Page last updated at 11:36 GMT, Wednesday, 18 February 2009

Germany drafts bank takeover law

German Chancellor Angela Merkel
The draft law still has to be approved by Germany's parliament

The German cabinet has agreed on a draft law that will allow it to temporarily nationalise troubled banks.

The law would allow private sector banks to be nationalised through the seizure of their shares to support Germany's financial system.

The draft law, which still has to be approved by the German parliament, said nationalisation would be a last resort.

The law is seen paving the way for the government to take over stricken German property lender Hypo Real Estate.

The lender's situation remains shaky despite a total of 102bn euros ($128bn, 90bn) in guarantees it has received from the government and other banks since October.

Finance Minister Peer Steinbrueck said at a press conference that Hypo Real Estate was a "system relevant" bank, and the draft law was designed to help the government stabilise it.

He also said the government would exhaust all the other possible options before deciding on taking over Hypo Real Estate.

'Crisis situation'

If the nationalisation goes ahead, it would be the first takeover of a bank by the government since the reunification of the country.

If we have one big one [bad bank], we split the shareholder from his responsibility and that is something we can't ascribe in Germany to the taxpayer
Otto Fricke, German politician

"The banking crisis has expanded into an acute crisis of the financial system. In this crisis situation, it is the fundamental duty of the state to restore trust in the financial markets and to prevent a further deterioration of the crisis," the draft says.

The UK, Irish and some other governments have already fully or partly-nationalised troubled banks to support their financial systems.

The German government has stressed it will try to avoid nationalising its banks and will do so only if it sees a threat to the country's financial system.

BBC Berlin correspondent Tristana Moore says that while the German government is against the idea of a central "bad bank" for toxic assets, many German politicians support the idea of a number of separate "bad banks".

"If we have one big one [bad bank], we split the shareholder from his responsibility and that is something we can't ascribe in Germany to the taxpayer," said Otto Fricke from the FDP party.

According to a recent survey, Germany's top banks are still sitting on around $380bn of toxic debts and they've only written off a quarter of their likely losses, says our correspondent.

On Wednesday, Commerzbank said it had made a 809m-euro loss in the final three months of 2008 amid write-downs on debt and more provisions for bad loans, including mortgages.

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