Frankfurt -- The German lower house of parliament approved a bill Friday that provides for the creation of "bad banks" to help commercial and state-owned banks recover from the financial crisis.

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

The plan involves exchanging complex items such as asset-backed securities and collateralized-debt obligations for state-guaranteed bonds, with banks paying a fee for the guarantees.

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

Banks will have to discount the assets however by 10 percent of their value on June 30 2008, before the collapse of the US investment bank Lehman Brothers sparked heavy devaluations of some securities.

By shifting the risky securities to a separate entity that they will also own, banks will nonetheless qualify for higher credit ratings, which mean they will pay less to borrow money on interbank credit markets.

That should allow them to increase lending to the economy as a whole.

The frozen assets are to be held for up to 20 years, and if they are worth less than the initial estimation, banks are to pay the state the difference to account for the state-backed bonds they issued.

Germany's draft bill also seeks to consolidate state-owned regional banks, several of which were badly hurt by the US subprime mortgage crisis and the Lehman Brothers failure.

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

The upper house of parliament is to vote on the legislation on July 10, and the plan must also be approved by the European Commission.

AFP/Expatica