FRANKFURT, (Reuters) - The president of Germany's financial watchdog BaFin broke his silence, speaking for the first time publicly since the sub-prime crisis rattled Germany and warned that it could also suck in insurers.

"Insurers don't invest in a vacuum and so they have also been landed with structured products," said Jochen Sanio, president of the German Federal Financial Supervisory Authority (BaFin).

"Insurers could also be part of a bigger international group or financial conglomerate, which makes them vulnerable to what is happening; for example, when they are connected to a bank that manages a SIV (Structured Investment Vehicle) or Conduit."

"The issue is mainly reputational risk, but this should not be underestimated."

Dresdner Bank, owned by German insurer Allianz, for example, manages such SIVs. The insurer recently said that it had conduits and SIVs of 28 billion euros managed for third parties.

Germany has been one of the countries most affected by the credit crunch, which came to a head in 2007 as less creditworthy US borrowers defaulted on their so-called sub-prime home mortgages.

Two German banks nearly collapsed and others have had to take heavy write-downs.

Sanio helped broker rescue packages for the country's two biggest subprime casualties — small-company lender IKB and regional state lender SachsenLB.

"The groups must equip their risk management systems so that they can see when extreme situations are approaching and make sure that they are in a position to deal with them when they arrive," Sanio told journalists.

"Expertise, risk management and money — many of the banks who crashed in the sub-prime crisis didn't have any of those."

He pointed to the structure of Germany's banking system in explaining how the crisis ended up battering many of the country's biggest banks.

"The profitability is to a large extent insufficient because the competition here is hard," said Sanio.

Germany's banking system is dominated by the state, which has seen the country sprout too many bank branches. This in turn has squeezed profits for commercial banks. Banks such as IKB looked abroad for ways to cushion their earnings.