Germany to set strict conditions for bank rescues

By Noah Barkin and Erik Kirschbaum

BERLIN (Reuters) - Germany has set strict conditions for banks that make use of its 500 billion euro ($674 billion) rescue package, including limits on managers' salaries, bonuses and severance, according to a draft law seen by Reuters.

Berlin unveiled the broad outlines of the package last Monday in a coordinated move with other European countries designed to restore confidence in a battered financial sector.

The German plan was approved by lawmakers on Friday, but the conditions that banks taking part in the scheme will be subject to was still being discussed early on Monday. Chancellor Angela Merkel's cabinet is expected to approve the full law later on Monday.

According to the draft, banks that make use of government funds would be forced to set "appropriate" compensation for their managers.

The draft law states that salaries above 500,000 euros per year are considered inappropriate, though a government official familiar with the talks said there was disagreement about this figure and it could still be changed before the cabinet meeting.

"The criteria for appropriate (remuneration) are based on responsibilities and personal performance, business conditions and the success and outlook of the company compared to others in its field," the draft states.

Banks participating in the scheme would be forced to scrap severance and bonus schemes that were deemed inappropriate and would not be able to pay out dividends while they were using government rescue funds.

RECAPITALISATION CAP

"The remuneration system and incentives should be examined with the aim of ensuring they do not encourage the taking on of inappropriate risks, are tied to long-term and lasting targets and are transparent," the draft said.

The draft foresees a recapitalization cap of 10 billion euros per bank and also sets a limit on the assumption of bank risks at 5 billion euros per bank.

The government rescue package is composed of as much as 400 billion euros in guarantees to help banks with liquidity problems and up to 100 billion euros in funds for the recapitalization of struggling financial institutions.

German banks have been reticent about stepping forward to accept government funds for fear such a move would send the wrong signal to hypersensitive financial markets which have been quick to punish the weak.

But over the weekend, Bavarian Finance Minister Erwin Huber suggested the German state's public sector bank BayernLB was likely to make use of the package.

Commerzbank CEO Martin Blessing said his bank would also take a close look at using government funds, but Deutsche Bank CEO Josef Ackermann appeared to rule out such a move.

(Additional reporting by Gernot Heller)

(Writing by Noah Barkin and Erik Kirschbaum, editing by Tim Pearce)