Q+A - Germany drafts legislation to nationalise banks

BERLIN, Feb 18 (Reuters) - German Chancellor Angela Merkel's cabinet has approved a draft law which would allow Berlin to nationalise stricken banks and, as a last resort, expropriate their shareholders to shore up the financial system.

Below are some questions and answers about the proposed legislation, which must still be approved by the German parliament.

WHAT IS THE GOAL OF THE NEW LEGISLATION?

The draft legislation, an extension of Germany's existing bank rescue law, was formulated to allow the government to take control of Munich-based lender Hypo Real Estate HRXG.DE, a high-profile casualty of the financial crisis. Hypo has received a total of 102 billion euros ($129 billion) in guarantees from the state and fellow banks but its financial condition remains uncertain. Because of its key role in the 800 billion euro Pfandbrief covered bond market, the government has said it cannot be allowed to fail.

WHY DOES BERLIN NEED A LAW TO NATIONALISE A BANK?

Germany's "Basic Law", or constitution, forbids the expropriation of shareholders without the establishment of a new law. In the case of Hypo Real Estate, the government wants the option of expropriation because without it, it might have trouble taking full control of the bank. This is because U.S. private equity investor JC Flowers owns nearly a quarter of Hypo's shares.

WILL BERLIN EXPROPRIATE JC FLOWERS SHARES?