A merger between WestLB and LBBW, two public-sector German Landesbanken, moved a step closer on Tuesday after a second major shareholder in WestLB urged the banks to join forces.

The savings banks association of Westphalia-Lippe, which owns about 25.1 per cent of the Düsseldorf-based bank, said it was in favour of WestLB merging with Landesbank Baden-Württemberg (LBBW).

The association's statement echoed Monday's call from the Rhineland savings banks association, which also owns 25.1 per cent of WestLB, for a merger that would create Germany's biggest bank by assets after Deutsche Bank.

The decision to enter merger talks now rests on the state of North-Rhine Westphalia. The state government wants to divest its stake in the bank, but is concerned about potential job losses in any merger with Stuttgart-based LBBW and Düsseldorf's standing as a financial centre.


"We are not excluding LBBW as an option, but we want to use the next two to three weeks to assess all options open to us," said a spokesman. The state government will next week appoint an investment bank to explore its strategic options, he added.


Bankers said a merger was looking increasingly likely because the two savings banks associations would reject a sale to a private bank.

People close to the proceedings said the politicians' main objective for pursuing alternatives was to gain concessions such as job guarantees from LBBW.

The owners can sell their stakes separately, but have a right of first refusal on each other's stakes.

LBBW on Tuesday repeated its desire to lead consolidation among Germany's public sector banks. "We will take a constructive approach . . . on a possible merger with WestLB," said Siegfried Jaschinski, the bank's chief executive.

LBBW on Sunday agreed to take over Sachsen LB, the troubled Landesbank in eastern Germany, for at least €300m ($409m) and a €250m capital injection.

Sachsen LB had to be rescued by German savings banks after it was unable to handle its exposure to volatile credit markets. The prosecutor in the state of Saxony on Tuesday said it would investigate the bank's actions leading up to the collapse.

LBBW, which reported rising first-half results on Tuesday, said its investments in credit instruments related to US subprime mortgages represented a "minimal share" of business volume.