German bank woes spark calls for overhaul of rules

BERLIN, Aug 29 (Reuters) German politicians called on Wednesday for an overhaul of domestic banking supervision rules that would give more power to the Bundesbank following two high-profile industry bailouts tied to the U.S. subprime crisis.

In an interview with the Passauer Neue Presse newspaper, German Economy Minister Michael Glos added his voice to a growing chorus of officials who want financial watchdog Bafin relieved of supervisory tasks.

Bafin, which shares oversight responsibilities with the Bundesbank, has been criticised for mishandling the subprime mortgage fallout -- allegations it has strongly rejected.

''We need to rely more on the expertise of the Bundesbank,'' Glos said, calling for a ''legislative reorganisation'' of current supervisory rules.

''The Bundesbank is present across the country, and as part of the European Central Bank, it is familiar with the global linkages in the financial world.'' Otto Bernhardt, finance expert for Chancellor Angela Merkel's Christian Democrats, and Ingolf Deubel, Social Democrat (SPD) finance minister for the state of Rhineland-Palatinate, echoed Glos's view in the Handelsblatt daily.

Their comments come after German state-backed bank Landesbank Baden-Wuerttemberg agreed at the weekend to acquire and inject 250 million euros (9.9 million) into fellow lender SachsenLB, which ran into trouble over investments linked to risky U.S. mortgages.

German small company lender IKB, 38 percent owned by state development bank KfW, also required a bailout because of its exposure to subprime home loans.

Neither Bafin nor the Bundesbank would comment on the matter on Wednesday.

MINISTRY, BANKS REJECT OVERHAUL Banking supervision in Germany is divided between Bafin and the Bundesbank, an arrangement criticised as unwieldy and confusing by politicians and some in the finance industry.

Bafin came under fire last year after one of its managers was arrested on suspicion of fraud and a government-ordered probe found that its chief, Jochen Sanio, had failed to ensure proper internal oversight.

It has also been criticised for failing to identify the scale of the risks at SachsenLB.

The German Finance Ministry has defended Bafin but said it would look into the regulator's behaviour and appealed for better cooperation between Germany's supervisory authorities.

''There is no cause for a general overhaul,'' ministry spokesman Stefan Olbermann said on Wednesday.

SPD Finance Minister Peer Steinbrueck is expected to present plans next month for a reorganisation of Bafin. That overhaul was planned before the recent turmoil.

Only in a second step could the ministry examine the broader issue of improving banking supervision.

A leading conservative deputy, Michael Meister, told Reuters any concrete proposals on shifting supervisory responsibilities to the Bundesbank were unlikely before the end of the year.

He said he was sceptical conservatives would allow the SPD-controlled finance ministry to oversee the Bundesbank as it currently does Bafin.

The head of Germany's private banks' association (BdB) on Wednesday defended the system that shares responsibility between Bafin and the Bundesbank and has been in place since 2002.

''We should stick with it, even if there is a need for adjustments in the cooperation between the two institutions,'' Manfred Weber told Reuters.

(Additional reporting by Carsten Lietz in Berlin and Patricia Nann in Frankfurt) REUTERS SY HS2106