GERMANYS SECOND-largest lender, Commerzbank, is examining setting up a “bad” bank to warehouse troubled assets potentially worth hundreds of billions of euro, according to sources familiar with the matter.

If Berlin agrees to help, it could be the first federal state-sponsored warehouse to deepfreeze ailing bank loans in the euro zone, as well as putting more taxpayer money on the line for banks rocked by the financial crisis.

One possibility under discussion is that Commerzbanks problem loans are fused with those of Hypo Real Estate to make a joint “bad” bank, the sources said on condition they remain anonymous because the discussions are confidential.

Such a move would create a “bad” bank straddling two of Germanys suffering lenders and set a precedent for others to follow suit, both at home in Europes economic powerhouse and across the continent.

“A very select high-level group is examining whether Commerzbank could join in a ‘bad’ bank for Hypo Real Estate,” said one source.

“The idea is still relatively vague and Commerzbank is also worried that doing so could hurt its image further,” he said.

Hypo Real Estate is in far more trouble than any other bank in Germany.

“Commerzbank’s Eurohypo has more than €200 billion of assets,” said a second source. “If [Commerzbank chief executive Martin] Blessing is stuck with them, he will never be able to get the bank back on its feet again.

“Commerzbank needs to be relieved of the weight of Eurohypo,” he added. “By putting Eurohypo together with [Hypos state lender] Depfa, you can achieve many synergies. It makes logical sense – this is the thinking at the moment.”

Dublin-based Depfa was acquired by Hypo for €5 billion in 2007 and has been hit by problems on the short-term credit markets it uses to finance its long-term credit dealings.

The move to create a “bad” bank could hit political hurdles, however. The government first needs to win control of Hypo Real Estate, which is in the throes of being rescued by the state.

Commerzbank, which received more than €18 billion in capital from the government and now has Berlin as a 25 per cent shareholder, is also grappling with similar, although less drastic problems, at property and state lending arm Eurohypo. (–Reuters)