Berlin - The German government agreed on a legal framework for so-called bad banks on Wednesday, approving a concept that could ultimately spell the end of the publicly owned "Landesbank" state banks. The aim of the approved scheme is to help rebuild confidence in the financial sector by enabling banks to remove toxic assets from their balance sheets and assign them to specifically created entities.
German banks are estimated to hold more than 200 billion euros (272 billion dollars) of troubled assets.
Germany's seven Landesbanken, owned by federal states, hold a high proportion of these toxic investments after overextending themselves through their involvement in high-risk projects before the crisis hit.
The laws drafted by Finance Minister Peer Steinbrueck will enable banks to receive state guaranteed loans on commercial terms, in exchange for offloading their troubled assets.
Banks will be expected to pay commercial rates for the loans and participate in a proportion of any losses, meaning the programme does not significantly burden the taxpayer.
The government pushed Wednesday to achieve a solution to the troubled Landesbanken by the summer, linking any offer of state aid to a shake-up of the publicly owned banks.
Steinbrueck said it was a "strict condition" that the Landesbanken were consolidated and restructured. "It is my impression that the state premiers will engage with the offers from the federal government," the finance minister added.
The Head of the Chancellery, Thomas de Maziere, said the state was prepared to make significant concessions for the Landesbanken, but expected their owners to reciprocate with measures such as binding commitments to reform the structure of the banks.
De Maziere said the bad-bank-proposal represented a significant encroachment by the state into the banks' operations.
Under the scheme, toxic assets are to be handed over to the specially created "bad banks" at a 10-per-cent discount. In return, the banks would receive guaranteed loans from SoFFin, the government's financial market stabilization fund.
To date there have been no specific requests to make use of the bad bank proposals, Steinbrueck said.
The President of the Sparkassen banks Heinrich Hassis welcomed the state's decision to help banks, but warned the proposals would burden affected banks for years to come and would hinder the acquisition of funds.
The BDI industry association said this was an important step to help corporations out of a liquidity squeeze. Ver.di trade union expressed concern that taxpayers could be burdened by the proposals and called for banks to unveil the scale of their toxic assets.
