German bailout paves way for bad bank

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Europe’s biggest economy is getting ready to pour more money into failing banks as German lender West LB secured a last-minute rescue plan on Tuesday (24 November), allowing the build-up of the country’s first ‘bad bank’ to take on toxic assets.

A German finance ministry spokesman said a deal had been reached to recapitalise a core, healthy bank that will be separate from the bad bank, just days before financial guarantees propping up the bank were set to expire. The German bank rescue fund SoFFin has committed three billion euros as a first step to prop up the bank. 

The accord resolved a dispute between its main shareholders, the government and regional lenders over who should pay for a fresh bailout. 

The urgency of the talks underscored how the financial and economic crisis is still rumbling through Europe’s biggest economy, amid wider concern by credit rating agency Standard & Poor’s that banks across the globe are undercapitalised. The move will reportedly give the German government a 49% stake in the Düsseldorf-based lender. 

Deal could conflict with EU rules 

The deal, however, is likely to meet stiff resistance from the European Commission, which needs to approve such measures. EU Competition Commissioner Neelie Kroes has already demanded a change of ownership to end the WestLB “saga”. 

Kroes’ spokesman said the Commission would take all new or renewed assistance to WestLB into account in its review of state aid. German daily Frankfurter Allgemeine Zeitung reported that the bank’s rescue will require closer to five billion euros. 

Deal points to a wider shake-up 

The deal could be the beginning of a wider shake-up of the banking landscape in Europe’s largest economy if Berlin is forced to clean up the mess left by the bank’s owners, the state of North Rhine-Westphalia and local savings banks. 

Banking industry observers have suggested the country’s seven independent Landesbank groups could be merged to form two or three big groups, though analysts remain sceptical. 

WestLB needs funds because guarantees on some of its toxic assets are set to expire by the end of the month, even as its savings bank owners said they were no longer prepared to shoulder the lender’s losses. 

“We are not prepared in principle” to make additional funding available for WestLB, Rolf Gerlach, president of the WLSGV savings bank association that holds a 25% stake in the lender, told the Boersen-Zeitung newspaper in an interview. 

Since February 2008, WestLB has received 11 billion euros in guarantees from Soffin and the bank’s owners to finance its sweeping restructuring programme. 

(EURACTIV with Reuters.) 

While the situation in financial markets appears to be improving, the full impact of the financial crisis on the real economy is now being felt. Banks are deleveraging and low investor confidence is leading to a credit squeeze. 

Though recognising the need for state intervention, the EU competition authority is engaged in negotiations with banks to scrutinise their allocations of state aid and restructuring plans. Banks will be expected to either downsize, pay back state aid or commit to a combination of both. 

The European Commission has adopted a temporary framework to give member states additional opportunities to tackle the effects of the credit squeeze on the real economy. Limited amounts of aid, guarantees and subsidised loans are among the measures available to banks. 

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