Squeezed by the financial crisis, losing credibility and facing unprecedented political pressure, Germany’s Landesbanken may finally be on the brink of fundamental change.

These regionally owned, wholesale banks have been contentious for years because of their political ties and weak business models. Now, the holes ripped in their balance sheets by toxic investments are sparking reform.

On Friday, the biggest, Landesbank Baden-Württemberg, got rid of its chief executive. Standard & Poor’s, the rating agency, also shocked the sector last week by downgrading five institutions, judging their medium term prospects 'bleak'.

Within days, Germany’s government will increase pressure on the sector by issuing detailed plans for a 'bad bank' to help stricken financial institutions dump their toxic assets. Landesbanken are thought to have hundreds of billions of unwanted assets – but Berlin is determined to extract a promise of consolidation as its price for offering them a 'bad bank' scheme.

Financial Times