TWO OF Germany's largest state banks are to hold merger talks after one of them, the Stuttgart-based Landesbank Baden Württemberg (LBBW), announced losses yesterday expected to top €2 billion by year-end. writes DEREK SCALLYin Berlin.

A successful merger with Munich-based Bayerische Landesbank would create Germany's third-largest financial institution with combined assets worth €916 billion and nearly 33,000 employees.

"LBBW will continue to play an active role in banking consolidation," noted a statement from Germany's largest state bank. "Therefore, it's ready to enter concrete merger talks with BayernLB."

Germany's state banks have been hit hard in the financial crisis and LBBW has said it may seek up to €20 billion worth of state guarantees from a government fund. Last year it purchased the crisis-hit Sachsen LB after its Dublin-based subsidiary brought the bank to the brink of ruin.

Like other state banks, Sachsen LB was criticised for getting out of its depth in world financial markets. But, after it was rescued, demands for the other state banks to merge came to nothing.

Critics say regional political leaders are unwilling to give up banks because of the influence they bring. "The problem is that our state banks have no business model, no reason to exist," said Dr Volker Wissing, a liberal Free Democrat (FDP) politician.

"Our party helped wind up our Rhineland Landesbank because it made no commercial sense. The same has to happen with the others."

Meanwhile, German president Horst Köhler attacked European bank managers in Frankfurt yesterday for losing touch with reality. "Please stop pointing the finger at others," he told an audience of Europe's leading bank managers. "Too many people from your companies tossed the many warnings to the wind and preferred to keep betting rather than deal with problematic developments. That now hits all of you, even those of you whose feet didn't leave the ground."

He demanded that, in light of the financial crisis, the banking industry ask itself some "unpleasant questions".

Mr Köhler, former president of the International Monetary Fund, called for beefed up power and greater independence for his former employer to enable it to police world finance markets.

After the speech, Commerzbank chief Martin Blessing said: "We get the message."