German government approves state bank plan

BERLIN — Germany’s government has approved a plan to take over troubled assets from state-owned banks in exchange for agreements to restructure and merge their operations.

Government spokesman Thomas Steg said Wednesday that Chancellor Angela Merkel’s cabinet had approved a plan to allow the nation’s seven public sector banks to move up to euro600 billion ($846 billion) worth of bad assets off their balance sheets. For their part, the banks have agreed to undergo a thorough restructuring that could include mergers by the end of 2010.

Last month the cabinet approved similar legislation for German banks in the private sector.

The public sector banks, or Landesbanken, are owned by regional governments such as Bavaria and Berlin, which play a key role in Europe’s largest economy by funding local businesses.

But big bets on global financial markets and large investments in securitized debt linked to the U.S. subprime housing market saw several of them rack up huge losses that forced the German government to bail them out.

The European Commission — which must clear costly government banking rescues — has ordered these banks to drop high-risk ventures and slim down their operations.

Under the plan, the banks themselves would be responsible for any losses incurred through the restructuring process in an effort to provide the government with as much protection as possible from any risks involved in liability.

Steg said the move would result in a changed system of state-owned banks in Germany within the next two to three years.