EU approves German plan to purchase banks’ troubled assets

EU approves German bad bank program

BRUSSELS — Germany won European Union approval Friday for a program that purchases troubled assets from banks to encourage them to keep lending.

Many banks have curbed new loans when they were forced to put aside large amounts of capital to cover huge potential losses from the sliding value of risky securities and other investments such as those based on U.S. subprime mortgages.

The European Commission warned that the German asset relief program would not exempt banks from restructuring “in a significant number of cases.” It said the plan would help market confidence and was “an efficient tool for addressing the uncertainty regarding the quality of banks’ assets.”

EU regulators have already ordered Commerzbank and WestLB to sell off nearly half their balance sheet in return for state bailouts. The EU’s top antitrust official cautions that Germany’s state-owned banks, or Landesbanken, must also radically change their business model.

The German program allows banks to transfer structured securities to a special purpose vehicle, or a subsidiary company, that will issue guaranteed bonds in return.

Banks will have to write down the securities by 10 percent of their current value on the balance sheet. Over 20 years, they will also have to pay the vehicle the difference between that value and the real economic value minus a “haircut” to cover any new losses.

Banks can only join the program within a six-month period to encourage them to come forward quickly.

The International Monetary Fund said Thursday that the 16 nations that use the euro must do more to shore up the banks if they want to limit the current downturn. The European Central Bank estimates that euro-zone banks could lose $649 billion on bad assets between 2007 to 2010.