BayernLB set for €10bn bail-out

The regional state of Bavaria is set to inject up to €10bn ($12.6bn) into BayernLB, in another sign that Germany’s ailing public sector banks are seeking alternatives to the federal government’s bail-out plan to avoid a forced consolidation.

This week, Bavaria’s government and parliament are expected to decide on the capital injection into BayernLB. About €7bn will be paid by the regional state. The rest has been requested from Soffin, the federal government’s stabilisation fund.

BayernLB previously asked for €5.4bn from the bank bail-out fund, but has scaled its request back now the regional state is prepared to step in.

However, it is still unclear if Soffin is prepared to give a capital injection without having a say in the bank’s strategy – which is what the Bavarian state is hoping. The bank is on Monday expected to unveil an overhaul of its business model and a cost-cutting programme.

Horst Seehofer, the region’s head of state, said last week that the Bavarian state was prepared to pay for the entire €10bn package if necessary. A decision from Soffin on the conditions of a possible capital injection is expected early this week.

Like several of the seven German public sector lenders, called Landesbanken, BayernLB has been hit hard by the financial crisis. It has struggled to survive without capital injections and large-scale credit guarantees.

The Bavarian and the federal state will provide credit guarantees of €21bn for BayernLB, which takes the rescue package to more than €30bn.

An increasing number of Germany’s ailing public sector lenders are looking for ways to avoid a federal bailout, as regional politicians are eager not to lose influence. Both LBBW and NordLB recently opted for support from their regional state instead of drawing on help from Soffin.

The federal government’s bail-out scheme was initially also seen as a means to trigger a fast consolidation of the seven Landesbanken. But the regional bail-out moves have dashed these hopes.

Landesbanken are generally owned by regional governments and local savings banks. The latter are pushing hard for restructuring, but often face strong opposition from regional politicians. Bavaria’s plan to bolster BayernLB’s balance sheet could also upset plans to merge the institution with rival Landesbank Baden-Württemberg.

LBBW recently offered “concrete merger talks” with its competitor.

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