THE GERMAN government has promised to charge banks "so much that it hurts" to participate in the €500 billion rescue plan for the financial system announced yesterday in Berlin.

After abandoning its strategy of individual bank bailouts yesterday, a frustrated finance minister Peer Steinbrück said he will help banks only if they agree to tighter financial regulations, drastic cuts in bank manager salaries and a freeze on shareholder dividends.

"I'll tell you what I think: no bank manager should earn more than €500,000, with no bonuses and no severance packages," said Mr Steinbrück.

His department's rescue plan has gifted the German language with a new mouthful of a word - Finanzmarktstabiliserungsgesetz, or law to stabilise the financial markets - and exposes the taxpayer to three separate risks.

There's a €400 billion, three-year guarantee to improve general inter-bank liquidity; an €80 billion recapitalisation fund for all banks operating in Germany until the end of 2009; and a further €20 billion to top up either of the two funds as necessary.

Berlin expects about 5 per cent of this fund to be lost to defaults, and Mr Steinbrück admitted yesterday that, in extreme cases, the billions may be used to buy up banks' bad assets "if it becomes clear that other measures won't be enough to keep the system in balance".

The government has also agreed to rewrite valuation rules to allow banks to reclassify the value of their assets based on their purchase price and not short-term the current market value.

Mr Steinbrück defended himself against accusations of flip-flopping on a rescue package.

Germany could not apply rescue plans from other countries, he said, because its banks are not yet experiencing a credit crunch, the country had no property price bubble and Germans had a high 10 per cent savings average.

The immediate consequence of the German bailout is that Mr Steinbrück has given up his ambitious plan to balance the German federal budget by 2011.

Politicians in Berlin's grand coalition fear being punished in next year's general election by voters outraged over perceived corporate greed. Chancellor Merkel was at pains yesterday to assure Germans that the billions earmarked for restoring trust and stability to banks may never be required.

"It serves the protection of citizens, not the protection of bank interests," she said of the plan.

The German leader promised that she would again demand the kind of financial regulation she saw blocked by the US and Britain during her G8 presidency last year. "I've spoken often about the need to change international finance rules and too much time has been wasted already," she said.