German financial market watchdog BaFin is setting up a special unit to support ailing German banks as it wants to be prepared for a future economic downturn, WirtschaftsWoche reported.

There is a scenario where the economy slows down and the number of nonperforming loans grows and at the same time interest rates go up, according to Raimund Röseler, executive director of banking supervision at BaFin. In this case, many German banks are likely to run into trouble as the higher risk provisions they have to make for the growing number of bad loans will hurt their profits, he told WirtschaftsWoche.

The new BaFin unit is expected to advise primarily smaller privately held banks as larger groups such as Deutsche Bank AG and Commerzbank AG fall under the supervisory remit of the European Central Bank, while failures among cooperative banks and state-owned savings banks are being supervised by their respective banking associations.

The main focus of the special unit will be to make sure that troubled banks are implementing necessary but sometime unpopular measures such as waiving bonus payments or dividends, according to Röseler.