But big bets on global financial markets and large investments in securitized debt linked to the U.S. subprime housing market saw several of them rack up huge losses that forced the German state to bail them out.

The European Commission — which must clear costly government banking rescues — has ordered these banks to drop high-risk ventures and slim their operations.

Germany's Steinbrueck said the German federal government agrees — putting it on a collision course with some regional governments reluctant to see their local banks shrink or disappear entirely.

He said the government would Wednesday discuss a proposal to set up "bad banks" to buy up impaired or "toxic" assets such as securitized debt that can find no buyers. This would purge billion-euro losses from banks' balance sheets to allow them return to normal lending.

"We all know that the German federal government has clear expectations that this will lead to a reconstruction, to a consolidation of state-owned banks in Germany," he said. "This is the interest that the federal government and the European Commission share."

EU regulators have already ordered WestLB to scrap trading shares, bonds and options — shrinking its assets by 50 percent — and focus on lending to companies. The bank is entirely owned by the German region of North Rhine-Westphalia and must seek a new buyer by 2012.

They are also investigating Bavaria's bailout of BayernLB, the nation's second largest Landesbank, to check if it needs government aid to survive. It last year received a euro10 billion capital injection and a euro4.8 billion risk shield or guarantee to cover losses.