Germany will reactive a financial-sector rescue fund to help bolster lenders facing insolvency and lessen the risk of a systemic financial meltdown caused by the debt crisis.
Chancellor Angela Merkel’s Cabinet in Berlin on Tuesday agreed to boost the size of the fund to 480 billion euros, from 360 billion euros, according to the draft bill, which waters down provisions in earlier drafts to force troubled banks to recapitalize.
Instead of allowing Bafin, the bank regulator, to force banks to recapitalize, the new law to reactive Germany’s SoFFin bank bailout fund will empower the regulator to replace a bank’s chief executive or entire board if the bank isn’t forthcoming on restructuring. Banks will be allowed to present their own plans for recapitalization before the regulator steps in.
The final bill creates a process through which Bafin can suggest changes to capital plans presented by banks. Should a bank refuse, significantly delay, or present insufficient plans, Bafin could then appoint an administrator to oversee their work who would be allowed to request aid from SoFFin to recapitalize.
The threat of appointing a representative is meant to incentivize banks to get themselves on sound footing without being forced, a German official said. No bank can afford to have such an overseer installed, he added.
The government source also said that the bill will allow the transfer of sovereign debt held by banks to special-purpose vehicles, giving no elaboration on the details of the provision.
Negotiations with six German banks over capital plans will begin in January. The European Banking Authority, in a recent stress test, said German banks have to raise 13.1 billion euros to meet the new capital requirement. Commerzbank AG alone would need 5.3 billion of that sum, while Deutsche Bank would need 3.2 billion.
Germany first set up the bank-rescue fund in 2008 following the collapse of Lehman Brothers. The fund had 400 billion euros in guarantees and 80 billion euros in capital to buy stakes in banks.
The Finance Minister closed its doors to new applicants for SoFFin aid at the end of 2010, reducing the fund’s scope to 300 billion euros in guarantees and 60 billion euros in capital to coincide with the creation of a new and separate fund for fresh cases paid by private banks.
The new plan will restore the fund’s original scope.