Germany's cabinet has agreed a 'bad bank' scheme to clean up toxic assets from banks' balance sheets.

The plan, which has become a political hot potato five months before a general election, would allow banks to put their bad assets in specially-created institutions for up to 20 years.

The German government hopes that removing these bad holdings from balance sheets will encourage them to begin lending to each other and to businesses and consumers, kick-starting an economy expected to shrink by 6% this year.

After dumping these toxic assets - mainly securities which have become virtually worthless or that cannot be sold because of frozen markets - banks receive government-backed bonds worth 90% of the value of the original asset.

20 years later, the value of these assets will be assessed to determine the final cost to the taxpayer, although the finance ministry has stressed that bank shareholders will have to pick up at least part of the tab.

Andreas Schmitz, from the federation of German private banks, said the scheme was like 'a huge freezer in which each bank will have a shelf'.