Germany's Landesbank Baden Wuertemberg won EU approval Tuesday for a state bailout after it promised to shrink its balance sheet by 40 percent and refocus on lending to companies.
The bank was several state-owned German institutions to run into trouble last year after it ran up more huge losses from investing in high-risk proprietary trading and capital market activities _ a business the EU has now told it to shun.
Seven current and former managers of the bank are also being investigated by German authorities for risking or damaging the bank's capital by carrying out or failing to block investments in high-risk deals worth hundreds of millions from 2006.
The European Commission said its Tuesday approval for the state rescue of the bank and its new restructuring plan would allow it become a viable business again _ and that the cutbacks would help limit the unfair advantage over rivals that the bank would get from the state aid.
Stuttgart-based LBBW earlier this year received a capital injection of euro5 billion from the bank's shareholders, all of them public authorities or state-owned, including the state of Baden-Wuerttemberg, the region's savings bank association and the city of Stuttgart.
It also gets state guarantees to cover potential loan losses of up to euro12.7 billion for a portfolio of troubled assets with a nominal value of euro35 billion.
The EU said its initial worries that the bank was paying too little for the help to the state of Baden-Wuerttemberg, its biggest single shareholder, were soothed when LBBW promised to increase remuneration. The bank will also, under EU pressure, make hybrid capital holders liable for losses.
In return, EU Competition Commissioner Neelie Kroes said the bank would now sharply reduce "risky investment activities" and refocus on financing German medium-sized businesses.
She said changes to corporate governance would increase oversight and ensure that the bank would be run on a purely commercial basis.
The bank will change its legal status to become a joint stock corporation and commit to appoint only qualified board members. The EU statement said this would reduce "the potential for undue influence on its day-to-day management."
German officials say the bank plans to cut some 2,500 jobs by 2013 under a cost-cutting drive that aims to save euro700 million a year. Some 13,600 people currently work for LBBW.
LBBW, Germany's fifth largest bank, focuses lending on small businesses and acts as a central bank for savings banks in the regions of Baden-Wuerttemberg, Rhineland Palatinate and Saxony. It had a balance sheet of euro448 billion at the end of June.
It has had a smoother ride than peers such as Bavaria's BayernLB and northern Germany's HSH Nordbank, but still had a net loss of nearly euro2.1 billion last year. It blamed that on market volatility and rising loan defaults from struggling companies.
The European Commission must check large state subsidies to banks to make sure they don't give them an unfair advantage over rivals. It has warned that the wave of bailouts for German state-owned banks must be linked to major restructuring, saying some are "addicted" to state help when they run into trouble.