When the German government unveiled a bank bailout pack age in 2008, it was conceived as a defensive umbrella for Germany's entire banking system. The package comprises €80 bn for capital injections, €20 bn for the purchase of so-called toxic assets, and some €400 bn in loan guarantees to restore liquidity. Despite this, the banking system has been hit hard by the liquidity crisis over the past few months. Deutsche Bank, Germany's biggest bank, reported a record fourth-quarter loss of €4.8 bn compared to last year's profit of €953 mn. It is now buffeted by the worst financial crisis since the Great Depression.
Germany has one of the densest banking networks in the world, having about 2,500 banks. Amidst liquidity crisis, Germany's biggest banks find themselves on the verge of collapse. Meanwhile, the government decided to back off from its earlier case-by-case approach, particularly after it had been forced twice to rescue the ailing mortgage lender Hypo Real Estate (HRE), Germany's second largest mortgage lender. In the past, the government was of the opinion that a bailout package for the whole banking system was avoidable. However, a dramatic deterioration in interbank lending and a panic-selling on stock markets forced Peer Steinbrueck, Finance Minister, to come up with another plan that he called `Plan B'. The German government finally decided to opt for a sector-wide plan, realizing that the worst hit of the worsening financial crisis are not private banks like Deutsche Bank, but the Landesbanken, the regional lending powerhouses that are owned by the 16 states of Germany. |
