WestLB's owners stumped up a further 3 billion euros ($4.4 billion) to rescue the state-sector lender which said it would slash up to 1,500 jobs in the next two years as it prepares to be sold.
The German state of North Rhine-Westphalia (NRW), which owns 38 percent of the bank, said it alone would shoulder the fresh risk guarantee, which comes on top of 2 billion euros agreed last month to cover losses and write-downs at the bank from the downturn in global credit markets.
Reuters had reported the size of the additional rescue package earlier this week, while sources familiar with the situation had also said last month that up to one-third of WestLB's nearly 6,000 staff would have to go.
"Job cuts are always bitter but here there was no alternative," WestLB Chief Executive Alexander Stuhlmann said in a statement on Friday.
"We must quickly begin to shape the future of WestLB and make the remaining jobs as secure as possible," he said.
NRW Finance Minister Helmut Linssen said the deal, hammered out in the early hours of Friday in the presence of Germany's top bank regulators, BaFin President Jochen Sanio and Bundesbank President Axel Weber, made consolidation easier among the country's landesbanks. These act as wholesale banks for the public savings banks in their region.
The two regulators said in a joint statement that "supervisory issues" were not involved in the discussions.
WestLB will continue to explore a merger with its southern landesbank neighbor Helaba, it said.
However, analysts have cast doubt on the value of tie-ups between landesbanks because local politicians and savings banks see them as a source of prestige and jobs, with limited scope for cost-cutting and revenue efficiencies.
Political opposition in NRW scuppered efforts to merge it with LBBW in the southern state of Baden-Wuerttemberg.
WestLB has been battered by trading losses and asset write-downs, prompting repeated emergency measures as the bank's problems worsened.
The plan to cut 1,300-1,500 jobs by 2010 is aimed at helping the bank to save 300 million euros per year in costs. It also hopes to raise revenues by 100 million annually through increased business with savings banks and corporate customers.
Investment banking, however, would be cut back.
As part of the agreement, some 23 billion euros in structured credit products will be moved into a special purpose company, protecting WestLB from risks affecting both its 2007 financial year and future as yet unidentified problems, it said.
The total of 5 billion euros in guarantees and assistance agreed by WestLB's owners over the last three weeks will be used to finance the special purpose company and cover any losses it may face.
The arrangement provides crucial support to the bank's credit ratings. A lower rating would raise its own borrowing costs, crimping business.
NRW's Linssen said the deal should allow the bank to achieve at least an "A" credit rating.
He also said that he expected the European Union authorities to look intensively at the assistance provided to WestLB.
If the 3 billion euro cover being provided by NRW is used, the deal would require WestLB's other owners, principally the state's savings banks, to compensate it with either shares in the lender or cash, though NRW said its aim was not to raise its stake in the lender.