Germany’s politicians seem to have rescued their bad bank. Pushing back the valuation date for toxic assets to before the Lehman collapse has made it more likely that banks will consign their dud investments to the voluntary scheme.
It had looked as if the banks might simply boycott it. However, while the government has scored a political goal, it is no closer to its aim of boosting lending to a credit-starved German economy.
The essence of the scheme is that banks will be able to transfer some 250 billion euros of toxic assets into “eine Bad Bank”. In exchange they receive government-backed paper that they can count towards regulatory capital.
In principle this will raise their lending capacity. However, because the Germans do not want to reward reckless banks, the banks will pay an annual fee to participate, and will be liable for any shortfall at the end of the scheme. In other words, there is no fundamental risk transfer from the banks and the uncertainty about their eventual liability remains.
The breakthrough this week is that the government has pushed the valuation back to before the collapse of Lehman last autumn — when valuations were much higher.