Germany creates bailout fund as Commerzbank struggles

Germany unveiled a new bank rescue law on Wednesday that will let struggling lenders like Commerzbank offload billions of euros worth of sovereign debt into a new bailout fund, according to a draft version of the law seen by Reuters on Wednesday.
Worries about a capital shortfall at Commerzbank, Germany's second-largest bank, have led to talks with the German government about possible state aid, people familiar with the matter have told Reuters.
Commerzbank, which has a market value of around 6 billion euros, has been asked by the European Banking Authority (EBA) to outline plans by Jan. 20 on how to find an extra 5.3 billion euros in capital by mid-2012.
The prospect of indirect state aid through a new bailout fund set to be established next year drove up Commerzbank shares on Wednesday. The shares closed up 5.2% at 1.23 euros.
Unlike previous German rescue funds, which ran from 2008 until 2010, the new SoFFin bailout fund will be able to buy sovereign debt. Write-downs on Greek sovereign debt have eroded Commerzbank's capital position in previous months.
As of the end of September, Commerzbank had 13 billion euros of exposure to the sovereign debt of Greece, Ireland, Italy, Portugal and Spain. Most of this sovereign debt was parked at the bank's Eurohypo unit.
The new rescue fund will also have the power to intervene proactively — as soon as signs emerge that the financial sector's stability could be put at risk — rather than reactively, after a bank has started to fail.
Under the resurrected SoFFin, which Germany's cabinet agreed on Wednesday, bank supervisor Bafin will be able to send a special envoy to check whether a lender has sufficient plans to raise capital.
The special envoy would also be able to make an application for help from the rescue fund and overrule a bank's management board.
Commerzbank declined to comment on Wednesday, but earlier this week, said it has no plans to ask for public funds.
The government handed over a total of 18.2 billion euros to Commerzbank and took a 25% stake in two previous rescue attempts in the aftermath of Lehman Brothers' collapse in 2008.
Earlier this week, Commerzbank reiterated that it plans to shed around 30 billion euros worth of risky assets. That would free up around 2.7 billion euros in capital, less than the EBA is demanding.
Another option is to park the lion's share of assets housed within the Eurohypo unit at SoFFin, a move that would strengthen Commerzbank's balance sheet because it would no longer have to set aside extra capital for Eurohypo's risky assets.
Doing so could free up about 5 billion euros in capital, which would go a long way toward filling Commerzbank's capital gap.