State aid: Commission launches probe into state bail-outs of IKB and Sachsen LB
European Commission - IP/08/314 27/02/2008
Brussels, 27 February 2008
The European Commission has opened under EC Treaty state aid rules an in-depth investigation into state support measures in favour of the German banks IKB and Sachsen LB. As a consequence of investments in US sub-prime markets, both banks ran into financial difficulties. During the summer of 2007, the state owned bank Kreditanstalt für Wiederaufbau (KfW) provided a risk shield of around €9 billion to IKB and a group of Landesbanken granted liquidity assistance of around €17 billion to SachsenLB. Without these and several subsequent measures the banks would not have been able to continue their business. The Commission has to assess whether these measures constitute state aid and, if so, whether they can be found compatible with EU rules for rescuing and restructuring firms in difficulties. The opening of an investigation is common for state interventions of this magnitude and gives interested parties a possibility to submit their comments. It does not prejudge the outcome of the procedure.
Competition Commissioner Neelie Kroes said: “It is generally acknowledged that public authorities might need to react to threats to the stability of the financial markets. For its part, the Commission has to ensure that such interventions do not unduly distort trade in the markets. Otherwise it is hard for European citizens to understand why they have to suffer from the economic downturn, while taxpayers' money is poured into once profitable banks that took excessive risks and might now avoid paying for their risky strategies."
In January 2008 Germany notified the measures and the Commission needs to assess whether they constitute state aid and, if so, whether such aid can be found compatible with the Single Market.
Germany maintains that the measures comply with the market economy investor principle and do not constitute state aid.
On the basis of the information provided, the Commission will investigate whether the measures would have been acceptable for a market economy investor and that they can therefore be considered free of aid.
Should the Commission come to the conclusion that the measures constitute state aid, such aid could be found compatible if it fulfils the conditions of the EU guidelines on state aid for rescuing and restructuring firms in difficulty. The Commission will in particular investigate whether the envisaged restructuring is capable of restoring the long-term viability of the banks, whether the state support is limited to the minimum necessary, and what kind of compensatory measures would be suitable to minimise potential distortions of competition created by the aid.
IKB Deutsche Industriebank AG is a medium-sized German bank with a balance-sheet total of €52 billion, based in Düsseldorf. IKB's main shareholder is Kreditanstalt für Wiederaufbau (KfW), a state-owned German development bank.
IKB provided several liquidity facilities to Rhineland Funding Capital Corporation and invested in Rhinebridge Funding, corporations which were exposed to the US subprime crisis. On 30 July 2007, KfW provided a guarantee for €8.1 billion of liquidity for one of IKB's special investment funds and protected the bank against €1 billion of losses resulting from other subprime investments. Three German banking associations agreed to take over 30% of the risks involved. On 30 November 2007 KfW and the banking associations covered additional risks estimated at €350 million. In January 2008 the first two measures proved to be insufficient. On 13 February 2008, the German federal government mandated KfW to inject additional €2.3 billion of capital into IKB in order to allow the bank to carry on its business. The banking associations agreed to participate in the renewed support.
Landesbank Sachsen Girozentrale (Sachsen LB) is based in Leipzig, with a group balance-sheet total of €67.8 billion. Sachsen LB is the central institution for the savings banks in Saxony and acts as their link to the global financial markets. The shareholders of Sachsen LB are the Land of Saxony and Sachsen-Finanzgruppe, a holding company linking eight Saxon savings banks.
Sachsen LB faced a serious liquidity problem in August 2007 when it was no longer able to refinance one of its special investment funds, the Ormond Quay conduit, which was exposed to the US sub-prime crisis. A banking pool consisting of the sister Landesbanken and the savings banks association committed to buy Ormond Quay's commercial papers of up to €17.1 billion.
One week later Sachsen LB realised further losses of €250 million through two hedge funds. Since Sachsen LB's equity approached the minimum regulatory capital requirements, the owners of Sachsen LB had to find a sustainable solution for the bank. On 26 August 2007 an agreement to sell Sachsen LB to Landesbank Baden–Württemberg (LBBW) was concluded.
A structured investment portfolio of €17.5 billion, including Ormond Quay, was excluded from the sale and transferred into a newly created special investment vehicle, the "Super SIV". The Super SIV's financing is provided by LBBW and the member banks of the Guarantee Fund of the Landesbanken. In order to enable the Super SIV's financing the Free State of Saxony granted a guarantee over an amount of €2.75 billion to the Super SIV.
The opening of a formal investigation procedure does not prejudge whether the measures concerned are in line with the EU state aid rules. However, a final decision is a necessary step to ensure legal certainty for the aid beneficiaries and their business partners.
The non-confidential version of the decisions will be made available under the case numbersC(2008) 711/3 for IKB and C(2008) 714/3 for Sachsen LB 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.
See also MEMO/08/124.