Germany allows banks to spin off toxic assets (Roundup)

Jul 3, 2009, 13:44 GMT

Berlin - Germany's parliament passed legislation Friday that will allow banks to clean up their balance sheets by spinning off toxic assets to so-called bad banks.

Germany was initially reluctant to let banks off the hook for their mistakes, but agreed to the good-bank-bad-bank separation as it became plain that credit was still tight.

The bill was passed by Chancellor Angela Merkel's large parliamentary majority and is expected to gain quick approval next week from the upper house of parliament, the Bundesrat.

Toxic assets, mainly 230 billion euros of structured-finance paper secured against valueless US mortgages, have continued to weigh heavy on German banks despite a state infusion of 480 billion euros (670 billion dollars).

Both landesbanks, which are owned by the 16 German states, and commercial banks are likely to use the new accounting mechanism, selling the toxic assets at a discount to separate units which will try to recover any remaining value.

Commercial banks are to obtain additional financing from SoFFin, Germany's rescue agency for banks, but they must compensate their bad-bank spin-offs over a 20-year period for the loss in value of the junk assets.

Explaining the bill, Finance Minister Peer Steinbrueck denied to legislators that it effectively meant the taxpayer was picking up the tab for bank excesses in the past.

He assailed Germany's trustee savings banks, which had criticized the bill. He said the German taxpayer was most at risk from any savings-bank losses because those institutions are backed by government guarantees.

'The greatest risk attaches to the current state of the savings banks,' he said.

Earlier, the Bundestag lower chamber passed another bill which increases taxation scrutiny of companies and private individuals who have business ties to tax havens.

   The bill, drafted by Steinbrueck but later watered down by the governing parties, targets nations which do not meet minimum standards set by the Organization for Economic Cooperation and Development (OECD).

   In his speech, Steinbrueck welcomed commitments from 84 nations to meet the OECD standards.

   High-income Germans will also have to offer more information in tax returns about where they are keeping their assets.

   Germans are legally required to declare their worldwide income, including yields on financial assets which they control abroad. Affluent Germans have historically opposed a tightening of tax laws, arguing that tax scrutiny breaches their privacy.