Bloomberg News

Germany Revives Bank-Rescue Fund as Bulwark Against Debt Crisis

January 26, 2012

Jan. 26 (Bloomberg) -- German lawmakers reopened the Soffin bank-rescue fund to counter the threat of financial-institution failures during the debt crisis, after allaying lenders’ concerns that they would bear the brunt of the cost.

Lower-house lawmakers in Berlin voted today in favor of legislation backed by Chancellor Angela Merkel’s government to revive the Soffin fund and arm it with 480 billion euros ($626 billion), up from 360 billion euros in its earlier incarnation. Lawmakers watered down provisions in earlier drafts to force troubled banks to recapitalize.

The fund will offer taxpayer help for banks only as a “last resort,” Norbert Barthle, the ranking budget expert for Merkel’s Christian Democratic Union, said in parliament. “Tapping these instruments is really only for emergencies -- there has to be a perceived threat to the financial system.”

European leaders are demanding some of the region’s largest banks increase reserves to bolster confidence after financial firms agreed to accept losses on Greek government bonds. Soffin, which could be used to recapitalize lenders if banks are unable to raise capital themselves, is a precautionary measure and the government doesn’t expect it to be tapped, Finance Minister Wolfgang Schaeuble said.

“We have to ensure that systemically relevant banks have enough capital during these difficult times,” Schaeuble said.

German banks including Deutsche Bank AG and Commerzbank AG were told by the European Banking Authority in December to raise a total of 13.1 billion euros to boost their core Tier 1 capital as a ratio of risk-weighted assets to 9 percent or more by June 30 after writing down the value of some sovereign bonds.

Commerzbank Shortfall

Frankfurt-based Deutsche Bank said Dec. 8 that it expected to meet the EBA benchmark by the end of 2011. Commerzbank, Germany’s second-largest lender, said Jan. 19 that it is more than halfway to plugging its 5.3 billion-euro capital shortfall and won’t have to ask for state aid.

The plan to revive Soffin may help prevent a credit crunch in Germany, Raimund Roeseler, head of banking supervision at financial-market regulator BaFin, said Jan. 23 in evidence to an open hearing of parliament’s Budget Committee.

Soffin’s reactivation shouldn’t be limited to one year, Bundesbank Vice President Sabine Lautenschlaeger told the same hearing.

“Given that no one knows where the markets will go, I don’t consider a limitation to be appropriate,” she said.

Germany set up the bank-rescue fund in 2008 following the collapse of Lehman Brothers Inc., arming it 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 Frankfurt-based Commerzbank.

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 restores the fund’s original scope.

--Editors: Alan Crawford, Eddie Buckle

To contact the reporters on this story: Brian Parkin in Berlin at bparkin@bloomberg.net; Nicholas Comfort in Frankfurt at ncomfort1@bloomberg.net

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


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