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Business

Bavarian Minister Quits After BayernLB Rescue

Bavaria's state finance minister said he will step down, taking the blame for losses at regional public-sector bank BayernLB which is the first German lender to tap the government's 550-billion-euro bailout.

A man walks in front of Bavaria's state bank BayernLB

BayernLB will get 5.4 billion euros in aid

Bayern's Bayerische Landesbank (BayernLB) was the first bank to signal that it will take the German government up on its offer for a bailout. The board met in Munich on Tuesday, Oct. 21, and decided to "apply for stabilization measures," said Bavaria's state finance minister, Erwin Huber, who heads BayernLB's governing board.

Huber, 62, announced on Wedesday that he is stepping down as finance minister because of the BayernLB debacle.

The southern regional bank is jointly owned by the state of Bavaria and regional savings banks. The bank ran into trouble more than a year ago due to its heavy investment in asset-backed securities. These securities lost much of their value when the US market for high-risk mortgages collapsed in 2007. As the bank was recovering from this loss, it was hit a second time when interbank loans dried up in mid-September.

In addition, German regional bank WestLB is reportedly also eyeing the government bank rescue plan.

Separately, German police led by prosecutors searched the offices of the federally owned Kfw bank Wednesday.

This action was part of an investigation into the transfer of 319 million euros to US bank Lehman Brothers, the day after the financial crisis triggered the New York-based financial house's collapsed.

Deal comes with strings attached

Woman on balance beam with Frankfurt financial district in background

German banks are still trying to find their balance

Germany's federal government approved a 500-billion-euro federal rescue package on Friday. Germany's rescue package was similar to measures taken by governments across Europe.

On Monday, the cabinet finalized the conditions banks must follow if they want to make use of the rescue package.

Those conditions include BayernLB limiting executive pay to 500,000 euros. It will also send any dividend payments to the state. And the government will get the right to review any lending practices seen as risky. The bank also has to promise to continue making loans to small- and medium-sized companies.

BayernLB is Germany's second biggest regional bank. It posted 770 million euros in losses during the first three months of 2008. That forced shareholders to come up with 4.8 billion euros in loan guarantees.

The state link allowed regional banks to offer lower credit rates. When the European Commission cut back on that privilege in 2005, the banks began engaging in risky investments as a way to keep making money.

Other banks holding off

A life buoy in Berlin with the Reichstag in the background

The government has thrown banks a lifeline

But the era of the Landesbank could be coming to a close, Merck Finck analyst Konrad Becker told AFP news agency.

"Their business model does not work any more," Becker said. "The era when each state had its own bank is over."

Other Landesbanken have not said whether they will also ask for a bailout. An HSH Nordbank spokesman said on Tuesday that no decision had been made. A spokesman for the Landesbank Berlin said that there were currently no plans to take the rescue package. Other banks were similarly uncommitted, according to AFP.

Less that one in four Germans expressed trust in domestic banks, according to a survey for the Frankfurter Allgemeine Zeitung. Only 52 percent of Germans said they trusted the bank in which they had their account.

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