EU clears euro5 bln bailout for LBBW

By AOIFE WHITE

posted: 151 DAYS 1 HOUR AGO

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BRUSSELS -EU regulators on Tuesday approved a euro5 billion ($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 also 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. The EU says the program doesn't meet its guidelines.

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 Landesbank Baden-Wuerttemberg 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 euro450 million 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.

It has also invested heavily in complex securitized investments based on repackaged debt that have slid in value over the past year and now find few buyers.

Rising loan defaults caused investors to question the entire way the investments work, forcing banks to devalue them and chalk up huge losses.

That saw banks freeze lending last year over fears of adding to their losses. Governments are now trying to restore confidence in banking by purging these problem or "toxic" assets from banks by buying them up or guaranteeing potential losses.

2009-06-30 07:17:48