German banks under fire for not passing on credit

BERLIN (Reuters) - German banks are doing too little to pass on credit and the government may need to consider measures other than its "bad bank " plan to ward off a severe credit crunch, politicians said at the weekend.

German politicians from across the spectrum criticized banks for not passing on credit that they were getting at low rates from central banks.

"Banks currently prefer to use that money to invest in foreign exchange, government bonds and shares instead of passing it on as credit," said Finance Minister Peer Steinbrueck, a member of the center-left Social Democrats (SPD), in an advanced release of remarks to run in Sunday's Bild am Sonntag newspaper.

Some managers in the German financial industry were making "business out of the crisis," Vice-Chancellor Frank-Walter Steinmeier (SPD) told Sunday's "Tagesspiegel am Sonntag."

Banks were refusing credit to many companies or only supplying it at "obscene interest rates," he added.

However, criticism did not only come from the left.

German Economy Minister Karl-Theodor zu Guttenberg, a member of the conservatives' coalition with the SPD, said at a congress on Saturday that low central bank interest rates should not serve only to clean banks' balance sheets.

The access of medium-sized companies to credit has significantly worsened in the past few weeks, according to a poll to be published on Monday in the weekly WirtschaftsWoche.

Some 57 percent of companies surveyed in June said they were feeling a credit crunch, versus five percent in March.

The president of Ifo think tank, Hans-Werner Sinn, told WirtschaftsWoche that difficult access to credit could become the German economy's biggest problem, as banks shrink to adapt their balance sheets to their reduced leverage.

"As the banks slim down, they could end up starving the economy," he said.

OTHER MEASURES

Germany will consider other measures to supply its economy with credit if its "bad bank" plan proves insufficient and banks still fail to pass on credit, Steinbrueck said.

Germany's Bundestag lower house of parliament on Friday approved a "bad bank" plan that aims to relieve banks by enabling them to shift billions of euros in troubled assets off their books.

"If we see a real credit crunch in the second half of this year, then the government will have to sit down with the Bundesbank and look for solutions," Steinbrueck said.

"Then we would have to think about measures, that we haven't had so far," he said.