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State aid: Commission temporarily authorises recapitalisation and asset relief for German bank LBBW

European Commission - IP/09/1058   30/06/2009

Other available languages: FR DE

IP/09/1058

Brussels, 30 st June 2009

State aid: Commission temporarily authorises recapitalisation and asset relief for German bank LBBW

The European Commission has granted temporary clearance to a recapitalisation and an asset relief measure provided to Landesbank Baden-W ürttemberg (LBBW) by the German State of Baden-W ürttemberg. The recapitalisation complies with the requirements set out in the Commiss ion's communication on the recapitalisation of financial institutions (see IP/08/1901 ), because it foresees an adequate remuneration. However, the Commission has doubts whether the asset relief measure can be considered fully in line with the Commission's guidance on asset relief (see IP/09/322 ). Therefore, the Commission will undertake a further in-depth analysis of the complex valuation of the impaired assets before taking a final decision. Both measures have been approved for six months.

Competition Commissioner Neelie Kroes said: " An impaired asset relief measure, like a recapitalisation, can be a useful instrument for maintaining trust in financial markets. However, the Commission has the duty to verify in detail that the valuation is done properly, to ensure that an asset relief measure does not unduly distort competition. I also expect LBBW to submit a restructuring plan shortly."

Landesbank Baden-Württemberg is a commercial bank which which operates internationally but with a particular focus on Baden-Württemberg, Rhineland Palatinate and Saxony. Its business model is mainly centred on SMEs (Mittelstand). It also acts as the central bank of the savings banks in Baden-Württemberg, Rhineland Palatinate and Saxony. With a balance sheet of about €450 billion, the bank is the fifth largest bank in Germany. The bank had about €180 billion risk weighted assets as of end-2008. The bank is owned by the Land Baden-Württemberg, the savings banks association of Baden-Württemberg, the city of Stuttgart and the Landeskreditbank Baden-Württemberg. All shareholders are either public entities or owned by public entities.

The asset relief is to be achieved via a guarantee structure, not through a sale of assets. The guarantee protects LBBW against credit losses potentially resulting from two separate portfolios of securitised assets. LBBW will retain the risk of default up to a certain amount (first loss piece), while the State of Baden-W ü rttemberg will bear potential losses exceeding this amount (second loss piece). The guarantee is provided for a term of five years and can be terminated at the request of LBBW.

The portfolios covered consist of structured credit products such as residential mortgage backed securities, commercial mortgage backed securities, collaterali sed debt obligations, collateralised loan obligations, and asset backed securities. Geographically, the exposures are focused mainly on the US and Europe. Due to the ongoing deterioration of the underlying assets, LBBW was faced with sharply increasing regulatory capital requirements which necessitated urgent remedial action.

In addition, LBBW will receive a capital injection of €5 billion from its owners. The capital injection became necessary to cope with higher expectations of market participants and rating agencies regarding capital ratios. The bank will pay an overall remuneration of 10% for the capital provided to it. It is therefore in line with the requirements of the Recapitalisation Communication.

As a preliminary result of its assessment of the complex asset relief measure, the Commission decided for reasons of financial stability, similar to those governing the assessment of rescue aid, not to raise objections for a period of six months. However, as some conditions required by the Impaired Asset Communication need further in-depth analysis, in particular regarding valuation, the Commission has decided to open an in-depth investigation on this and corresponding elements like burden sharing.

The non-confidential version of this decision will be made available under the case number N138/2009 in the state aid register on the DG Competition website once all the confidentiality problems have been resolved. New publications of state aid decisions on the internet and in the Official Journal are listed in the online newsletter State aid Weekly e-News ).


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