European Union regulators gave temporary approval Monday for the German government to give euro18 billion in loan guarantees to German lender Hypo Real Estate to help it cover urgent liquidity needs.
The European Commission last month extended a probe into the German government takeover of the bank to examine whether planned cutbacks will compensate for the competitive advantage it got from large state subsidies.
It has warned that Germany may need to rethink a target to finance half of HRE's restructuring from the bank's own coffers or non-governmental sources because private sources of funding had dried up.
In the meantime, regulators said the German government's Financial Market Stabilization Fund, or SoFFin, could go ahead and grant the bank two guarantees of euro8 billion and euro10 billion as "an appropriate means to remedy a serious disturbance in the German economy."
They said they would include the new guarantees in their ongoing investigation into government aid for the bank.
The EU's executive must approve government bailouts of banks that neared collapse during the financial crisis last year. It has ordered banks such as Commerzbank, ING and others to shed units to compensate for the unfair advantage over rivals that they received from state help.
Hypo Real Estate is the most prominent German victim of the financial crisis. It ran into trouble in September 2009 after its Dublin, Ireland-based unit Depfa Bank PLC failed to find short-term funding in the credit crunch.
Since then, the German government has shored it up with loan guarantees covering billions of euros (dollars.) In November, it gave the bank an extra capital injection of euro3 billion, just weeks after it took full control of the lender.