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Cash boost for German bank

EUROPEAN Union regulators yesterday approved a 5 billion euro (US$7.03 billion) recapitalization program for Germany's largest state-owned bank LBBW for six months and launched a probe into a plan that would cover losses from the lender's troubled assets.

The European Commission said it would allow the state's asset guarantee program to run for six months "for reasons of financial stability" but wanted to check the valuation that public shareholders are using to guarantee or cover potential losses from the bank's securities.

In the plan that the EU will examine, LBBW will bear the risk of default up to a certain limit, with its largest single shareholder, the state of Baden-Wuerttemberg taking on any further losses for five years.

EU approval for the state help is temporary.

Regulators told the bank to come up with a longer-term restructuring plan by the end of the year to show how it could survive without new state help.

The EU has already forced several other banks to slim down and shed units in return for government bailouts.

The cash injection for Stuttgart-based LBBW is shared between the bank's shareholders, all of them public authorities or state-owned, including the state of Baden-Wuerttemberg, the region's savings bank association and the city of Stuttgart.

The European Commission must check large state subsidies to banks to make sure they don't give them an unfair advantage over rivals.

It has warned that the wave of bailouts for German state-owned banks must be linked to major restructuring, saying some are "addicted" to state help when they run into trouble.

LBBW sought more money to raise its capital ratios after it wrote down more than 450 million euros on bad investments last year. It will pay a 10 percent return to shareholders for the capital increase.

Germany's fifth-largest bank focuses lending on small businesses and acts as a central bank for savings banks in Baden-Wuerttemberg, Rhineland Palatinate and Saxony.


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