Berlin gets tough with regional banks

Agence France-Presse

The federal government now had "a very good chance" of forcing the banks to downsize and merge into between one and three banks that would be "German players with some European scope," the officials were quoted as saying.

A merger into just one bank would create one of the world's largest by assets, but such a bank would have to quickly cut back on its activities, the report said. After being forced to give up advantageous lending conditions that distorted competition, many of the regional banks invested heavily in risky U.S. assets that later collapsed, leaving them exposed to huge losses.

Several of the banks, WestLB, HSH Nordbank, LBBW and Bayern LB, have already received state aid from the state governments and savings banks, known as Sparkassen.

Berlin is now preparing to create "bad banks" that would assume imperiled investments in a bid to lift mistrust that has caused the crucial interbank lending market to grind almost to a halt.

But the Landesbanken would have to agree to a major consolidation to get the government to take over their toxic assets, the report said.

Past attempts at consolidation have failed because the regional governments feared losing prestige, influence and jobs, it noted.