-risk, or subprime mortgages melted down in mid 2007.

Terms of the bill also encourage consolidation of the regional banks, several of which were hurt further by the collapse of the investment bank Lehman Brothers.

The lower house of parliament approved the legislation last week.

Jumpstarting bank lending is a growing concern for German leaders, and Finance Minister Peer Steinbrueck pointed Friday to a serious threat of a German credit crunch later this year.

"We must take seriously, very seriously, the threat of a credit crunch in the second half" of 2009, Steinbrueck told the Frankfurter Rundschau in an interview.

He suggested the German central bank, the Bundesbank, could buy corporate debt if the situation worsened.

Economy Minister Karl-Theodor zu Guttenberg also warned Thursday about deteriorating credit conditions in Europe's biggest economy.

"It must be clear to all: we must prepare for difficult times and we must do it very soon," Guttenberg told a press briefing in Berlin.

AFP/Expatica

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