SCENARIOS-Germany raises pressure on banks to lend
By Paul Carrel
BERLIN, July 14 (Reuters) - Finance Minister Peer Steinbrueck is pressing Germany's banks to increase their lending to businesses and has given them until Sept. 1 to show him they are supplying the economy with enough liquidity.
Steinbrueck is concerned that credit conditions could tighten later this year, throttling Europe's largest economy just as it shows the first signs of emerging from its deepest recession since World War Two. [ID:nL9546479]
He has written to Germany's bankers and told them they have a responsibility to supply companies with credit. [ID:nLD72125] Beyond leaning on the banks, Steinbrueck also has a number of options he could use to try to boost the credit flow in Germany.
Below are possible scenarios under which Steinbrueck could try to increase the lending flow, and the hurdles he faces:
BAD BANKS
If banks divest themselves of problem assets, it could free up the necessary liquidity to supply the economy with credit. Germany's parliament last week passed a "bad bank" plan that will allow lenders to shift billions of euros of troubled assets off their balance sheets. The government hopes that by unloading the toxic assets, banks will be encouraged to lend, providing a boost to investment and spurring economic growth.
Banks have been reluctant so far to embrace the plan. Commerzbank (CBKG.DE), Germany's second-largest bank, last week told Reuters it had no need for now to use the measure.
In his letter to Germany's banking associations, Steinbrueck pressed banks to make use of the "bad bank" model if they were unable to supply credit to firms on "reasonable" terms.
FORCED RECAPITALISATION
Steinbrueck could push lenders to undertake a coordinated share issue, raising new funds without exposing any individual bank to speculation about the vulnerability of its capital base.
Many German banks are focused on shoring up their capital ratios rather than making large loans that would help boost the economy. They have been afraid to boost their capital bases by issuing new shares in case this is seen as a sign of weakness.
However, such a forced recapitalisation would probably require new legislation, which is unlikely before a federal election due in September as parliament is already winding down.
BUNDESBANK INTERVENTION
Steinbrueck has floated the idea of using the Bundesbank to buy up corporate bonds to help ease the credit squeeze. However, the German central bank has resisted the idea of lending directly to firms, saying last week it saw no need to do so.
RELAXING BASEL II
Germany has proposed the Basel II rules on capital requirements be temporarily relaxed. Basel II requires banks to build capital reserves to cover potential losses but Germany is concerned that during the economic downturn this could lead to credit drying up altogether. However, the idea has drawn little enthusiasm from other European Union member states.
