Bad Banks

The bill would see the creation of a federal agency for financial market stabilisation, called FMSA to be based in Frankfurt. The agency would take in the so-called "toxic assets" of the state banks and savings and loan banks.

Berlin also wants to consolidate the entire sector by reducing the number of large state banks - so called Landesbanken - from the current seven to three by the end of next year.

A bad bank draft for the private bank sector is already in the works. The state-owned institutions, however, required a separate extended model. Berlin wants to have a large chunk of responsibility remain on the shoulders of the state governments that are in charge of the banks.

The toxic assets are to remain connected to their original institution and future losses of the outsourced assets can be rolled back on their books - or those of the respective state government.

Regional banks remain crucial to Germany's economy

The new federal agency for financial market stabilisation FMSA would take the toxic assets only on the condition that the banks can present a "sustainable business model as well as an appropriate capitalisation of the transferring credit or financial services institutes."

Many of the risky financial assets that banks have acquired in recent years now prove impossible to sell at a reasonable return in the current global financial crisis. With these so-called toxic assets weighing down the banks' balance sheets, financial institutions are hesitant to continue borrowing - both among themselves and to business and companies.

Yet the regional banks' role in local lending remains crucial to Europe's biggest economy, and experts have warned that a prolonged credit crunch will worsen the country's current economic woes.


ai/dpa/AFP
Editor: Chuck Penfold