The German government has rejected the idea of setting up a “bad bank” to park toxic assets held by the country’s financial institutions and is instead pushing for an industry-led solution that could see each bank split itself up between a “good” and a “bad” bank.
Under the plan, the banks would set up individual “bad banks” to hold their illiquid assets. These would be issued with state guarantees by the bank rescue fund set up in October by the government.
Once rid of their toxic assets, the banks could apply to the fund for fresh capital.
The government has come under pressure to modify its October rescue package for the banking sector, which has failed to restore confidence in the banks.
With its new plan, Berlin hopes to stop the spiral of asset write-downs that is eating into banks’ balance sheets and forcing them to hog capital.
Coalition officials agreed on the outline of the plan at a closed-door meeting in the Bundestag on Friday, participants told the FT, with only minor differences between the finance ministry and representatives of chancellor Angela Merkel’s Christian Democratic Union.
The government aims to agree on a final version of the plan before the beginning of March, too late to have any impact on last year’s balance sheet but in time for the publication of annual reports and ahead of most banks’ annual general meetings.
One central aspect of the plan is that the decentralised “bad banks” would be subject to German accounting rules, allowing them to price toxic assets at book value. The International Accounting Standards used by most commercial banks states that assets should be “marked to market”.
This has forced banks to undertake continuous write-downs as the value of their illiquid assets has collapsed, in turn raising their need for capital.
The coalition is also considering extending the life of the state guarantees issued by Soffin, the body that runs the bank rescue fund, from three to five years, although this would require approval by the European Commission.
“The proposals of the finance ministry definitely go in the right direction,” Albert Rupprecht, chairman of the parliamentary committee that oversees Soffin, told the FT.
Mr Rupprecht, a Merkel ally, said minor differences remained between the CDU and the ministry over the timing of the plan and the type of assistance Soffin could grant both “good” and “bad” banks.
The plan would satisfy two conditions set by Peer Steinbrück, finance minister – that it should not involve any new financial commitments by the government; and that the banks, not the taxpayer, should ultimately continue to carry the risks associated with toxic assets.
Accordingly, any new state guarantee issued by Soffin to back the individual “bad banks” – and any new capital offered to the “good banks” – would have to come from the €500bn bank rescue package agreed in October, most of which remains untapped.
The decision came as JPMorgan analysts said extensive recapitalisation of most of Germany’s commercial banks was “only a matter of time, given the balance sheet issues they carry”.
Four banks – Commerzbank and Postbank, two big retail banks, along with Hypo Real Estate and Aareal, two property lenders – had an estimated €93bn of “at risk assets” that could require €34bn of collective writedowns, JPMorgan said.
Hypo Real Estate’s own chief executive has said the government needs to step in to stabilise the bank, which appears set for partial or full nationalisation. But such a step would require changes to laws that were approved in October to pave the way for government bank bailouts.
Coalition officials said the government had decided to postpone deciding on a potential nationalisation until it had obtained the go-ahead from Brussels on extending the lifetime of Soffin’s debt guarantees.
Hypo Real Estate shares fell 13.6 per cent to €1.27.
