Merkel’s Cabinet Backs Revival of Bank-Rescue Fund to Reduce Meltdown Risk

Chancellor Angela Merkel’s Cabinet backed plans to reactivate Germany’s bank-rescue fund to help bolster lenders facing insolvency and lessen the risk of a systemic financial meltdown as a result of the debt crisis.

Ministers meeting in Berlin today agreed to boost the size of the fund to 480 billion euros ($626 billion) from 360 billion euros, according to the draft bill. The text waters down provisions in earlier drafts to force troubled banks to recapitalize.

‘It’s especially important to act preventively including when there is a latent danger” to the bank system, the bill said. The fund’s revival underscores the government’s aim to be ready should any bank face collapse during the debt crisis and to pre-empt contagion. The measures include state help if banks are unable to raise capital via private means, it said.

German banks including Deutsche Bank AG and Commerzbank (CBK) AG were told by the European Banking Authority last week to raise more capital than previously estimated as part of efforts to bolster confidence in the industry after financial firms agreed to accept losses on Greek government bonds. Germany’s banks must raise 13.1 billion euros to reach a core Tier 1 capital ratio of 9 percent or more, based on data from the end of September, BaFin and the Bundesbank said Dec. 8.

‘Trust-Building’

“It’s a trust-building signal for the markets that the fund is ready in case of need to provide firms funds on a voluntary basis because of the burden of the sovereign debt crisis,” Michael Kemmer, general manager of the BdB Association of German Banks, said in an e-mailed statement. “It’s important that it remains that a bank can decide on its own how to meet higher capital requirements.”

Banks should expect BaFin to demand improvements if they fail to take appropriate measures themselves, including the option to appoint a special representative to oversee their work, a German government official told reporters in Berlin today on condition of anonymity.

The threat of a representative being appointed will give executives an incentive to put their banks on a sound footing even in the absence of a forced recapitalization, the official said. No bank executive can afford to have such an overseer installed, he said.

Earlier drafts of the German bill, which is due to become law early in 2012, empowered BaFin to order struggling banks to recapitalize at an early stage when threatened with possible insolvency. The draft approved by Cabinet shows that such a lender must offer a plan to demonstrate how it intends to return to health including means to recapitalize. It also shows that banks in the future can shift government bonds to a bad bank, an external entity.

Commerzbank Options

Commerzbank is exploring options including placing sovereign holdings in a bad bank as well as looking at ways of getting rid of Eurohypo, its commercial-property and public finance unit, including a takeover by the German government, a person familiar with the matter said on Nov. 29.

Germany set up the bank-rescue fund in 2008 following the collapse of Lehman Brothers Inc., arming the fund called by its acronym Soffin with 400 billion euros in guarantees and 80 billion euros in capital to buy stakes in banks. The move included provisions for creating bad banks that were taken up by WestLB AG and Hypo Real Estate Holding AG and buying stakes in lenders as in the case of Commerzbank AG. (CBK)

Commerzbank, which needed a government bailout after the credit crunch in 2008, must raise 5.3 billion euros in capital by mid-2012 after marking down the value of its sovereign debt in a European stress test.

The Finance Ministry unit closed its doors to new applicants for Soffin aid at the end of last year to coincide with a new and separate fund for fresh cases paid by private banks. Soffin’s scope was reduced to 300 billion euros in guarantees and 60 billion euros in capital. The new plan will thus restore the fund’s original scope.

To contact the reporter on this story: Brian Parkin in Berlin at bparkin@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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