DUESSELDORF, Germany (Reuters) - The owners of German state bank WestLB [WDLG.UL] are discussing setting up a special investment vehicle that will guarantee around 4 billion euros ($5.89 billion) in risky investments by the bank, financial sources familiar with the situation said on Monday.
It was not immediately clear who would put up the required funds to cover the sum, which is around a fifth of WestLB’s overall exposure to risky investments, the sources said.
Local savings banks and the state of North Rhine-Westphalia (NRW) own the state-backed regional lender, or Landesbank, which has been hit hard by asset writedowns and trading losses.
The fresh funds would be in addition to the 2 billion euro capital injection that WestLB’s owners agreed earlier this month to prop up the lender. It expects to lose 1 billion euros in 2007 and write down another 1 billion in assets.
German financial watchdog Bafin and the country’s central bank, the Bundesbank, were involved in brokering that deal which saved WestLB but nonetheless led to its credit rating being slashed.
WestLB’s owners met again on Sunday to discuss the situation at the bank. NRW finance minister Helmut Linssen had also revealed the existence of discussions to see “if everything that has to do with subprime can be spun off.”
WestLB’s troubles reflect the blow that German banks have absorbed from the global credit crunch triggered by rising default rates on U.S. subprime mortgages.
Small-company lender IKB IKBG.DE and rival Landesbank SachsenLB also required rescues that averted their collapse.
Struggling after the abolition of government guarantees that made it cheaper for them to borrow, many Landesbanks seized on the booming market in securitised debt to bolster profit only to run into trouble when credit markets seized up.
After blocking attempts for WestLB to merge with fellow Landesbank LBBW in Baden-Wuerttemberg, NRW state politicians are now pushing for it to pursue a deal with Helaba, a Landesbank in the state of Hessen.
Reporting by Matthias Inverardi; Editing by Paul Bolding