Weakened German banks may exacerbate credit crunch

The weakness of the German banking sector may be hampering the supply of loans and could cause a credit crunch in the real economy, Germany's development bank KfW said on Monday.

Frankfurt-based KfW, controlled by the German government and federal states, said loan volumes declined over the past year,reaching an "extraordinarily weak" level in the fourth quarter of 2009, even taking into account the weaker economy.

"One could conclude that the issuance of loans was further slowed ... by insufficient capital levels among banks" KfW said, adding the fall was no longer attributable purely to afall in demand for loans among German companies.

Citing a survey of German companies, KfW said it "sees adanger of an exacerbation of the problems supplying credit for 2010."

The weak capital situation at German banks, the threat of further writedowns and rating downgrades could inhibit banks'ability to extend loans, KfW said.