Berlin approves public ‘bad bank’ bill

The German cabinet approved draft legislation Wednesday that would take risky assets from state-owned regional banks and group them in a "bad bank" in exchange for a serious slimming down of the Landesbanken.

Berlin approves public 'bad bank' bill
Photo: DPA

Berlin wants the shaky regional banks to consolidate into three institutions from seven at present by the end of next year.

The German bill would establish a federal agency for financial market stabilisation, or FMSA, to be based in the financial capital Frankfurt. The FMSA would take so-called “toxic assets” and non-strategic assets off the Landesbanken’s books but would require the banks to present a “sustainable business model as well as an appropriate capitalisation of the transferring credit or financial services institutes.”

Banks would also have to present detailed plans for liquidating risky positions and non-strategic operations. The government set up a “bad bank” for private banks last month but had to come up with a separate model for the Landesbanken, which are owned by regional governments and local savings banks associations.

Under pressure from European Union competition officials, the regional banks lost public guarantees that allowed them to lend at favourable rates to companies and individuals and turned to investments in areas like the US market for high-risk, or subprime, mortgages.

The vice-president of the European Commission, German Guenter Verheugen, has said the banks proved to be “world champions in risky business transactions.”

Heavy losses in such investments forced regional and federal authorities to draw up rescue plans, since the Landesbanken’s role in local lending is still crucial to the biggest European economy. Berlin’s insistence on sector consolidation has been resisted by regional authorities, who are reluctant to give up control over banks that underpin local interests.

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German consumer prices set to rise steeply amid war in Ukraine

Russia's war in Ukraine is slowing down the economy and accelerating inflation in Germany, the Ifo Institute has claimed.

German consumer prices set to rise steeply amid war in Ukraine

According to the Munich-based economics institute, inflation is expected to rise from 5.1 to 6.1 percent in March. This would be the steepest rise in consumer prices since 1982.

Over the past few months, consumers in Germany have already had to battle with huge hikes in energy costs, fuel prices and increases in the price of other everyday commodities.


With Russia and Ukraine representing major suppliers of wheat and grain, further price rises in the food market are also expected, putting an additional strain on tight incomes. 

At the same time, the ongoing conflict is set to put a dampener on the country’s annual growth forecasts. 

“We only expect growth of between 2.2 and 3.1 percent this year,” Ifo’s head of economic research Timo Wollmershäuser said on Wednesday. 

Due to the increase in the cost of living, consumers in Germany could lose around €6 billion in purchasing power by the end of March alone.

With public life in Germany returning to normal and manufacturers’ order books filling up, a significant rebound in the economy was expected this year. 

But the war “is dampening the economy through significantly higher commodity prices, sanctions, increasing supply bottlenecks for raw materials and intermediate products as well as increased economic uncertainty”, Wollmershäuser said.

Because of the current uncertainly, the Ifo Institute calculated two separate forecasts for the upcoming year.

In the optimistic scenario, the price of oil falls gradually from the current €101 per barrel to €82 by the end of the year, and the price of natural gas falls in parallel.

In the pessimistic scenario, the oil price rises to €140 per barrel by May and only then falls to €122 by the end of the year.

Energy costs have a particularly strong impact on private consumer spending.

They could rise between 3.7 and 5 percent, depending on the developments in Ukraine, sanctions on Russia and the German government’s ability to source its energy. 

On Wednesday, German media reported that the government was in the process of thrashing out an additional set of measures designed to support consumers with their rising energy costs.

The hotly debated measures are expected to be finalised on Wednesday evening and could include increased subsidies, a mobility allowance, a fuel rebate and a child bonus for families. 

READ ALSO: KEY POINTS: Germany’s proposals for future energy price relief

In one piece of positive news, the number of unemployed people in Germany should fall to below 2.3 million, according to the Ifo Institute.

However, short-time work, known as Kurzarbeit in German, is likely to increase significantly in the pessimistic scenario.