Germany Considers "Umbrella" to Shield Banks

Germany said on Monday it was considering a nationwide "umbrella" to shield its banking sector from market turmoil, a reversal in policy which underscored growing government concerns about financial contagion.

A day after Berlin pushed through a rescue for German lender Hypo Real Estate and announced a federal guarantee of over 500 billion euros ($679.5 billion) for private bank deposits, German Finance Minister Peer Steinbrueck said a "Plan B" for the domestic financial sector was under discussion.

In recent days, Germany has resisted pressure from European partners for an EU-wide rescue package for banks that would mirror the $700 billion plan in the United States and said bank troubles should be handled on a case-by-case basis.

But Steinbrueck reversed course on Monday: "I am very much aware that at some point individual solutions are no longer enough," he told reporters in Berlin.

He said Berlin was looking at putting up an "umbrella for Germany as a whole, so that we don't go from one case to the next." As he spoke, concerns about the health of the banking sector sent European stocks plunging 5 percent.

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Hypo Real Estate stock was down 30 percent despite an agreement by banks and insurers on Sunday to extend 15 billion euros in new liquidity to the Munich-based lender. Commerzbank was another big loser, down 13 percent.

Steinbrueck said uncertainty in the market raised questions about whether Berlin should push ahead with a partial privatisation of Deutsche Bahn, planned for later this month.

Berlin was forced to call together officials from the Bundesbank, Bafin financial regulator, banking and insurance industry on Sunday to agree the guarantees after new refinancing problems at the Munich-based firm came to light, making a 35 billion ($47.57 billion) euro rescue agreed last week obsolete.

Steinbrueck defended the new Hypo rescue, which came after financial firms threatened to pull out of the original scheme.

He said the firm's collapse would have meant a conflagration across the banking sector.

Two financial sources said on Monday that Hypo's chief executive and chairman, sharply criticised by the government, were expected to resign within days.

Savings Guarantee

Merkel and Steinbrueck announced on Sunday a new federal guarantee for private savings deposits, a move they said was meant to reassure a public spooked by daily headlines of financial turmoil.

"It was a signal from the Chancellor and me, that savers understand they mustn't be worried about their savings," Steinbrueck said.

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"That's important in this situation because we don't want them to run to their banks filled with fear and withdraw money." But Berliners were mostly dismissive of the move.

"It's totally unrealistic, a feeble attempt by the government to stop a vicious cycle of people panicking, withdrawing their money and making the situation even worse," said Judith Trauben, a 54-year old housewife, walking near the Reichstag building in central Berlin.

Steinbrueck said finance ministers from Europe and the Group of Seven (G7) leading industrialised nations would have to work together to reach solutions in the coming days.

He said he would be unable to attend a meeting of euro zone finance ministers on Monday in Luxembourg but was still aiming to get there for a wider meeting of EU counterparts on Tuesday.

Banks in Germany and elsewhere in Europe have been keen for governments to agree a general package of help along the lines of the bailout plan agreed in the United States, but Berlin has resisted pressure from other EU countries to agree such a package.

Copyright 2008 Reuters. Click for restrictions.