Oct. 22 (Bloomberg) -- Bayerische Landesbank, the first lender to tap Germany's rescue package, will seek 5.4 billion euros ($7.1 billion) of fresh capital and likely hand over partial control to the government in return.

``The federal government will probably get a stake,'' BayernLB spokesman Matthias Priwitzer said today. ``What size remains open.'' The Munich-based bank, Germany's second-biggest state-owned lender, announced plans late yesterday to seek state aid and raise another 1 billion euros in capital from its owners, the state of Bavaria and the Bavarian savings bank association.

BayernLB's decision to tap the 500 billion-euro rescue package opens it to what Chancellor Angela Merkel said last week will be ``very concrete'' requirements. These include limits on executive salaries and bonus pay, allowing the state to have a say in company policy and participate in bank profits, she said.

``What this once again shows is that the business model of Landesbanken is fundamentally flawed,'' said Alexander Plenk, a financial credit analyst at UniCredit SpA in Munich, referring to Germany's state-owned banks, known as Landesbanken. ``Not only is the sector in desperate need of consolidation but it also needs to undergo some fundamental restructuring.''

BayernLB had 11.5 billion euros in shareholders equity at the end of June. Based on that figure and the 6.4 billion euros in new capital from the government and owners, Germany would have a stake of about 30 percent in the lender. The Finance Ministry declined to comment on a possible stake.

`Political Responsibility'

Erwin Huber, Bavaria's state finance minister, said he will quit and ``take political responsibility for the developments at BayernLB.'' Huber's decision means he will also leave as head of BayernLB's administrative board, according to Bavarian law.

Bavarian savings banks, which agreed to provide 300 million euros in fresh capital for BayernLB, ``can handle the situation by tapping reserves,'' said Hans Schmid, spokesman for the Bavarian savings banks association.

The German Cabinet two days ago passed a regulation which says that annual pay for bank managers exceeding 500,000 euros per year is ``inappropriate in principle'' if financial aid is provided. Kemmer's predecessor Werner Schmidt, who left in March, earned a fixed salary of 1.23 million euros in 2007, according to the annual report.

According to the government regulation, participating banks must agree to discontinue bonuses unless the sum of bonuses and fixed pay is ``appropriate.'' Chief Executive Officer Michael Kemmer and his management board colleagues won't receive bonuses, the bank said yesterday.

`Inappropriate'

German banks availing themselves of the rescue fund may also be forced to abandon business deemed by the state to be risky, to support small and medium-sized industries and review their compensation packages to prevent ``inappropriate'' risk- taking, under the terms announced Oct. 20. Dividends ``in principle'' shall only be paid to the government-backed fund that administers the 500 billion euros.

The Munich-based lender posted a pretax loss of about 1 billion euros in the third quarter and may report a loss of 3 billion euros for the year after the collapse of Lehman Brothers Holdings Inc. led to worsening financial markets, it said yesterday.

Landesbanken such as BayernLB, Landesbank Baden- Wuerttemberg or WestLB AG, which serve as savings banks' central banks and clearing houses in Germany, have announced writedowns of more than 16 billion euros since the U.S. subprime mortgage collapse last year sparked the financial market crisis. The Bavarian lender has reported about 4.9 billion euros in markdowns since last year.

To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Oliver Suess in Munich at osuess@bloomberg.net.

Last Updated: October 22, 2008 09:03 EDT