The bill is essentially aimed at unfreezing credit markets and freeing commercial and state-owned banks of their risky and non-core assets.

This will be achieved by shifting as much as 230 billion euros ($322 billion) worth of toxic assets held by banks to the so-called bad banks.

The plan will involve exchanging items such as asset-backed securities and collateralized-debt obligations for state-guaranteed bonds, for which banks will be charged a fee.

It is hoped the bill can help consolidate Germany's many state-owned banks, the Landesbanken, several of which have been hit hard by the effects of the US subprime mortgage crisis.

Finance Minister Peer Steinbrueck denied to legislators that the bill effectively meant the taxpayer was picking up the tab for past bank excesses.

He assailed Germany's savings banks, also known as Sparkassen, which had criticized the bill. He also said the German taxpayer was most at risk from any savings bank losses because those institutions were backed by government guarantees.

Bankers divided

Manfred Weber, general manager of the Federation of German Banks (BDB), agreed, saying the current bad banks model offered a reasonable balance between offloading banks' toxic assets and not simply pushing the debt burden onto taxpayers. The BDB is an association of private financial institutions.

The Federal Association of German Public Sector Banks, which has among its members the Landesbanken, said the new law would be necessary for battling the credit crunch.

German trade union Ver.di stuck to its mandate, insisting the bad banks plan would not guarantee jobs. "Neither the worries nor miseries of affected employees are solved with this plan, nor can taxpayers really be assured," said Uwe Foullong, a member of the Ver.di board of directors.

The bill was passed by Chancellor Angela Merkel's large parliamentary coalition and is expected to gain quick approval next week from the upper house of parliament, the Bundesrat.

Tax haven bill

Earlier Friday, the Bundestag lower chamber passed another bill which will see increases in taxation scrutiny of companies and private individuals who have business ties to tax havens.

The bill, drafted by Steinbrueck but later watered down by the governing parties, targets nations which do not meet minimum standards set by the Organization for Economic Cooperation and Development (OECD).

In his speech, Steinbrueck welcomed commitments from 84 nations to meet the OECD standards.

High-income Germans will also have to offer more information in tax returns about where they are keeping their assets.

Germans are legally required to declare their worldwide income, including yields on financial assets they control abroad. Affluent Germans have historically opposed a tightening of tax laws, arguing that tax scrutiny breaches their privacy.

dfm/AFP/dpa/Reuters
Editor: Trinity Hartman