Diplomats from other northern EU countries where state guarantees are less common have hailed Monti’s get-tough approach.Monti is due to meet Germany’s Finance Minister Hans Eichel soon to discuss the issue. In the run-up to the meeting, EU sources say Berlin is anxious to avoid a public battle with the Commission and does not see the forthcoming paper as “all negative”.But Germany is concerned that the Commission might treat any direct payment to regional banks as a guarantee, even if these handouts were intended as a general subsidy to help meet a bank’s operating costs.Under the new regime, governments and authorities would have to notify such guarantees to the Commission just as they already do for other state payments.If the guarantees were deemed to be illegal aid, the Commission could force the banks to recoup the loans they had made to companies on the strength of the guarantees. Unfortunate borrowers would then have to find alternative financing or re-negotiate their loans. Moreover, if firms went out of business in the meantime, the banks would not be protected by the guarantees.The Commission is expected to offer banks a six-month ‘grace period’ to protect them from this threat for outstanding guarantees, as long as the government or state concerned notified existing measures during this period. Monti is expected to begin implementing his ‘zero tolerance’ approach to state aids early next month with a paper setting out the Commission’s strategy for dealing with such guarantees for the first time.The move is widely seen as a thinly veiled attack on Germany, whose local Länder banks flourish despite competition from private-sector rivals largely thanks to guarantees they receive from the local governments which own them.Critics say the system shields the Landesbanks from risk and gives them a high credit rating, allowing them to win customers by offering lower interest rates than the market would offer. Other schemes aimed at giving banks the means to offer cheaper loans are also under the spotlight. This could pave the way for a repeat of the Commission’s ruling that Germany’s biggest regional bank, WestLB, should repay 0.8 billion euro to its owner, the local government of North-Rhine Westphalia.North-Rhine Westphalia transferred a local real estate company’s assets to West LB, helping it secure a ‘triple A’ credit rating. The Commission ruled the bank must pay a commercial rate of interest for the privilege of having the real estate company on its books.