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Germany: Law on “Bad Banks” Adopted to Help Clear Toxic Assets

(July 15, 2009) On July 10, 2009, the upper house of the German Federal Parliament (Bundestag) approved a bill enabling the creation of “bad banks” to help the country's commercial and state-owned banks recover from the domestic and global financial crisis. The Law on Further Development of Financial Stabilization (Das Gesetz zur Fortentwicklung der Finanzmarktstabilisierung), or Bad Banks Law (Bad-Banks-Gesetz) for short, stipulates that the owners of established banks will defray the cost of measures that allow them to transfer risky and non-core assets to a new, separate body, in order to be able to clear their balance sheets and renew lending.

The banks will pay a fee to exchange toxic assets—in the form of asset-backed securities and collateralized debt, among other financial instruments—for state-guaranteed bonds. The Law might cover as much as €230 billion (about US$320 billion)-worth of those private bank assets. (German Lawmakers Approve 'Bad Bank' Scheme, FRANCE 24, July 10, 2009, available at
; Bundestag macht Weg frei für Bad Banks [Federal Parliament Clears Way for Bad Banks] [in German], Deutscher Bundestag website, July 10, 2009, available at

Regional state-owned banks would also be able to shift their toxic instruments to a liquidating institution under a separate “bad bank” model, according to the Law. These Landesbanken were reportedly heavily invested in complex instruments that collapsed after the disintegration of the U.S. subprime mortgage market in mid-2007. Other provisions of the Law “encourage consolidation of the regional banks, several of which were hurt further by the collapse of the investment bank Lehman Brothers.” (FRANCE 24, supra.)

German leaders are increasingly concerned about jumpstarting bank lending, it has been reported. Finance Minister Peer Steinbruek commented, “[w]e must take seriously, very seriously, the threat of a credit crunch in the second half” of the year, adding that the Bundesbank, the country's central bank, “could buy corporate debt if the situation worsened.” (Id.)