Germany set to create 'bad banks'David Gow in Brussels

Germany set to create 'bad banks'David Gow in Brussels
guardian.co.uk, Sunday 25 January 2009 15.39 GMT David Gow Brussels

The German government is poised to do a U-turn and approve several "bad banks" to take over its banks' toxic assets for up to five years as the financial crisis and recession deepen.

German banks are estimated to have between €300bn (£285bn) and €1tn of these assets sitting on their books, adding to the pressure on Berlin to act. The total of bad assets held by banks across Europe could be as high as €4.8tn.

Private sector banks and Landesbanken, or state-owned regional banks, in Germany are due to declare multibillion losses for 2008. Deutsche Bank, the country's biggest, has already indicated a near-€4bn loss and BayernLB, the Bavarian regional bank, one of €5bn.

This dire situation has emerged as eurozone and EU governments consider handing the European Central Bank the lead role in supervising Europe's 46 big cross-­border banks in the wake of the crisis that saw the nationalised Fortis bank of Belgium indicate last week it had lost close to €20bn last year.

Chancellor Angela Merkel and her finance minister, Peer Steinbrück, are under pressure from leading Bundestag deputies of their respective parties — the Christian (CDU) and Social (SPD) Democrats — to draw up a second bank rescue plan on top of the current €480bn scheme.

Steinbrück has been the most vocal opponent of the notion of a bad bank, and his spokesman said late last week that there could be no question of nationalisation. CDU experts said a "state-financed toxic waste dump" was out of the question. The finance minister has also sharply queried Britain's latest scheme to insure the banks' toxic assets, saying that nobody could price these and they could potentially amount to up to 30% of banks' balance sheets.

But Berlin's "grand coalition" is now reportedly coming round to the notion of adopting a solution whereby individual banks would park their toxic assets in separate bad banks. The state would guarantee these as they were unwound and sold off over the next few years.

The new Obama administration in the US is also reportedly considering a bad banks solution as EU governments pile the pressure on the banks to come clean about how big their exposure is.

On February 25 an independent body of advisers, led by Jacques de Larosière, the ex-Bank of France chairman, is due to propose an overarching supervisory role for the ECB to prevent a recurrence of the crisis. This will come in a report to the European commission. Both he and the current French central bank chairman, Christian Noyer, have pinpointed the ECB as a more viable solution than the current system of cross-border supervisors, including the City-based Committee of European Banking Supervisors.

But David Wright, deputy head of the European commission's internal market department, has insisted that the banks must first own up to the scale of their toxic assets. "How can you deal with the problem if you don't know where it is? Even today we are struggling to define the size of the problem," he said on Friday.

The UK government, pressing British and other European banks to come clean, is already casting a wary eye on the proposed new ECB role, given the once-mighty position of the City as the EU's leading financial centre.