How can governments avoid the forced nationalization of suffering banks and, more importantly, the hefty claims made by investors that come with them?

One option is to put the banks under compulsory state administration instead. This way, no structural changes are made in the bank’s ownership and the government has less trouble pulling out when the situation improves. The German parliament is working to implement such a plan right now.

Dispossession bill
The German government is sick and tired of it. They provided the suffering Hypo Real Estate bank with over 100 billion euros in support. Unfortunately, this amount proved to be insufficient and the government was forced to nationalize the bank. To allow this, a special temporary dispossession bill was put into effect. However, it turned out that this solution is far from ideal as millions of euros worth of claims made by investors are now officially the responsibility of the German republic.

Pull back again
Not surprisingly, federal minister of economics, Karl-Theodor zu Guttenberg – a known opponent of nationalization and dispossession – proposed a new bill that allows the government to put banks under compulsory state administration.

If his bill passes, the German federal financial supervisory authority, BaFin, will play an important role in the process. According to a recent article in the Süddeutsche Zeitung, BaFin can effectively take control of banks that have problems fulfilling their payment obligations. When the problems are solved, BaFin can pull back again.

The question remains whether this bill will pass before the elections held on september 27th, as the issue is a very sensitive one for a lot of politicians.

Thursday, proceedings began in a 320 million euro damages case filed by investors against Hypo Real Estate. The investors claim that Hypo Real Estate executives withheld information on dangers that caused stock to plummet. It is possible that more investors will join the suit, causing the total claim to reach the 500 million euro mark.

What is your opinion on compulsory state administration of banks? We look forward to reading your comments.