Commercial bank WestLB will transfer a portfolio of assets worth €85bn (US$127.13bn) off its balance sheet and into a “bad bank” vehicle. In so doing, WestLB becomes the first German bank to pursue such a structure. Richard Bassett, head of WestLB’s corporate communications, confirmed to HousingWire the bank will unload a portfolio of “non-core” — but not necessarily non-performing — assets, although he could not give specifics of the assets. With the divestment, WestLB will essentially split into a “core” bank that operates under a less risk-weighted balance sheet and a “non-core” unit consisting of the transferred portfolio. It’s the latest in a round of European banks that are unwinding non-core businesses — including Northern Rock‘s recent European Commission-approved restructuring into a “good” and “bad” bank. A source familiar with WestLB’s divestment plans tells HousingWire a portion of the assets being transferred off balance sheet probably have to do with a “once-flourishing” air transport finance business largely considered secondary to WestLB’s core business. Divestment of non-core assets seems to be what the European Union (EU) seems to favor, the source said, adding other German banks may soon be forced to follow WestLB’s example. Despite the possibility the bad bank scenario may help WestLB comply more quickly than anticipated with the EC’s conditions for state aid, few other banks are likely to follow suit, according to weekly commentary by Moody’s Investors Service. The bad bank absorbs nearly 30% of WestLB’s risk exposure, said Katharina Barten, vice president and senior analyst, and Carola Schuler, managing director at Moody’s. The bad bank also keeps the non-core assets off WestLB’s balance sheet and therefore grants some relief in terms of accounting. Any expected loss on the bad bank’s exposures will be absorbed by WestLB’s public sector owners, but not WestLB itself, Moody’s indicated. But the bad bank’s scheme also comes with pay restrictions for senior managers, additional fees for the bad banks and close scrutiny of the business model, which combined pose a significant disincentive for most banks to use the scheme, Barten and Schuler said. Write to Diana Golobay.