Germany backs 'bad bank' plan

Germany approved a "bad bank" plan on Wednesday to relieve lenders of toxic assets, aiming to boost confidence in the sector and encourage lending. Banks across Germany are burdened by billions of euros in toxic assets, hindering lending and aggravating the economy's most severe post-war recession. Finance Minister Peer Steinbrueck said banks had expressed interest in the plan.
"There's a lot of curiosity," he told reporters. "But I can't tell you that there have already been ... concrete requests. The government wants to get parliamentary approval for the plan before the summer recess starts in early July. Steinbrueck said members of his Social Democrats in parliament, some of whom had questioned the plan, would back it.
The plan, which Steinbrueck said targeted just under 200 billion euros ($273 billion) worth of toxic assets, envisages shareholders in affected banks shouldering risks tied to those assets. "We must free the banks of this ball and chain," said Chancellor Angela Merkel's chief of staff, Thomas de Maiziere. "In the interests of the real economy, we are buying time for the eradication of contaminated assets."
The BDI industry association welcomed the plan. BDI Managing Director Werner Schnappauf said the cabinet's approval of the plan was a relief for industry and "an important step towards a solution for the most pressing of problems - the liquidity squeeze facing businesses".
The government also backed a plan to develop a further so-called "bad bank" model for Germany's publicly-owned Landesbanks, which it wants to use to press for consolidation of the regional lenders. De Maiziere said the government would incorporate the Landesbank model into the "bad bank" legislation by the summer recess.
"The Landesbanks, if they want to tap this facility, must present an EU-compatible business model that gives the federal government a green light to make aid available," said Steinbrueck, pressing the regional lenders to restructure.
De Maiziere said the government was not seeking to get rid of Landesbanks, which have been hit hard by the financial crisis. "We need a strong Landesbank sector, with a different business model," he said. Germany has been slower than other leading economies to help banks deal with toxic assets. But the plight of some leading lenders has prompted the government to act.
Highlighting the sector's woes, Commerzbank said last Friday it racked up an 861 million euro net loss in the first quarter, weighed down by charges and writedowns of over 2.6 billion. Steinbrueck, whose room to manoeuvre with banks is increasingly constricted by a deteriorating budgetary situation, said the government needed no new funds for the "bad bank" plan.
The government, which faces a federal election in September, has already set up a banking sector rescue fund as well as launching twin economic stimulus packages, and is loath to be seen spending more taxpayer money helping bankers. "It is a voluntary solution," Steinbrueck said of the plan. "A compulsory solution would not work, in my view."