“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”

This looks somewhat like the plans of some of our own more enlightened economists who want avoid simply pouring endless money into a bottomless black hole.

FT

30th January, 2009

The toxic assets of troubled German banks will be spun off into separate “bad banks” under a new government plan, the Financial Times has learnt.

Instead of setting up a national “bad bank”, the German government wants banks to set up individual vehicles to hold their illiquid assets

These would be issued with state guarantees by the government’s existing bank rescue fund. Once rid of these assets, the banks could apply to the fund for fresh capital.

Angela Merkel, German chancellor, has come under pressure to modify the government’s October rescue package for the sector, which has failed to shore up confidence in the banks. With its latest plan, Berlin hopes to stop the spiral of asset writedowns eating into balance sheets and forcing banks to hoard capital.

Coalition officials agreed on the outline of the plan on Friday at a closed-door meeting in parliament, participants told the FT. There had been only minor differences between the finance ministry and ­representatives of Ms Merkel’s Christian Democratic Union, they said.

The finance ministry refused to comment.

Berlin aims to finalise the scheme by the beginning of March, too late to have an impact on last year’s balance sheet but in time for the publication of most banks’ annual reports and general meetings. Officials said they did not know whether the sector would support the plan.

The government’s original €500bn bank rescue package included €400bn in credit guarantees for new bank debt as well as fresh capital for cash-strapped lenders. The package is distinct from the €50bn fiscal stimulus adopted by the government this month to support consumption and protect jobs.

Under the proposal, the “bad banks” could use German accounting rules, allowing them to price assets at book value instead of “marking to market”. The international standard has forced banks to undertake continuous writedowns and raised their need for capital.

The coalition is also considering extending the life of the guarantees issued by Soffin, the state body that runs the bank rescue fund, from three to five years. 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.