Germany's private banks called for euro zone policymakers to finally accept that Greece is insolvent and also pressed for rules that would force lenders to set aside capital on their balance sheets for government bonds, a magazine reported.

Greece is not able to pay back its current debts even over the course of generations, said Andreas Schmitz, the head of German bank lobbying group BdB, in an interview with the WirtschaftsWoche.

Schmitz called for a change in Basel III regulations, which spell out the amount of capital reserves that banks must set aside for so-called risk-weighted assets.

Under the current Basel II rules and EU guidelines, all euro zone sovereign debt can be assigned zero risk, which has provided a strong incentive for banks to buy and hold government bonds.

The current situation shows that zero (risk weighting) accounting doesn't accurately reflect reality, Schmitz said.

Politicians are not tackling this issue, since it concerns them, he added, explaining that this exemption has helped sovereign borrowers market their debt to banks.

Hesse, the German federal state home to the country's banking center of Frankfurt, said late in September it would push for an end to the exemption of capital reserves for central government debt.

The exemption distorts investment markets and sweeps under the carpet the actual inherent risks, said Hesse's finance minister, Thomas Schaefer, and its economy minister, Dieter Posch, at the time.

At the same time, Schmitz opposed a forced recapitalization of German banks, because it would only cause further uncertainty in the markets.

Compulsory recapitalizations do not solve the political crisis of confidence, he said.

(Reporting by Christiaan Hetzner, editing by Jane Baird)

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