The German government will launch an inquiry into BaFin, the German financial services regulator, amid accusations that the watchdog took too long to address crises at the two German banks that had to be bailed out in recent weeks.
Torsten Albig, a spokesman for the finance ministry, which oversees BaFin, said yesterday the ministry would look into "what reasons BaFin had to take, or not take, action".
The recent turmoil in the global credit markets, triggered by a weakening US mortgage market, has hit Germany's financial sector particularly hard.
In the past month, IKB, a small company lender, and SachsenLB, the public Landesbank, had to be rescued after they were unable to provide credit facilities they had pledged to their own investment funds.
The regulator has been criticised for not acting soon enough over the banks' exposure.
The crisis around SachsenLB could bring new impetus, and possibly a change of direction, to the long-running plans to reform Germany's two-headed banking supervision system, shared between BaFin and the Bundesbank, Germany's central bank.
Banks have long complained about the two-headed regime, with its overlapping investigation and filing obligations.
BaFin was also shaken by a corruption case earlier this year, prompting the ministry to consider appointing a chief operating officer at the watchdog, who would report directly to Berlin.
A draft reform produced by the finance ministry before the summer, which envisaged subordinating the Bundesbank's regulatory activities to the authority of the ministry, was rejected by chancellor Angela Merkel's Christian Democratic Union as a stealthy attack against the bank's independence.
Peer Steinbrück, the finance minister, who was scheduled to put a reworked draft to the cabinet last week, postponed his presentation in the light of the crises at IKB and SachsenLB.
Finance ministry officials yesterday rejected suggestions that Jochen Sanio, BaFin's president, had fallen out with Mr Steinbrück, although they conceded the minister had questioned recent alarmist comments by him about the state of the German banking system.
During the rescue of IKB, Mr Sanio compared the financial turbulence with the banking crisis of 1931, a comment Mr Steinbrück later privately criticised.
