German govt says not the right time for "bad bank"

BERLIN/FRANKFURT, Dec 22 (Reuters) - The German government said it did not believe it was the right time to discuss setting up a so-called "bad bank" -- a vehicle to buy toxic securities held by financial institutions.

Government spokesman Thomas Steg told a news conference on Monday the time for creating such a bank had not yet come and added: "One would be well-advised to wait on any such decision."

Economy Minister Michael Glos said last week he was opposed to a reported proposal from Deutsche Bank AG (DBKGn.DE) Chairman Josef Ackermann to establish a bad bank to buy toxic securities.

However Steg confirmed the proposal for a bad bank was discussed at a meeting this month at the chancellery in which banking and industry leaders met government leaders and union leaders to work on ideas to counter the economic crisis.

The idea has found growing support from the finance sector as a way to help reduce banks' risk provisions and free up much-needed capital. The total volume of potentially toxic assets that could be shifted to a "bad bank" in Germany is estimated by analysts at several hundred billion euros.

But financial experts warn such a vehicle could merely pass on the risks associated with bad loans to taxpayers.

POTENTIAL PROBLEMS

Among those supporting the creation of a bank onto which financial institutions could unload their problem-ridden securities are Deutsche Bank Chief Executive Josef Ackermann, private bank Sal. Oppenheim and German State bank WestLB's [WDLG.UL] head Heinz Hilgert, German daily Handelsblatt said on Monday.

WestLB earlier this year faced upwards of 1 billion euros ($1.4 billion) in writedowns and was forced to push many of its riskier loans into a special purpose vehicle (SPV).

Economics professor and head of the Bavarian Financial Center (BFZ) Wolfgang Gerke said he saw the creation of a state-run bad bank as rife with potential problems.

"Whoever takes their trash to the dump, no longer worries about it," Gerke said. "Through the creation of a bad bank the fundamental problems of the crisis won't be solved, rather the costs will only be shifted to taxpayers."

Securities which have been moved to the "bad bank" would continue to be in danger of failing and losing further value.

The German government has already launched a rescue package worth almost 500 billion euros to support the banking industry, but four-fifths of the package are state guarantees which will not create costs for the government unless some of the backed securities default.

"With a bad bank [however] the government has to have real money in hand and not only offer guarantees," said Konrad Becker, banking analyst at Merck Finck. "This would be a lot more expensive than the existing rescue package." (Additional reporting by Erik Kirschbaum in Berlin; Writing by Tyler Sitte; Editing by David Holmes) ($1=.7141 Euro)