German news agency DPA reported that the governments of Schleswig-Holstein and Hamburg, will bail out HSH by pumping more than 3 billion euros into the bank and offering another 10 billion euros in state-backed guarantees.

The two state governments own a total of 60 percent of the bank, which specializes in financing ship building.

"We are standing by our bank," Hamburg Mayor Ole von Beust said on Tuesday, Feb 24.

It became clear that the bank would need help earlier this month, when it reported a pre-tax loss of 2.8 billion euros for 2008.

Both state governments will have to approve the bailout in March before it goes into effect. In the meantime, HSH has already begun a major restructuring, which has included layoffs. It has also said it wants to form a so-called "bad bank" to take over its toxic assets.

Public-sector banks hit hard

Harry Carstensen, Schleswig-Holstein's premier, pointed out that the bank was important to the regional economy. Since it was impossible to find anyone likely to want to buy the bank in these times of crisis, "the only alternative was to continue on with the bank," he said.

News agency Reuters reported on Tuesday that US financial investor JC Flowers who holds a 26-percent stake in HSH, will remain on board and participate in increasing the bank's capital base.

Several of Germany's Landesbanken, or public-sector banks, have suffered as a result of the subprime lending and credit crisis.

German Chancellor Angela Merkel's cabinet took steps last week enabling the state to take control of troubled banks as a last resort. The cabinet approved legislation that would allow Germany's Federal Government to seize control of Hypo Real Estate (HRE), a Munich-based mortgage lender that has been hit particularly hard by the financial crisis.

Author: Trinity Hartman (dpa/reuters/ap)

Editor: Sonia Phalnikar