3rd UPDATE: German Government To Decide On "Bad Bank" Apr 21

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   By Nina Koeppen and Andreas Kissler 
   Of DOW JONES NEWSWIRES 
 

FRANKFURT -(Dow Jones)- The German government is to decide April 21 on whether to set up a "bad bank" to absorb banks' illiquid assets to help restart lending activity, a Finance Ministry spokeswoman confirmed Tuesday.

Next week's meeting is unlikely to result in the immediate launch of the plan, but is likely to set the broad parameters for details to follow.

"It'll be a preliminary vote," Finance Ministry spokeswoman Jeanette Schwamberger said.

The issue of ridding the banking system of toxic assets has been under discussion by the German government for several weeks. The idea received a further impetus last week after Ireland became the first euro-zone nation to use an industrywide bad bank plan.

The U.S. administration in March unveiled its Public-Private Investment Program, aimed at helping banks to sell troubled assets to public-private partnerships.

Finance Minister Peer Steinbrueck has said he would prefer the creation of several bad banks instead of one large, centralized institution. He has also suggested distinguishing between "toxic" and "momentarily illiquid" assets.

The government's financial stabilization fund, or SoFFin, will back a bad bank plan with guarantees worth EUR200 billion, Der Spiegel magazine reported Friday.

Steinbrueck, Germany's Bundesbank President Axel Weber and SoFFin Chief Hannes Rehm will take part in the April 21 meeting.

It is hard to define an illiquid asset's value and the government may end up overpaying for securities, analysts say.

A "bad bank light" could partly solve those problems, said Michael Schroeder, who heads the international finance and financial management department at Germany's ZEW think-tank.

Such an option would involve the government taking over bad assets but it wouldn't need to provide cash instantly, covering losses only when the assets are due.

"The 'light' option would help ease banks' strains, but also encourage them to pay off their bad assets," Schroeder said.

Germany's state-controlled banks, which have been particularly hard hit by the financial crisis, are considered likely candidates for participating in a bad bank.

Reports in the media have suggested that Commerzbank (CBK.XE) may also want to offload illiquid assets to a bad bank as it attempts to integrate Dresdner Bank, the loss-making unit of insurer Allianz SE (AZ) it acquired in January for EUR4.7 billion. A spokesman for Commerzbank declined to comment.

-By Nina Koeppen and Andreas Kissler, Dow Jones Newswires; +49 69 2972 5509; nina.koeppen@dowjones.com

(William Launder contributed to this report.)

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(END) Dow Jones Newswires

April 14, 2009 09:25 ET (13:25 GMT)


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