The plan, which has become somewhat of a political hot potato five months before a national election, would allow banks to park their toxic assets in specially-created institutions for up to 20 years.
Berlin hopes that removing these bad holdings from banks' balance sheets will encourage them to begin lending to each other and to businesses and consumers, kick-starting an economy expected to shrink six percent this year.
After dumping these toxic assets – mainly securities which have become virtually worthless or that cannot be sold because of frozen markets – banks receive government-backed bonds worth 90 percent of the value of the original asset.
Twenty years later, the value of these assets will be assessed to determine the final cost to the taxpayer although the Finance Ministry has stressed that bank shareholders will have to pick up at least part of the tab.
Andreas Schmitz, from the federation of German private banks, said the scheme was akin to "a huge freezer in which each bank will have a shelf."
"Their problem assets will be stored there and frozen. After the crisis, we will see if the merchandise can still be sold," he said.