September 24, 2007 (LPAC)--The state owners of Germany's two biggest Landesbanks have begun talks that could end in a merger, and the creation of Germany's second-biggest bank.

The prime ministers of the German states Baden-Wuerttenberg and Bavaria met last week to discuss recent upheavals in the banking system, arising from risk-taking that resulted in losses. An additional problem is that there are no longer state guarantees, the Financial Times reports today.

In August, Landesbank Baden-Wuerttenberg (LBBW) bought Sachsen LB. As EIR reported at the time, Germany's BaFin, or bank financial authority, arranged a $17.3 billion euro bailout of Sachsen from the German S & L Association, which was made insolvent by the investment of its Irish Fund, Ormand Quay, in U.S. subprime mortgages. LBBW is said to be the leading candidate to purchase the state of North-Rhine Westphalia's West LB.

Guenther Oettinger, the Prime Minister of Baden-Wuerttenberg, said the state's priority is for LBBW to take over West LB before entering any talks to take over Bayern LB, the State of Bavaria's bank. The state, and the region's savings bank association, each own half of BayernLB. In Baden-Wuerttenberg, the state owns 35.6%, and the city of Stuttgart holds 18.9% of the bank, and the regional banks control the rest.

There have been many warnings in recent months that the Landesbanks must be bailed out through consolidation. The consolidation of all these banks would create a bank with assets of 900 billion euro, second only to Germany's Deutsche Bank, the Financial Times says.