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Brussels, 12th December 2008

State aid: Commission approves modifications to German financial rescue scheme

The European Commission has approved, under EC Treaty state aid rules, modifications to the German rescue package for financial institutions, initially approved by the Commission on 27 October 2008 (see IP/08/1589). The amendments concern mainly the remuneration of recapitalisation measures, in line with the Commission's Communication on recapitalisation (see IP/08/1901). Although basic remuneration rates may, in certain cases, be below the rates foreseen in the initial package, the price for the state participation increases in proportion to its duration, so as to incite beneficiaries to pay back the state support as soon as market conditions permit it. This will ensure the proportionality of the amended measures and contribute to the adequacy of the whole scheme to remedy a serious disturbance in the German economy. The Commission therefore concluded that the German rescue package, as amended, was compatible with Article 87.3.b of the EC Treaty.

Competition Commissioner Neelie Kroes said: "The present decision demonstrates again, how quickly and effectively the Commission can adapt to changing conditions in the financial markets with good cooperation from Member States. On this basis we have now finally found an acceptable solution in order to allow confidence building and credit stimulating measures in Germany including the recapitalisation of Commerzbank".

On 11 December 2008, Germany informed the Commission about a set of modifications, it intended to make to the German support package for financial institutions (see IP/08/1589). These amendments are aimed at adapting the package to the Commission's Communication on recapitalisation (see IP/08/1901) and to changes in the fast evolving financial markets.

The main amendments concern the following basic features of the recapitalisation measures:

  • Entry level - remuneration for fundamentally sound banks - in line with the Communication on recapitalisation, the remuneration for such measures would depend on the risk profile of the beneficiary and on the capital instrument. For fundamentally sound financial institutions the basic remuneration would vary according to the risk profile and instrument chosen from 7% (for subordinated debt) to 9.3% (for instruments with features like ordinary shares), whereas institutions in distress would have to pay a minimum of 10%. These minima would not apply if private investors participate under the same conditions and to a significant extent in the capital injection. In particular, for hybrid capital which is considered as core tier 1 capital, there will be an entry remuneration of 9 % for fundamentally sound banks.
  • Step up - in order to ensure that strong incentives exist to encourage beneficiaries to pay back the state support as soon as market conditions permit Germany proposed a combination of two measures: either the banks accept a dividend ban or they increase the remuneration by 0.5 % per annum over the next 5 years. The increase can be smaller if a dividend ban is maintained at least for some years or a dividend restriction is accepted.
  • Restructuring plan - The Commission accepted in principle that fundamentally sound banks do not need to provide a restructuring plan. They have however to provide a report that illustrates that they remain fundamentally sound and how they plan to repay the state capital.
  • Other banks still need to pay a remuneration of in principle 10 % and need to provide a restructuring plan after six months in order to enable the Commission to assess the need for structural interventions.

Further amendments concern the possibility of extending the duration of debt guarantees of up to five years under certain circumstances and for limited amounts. Moreover, in case a guarantee is given for collateralised claims the remuneration can be reduced.

The Commission is satisfied that as a result of its dialogue with the German authorities, the banking rescue package has been adjusted to changing market conditions, including a reduction of interest rates by the European Central Bank. The adjusted package takes into account the latest guidance of the Commission and may as a result also attract fundamentally sound banks. The Commission understands that the recapitalisation conditions for Commerzbank are being amended so as to comply with the new scheme.

The non-confidential version of the decision will be made available under the case number N625/2008 in the State Aid Register on the DG Competition website once any confidentiality issues have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the
State Aid Weekly e-News

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