German Government Proposes Legislation to Take Toxic Securities Off Bank Balance Sheets

The German government has proposed legislation to transfer toxic securities from the balance sheets of financial instructions to specific purpose vehicles, colloquially called ``bad banks,’’ which will not have to be licensed. The transfer of the toxic securities will be at a 10 percent discount to book value. The plan is designed to avoid continuing massive write downs connected to the declining value of the toxic securities held by financial institutions on their books; and so free up funds for lending.

In return for the transfer, the special purpose vehicle will issue a bond guaranteed by the German bailout fund, the Special Institute for Financial Stability (called SoFFin) in the amount of the transfer value of the toxic securities. The financial institution will pay the SPV over the term of 20 years, a compensation amount of the difference between 90 percent of book value and the estimated value at maturity of the securities. Shareholders will benefit from any surplus in the liquidation of the SPV.