Leipzig prosecutors yesterday said they were making initial checks for irregularities at Sachsen LB, the state lender that nearly collapsed after investments linked to US subprime mortgages turned sour.

Prosecutors are reviewing whether there are issues requiring further investigation, a spokesman for the prosecutors' office said, declining to give further details.

Leipzig-based Sachsen LB was hastily sold over the weekend to Germany's biggest regional state bank, Landesbank Baden-Württemberg (LBBW).

Saxony's state premier has said he had not felt sufficiently informed about the size of the problems at Sachsen LB, but also said he did not feel misled.

LBBW agreed to take over the troubled Landesbank in eastern Germany for at least €300 million and a €250 million capital injection.

Sachsen LB had to be rescued by German savings banks after it was unable to handle its exposure to volatile credit markets.

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

"Even in the face of the scarcity of free funds that has been observed on the capital markets in the last weeks, its liquidity situation remains good," the bank said.

Meanwhile, a merger between WestLB and LBBW moved a step closer yesterday after a second major shareholder in Düsseldorf-based WestLB urged the banks to join forces. The savings banks' association of Westphalia-Lippe, which owns about 25.1 per cent of WestLB, yesterday said it was in favour of the bank merging with 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 it is concerned about potential job losses and about Düsseldorf's standing as a financial centre in any merger with Stuttgart-based LBBW. "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 government spokesman.

The state government will next week appoint an investment bank to explore its strategic options, he added.

About a dozen banks had pitched for the mandate by last Friday's deadline, bankers said.

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.

LBBW yesterday repeated its desire to lead consolidation among Germany's public-sector banks.

"We will take a constructive approach with regard to thoughts . . . on a possible merger of LBBW with WestLB," said Siegfried Jaschinski, the bank's chief executive.

British bank Barclays yesterday denied a media report that failed debt vehicles structured by its investment banking arm had left it with an exposure worth hundreds of millions of dollars.

"To say we have hundreds of millions of dollars of exposure to SIV-lites generally is inaccurate," a bank's spokesman said, responding to a report in the Financial Times. - (Reuters/ Financial Times service)