Brussels  - The European Union on Friday approved a German law allowing the creation of "bad banks" to relieve working banks of assets whose value has collapsed in the financial crisis.

"The European Commission has approved ... a German scheme designed to further stabilize the financial markets by providing financial institutions with the possibility of asset relief," the EU's Brussels-based executive said in a statement.

The scheme is aimed at making banks profitable again by allowing them to hand over "toxic" assets, whose value has been reduced to zero or cannot be assessed, in return for bonds whose value is known and guaranteed.

The idea is to give banks confidence in their own investments, and therefore enable them to start lending to businesses once again.

The commission is tasked with making sure that government bail-outs in one member state do not give companies there an unfair advantage over competitors in other countries.

The German law includes strict rules on how the impaired assets should be valued and how the banks in question should pay for the rescue scheme, the commission pointed out in its decision.

German banks will have six months to apply to take advantage of the offer. (dpa)