Brussels, 15 th December 2009
State aid: Commission approves LBBW restructuring plan and impaired assets relief measure
The European Commission has approved under EU state aid rules the impaired asset relief measures and the restructuring plan of German-based financial institution Landesbank Baden Württemberg ("LBBW"). The restructuring plan demonstrates that LBBW is able to restore its viability while undue distortions of competition will be mitigated. Also the bank's own contribution to the restructuring costs is ensured through loss participations by hybrid capital holders. In addition, changes in the bank's corporate governance structure will provide an additional safeguard against excessive risk-taking and ensure that LBBW will be run on a sound commercial basis. The Commission has therefore concluded that the measures are compatible with EU rules on state aid to remedy a serious disturbance in a Member State's economy (Article 107(3)(b) of the Treaty on the Functioning of the European Union - TFEU).
Competition Commissioner Neelie Kroes said: "This decision shows that German Landesbanks can meet the Commission's criteria for viable banks if they have the right business model. LBBW will now focus its activities in financing German Mittelstand enterprises, away from risky investment activities. I am particularly pleased with the improvements in corporate governance which should not only increase corporate oversight but also ensure that LBBW will be run on a purely commercial basis."
LBBW is one of the few Landesbanks which is vertically integrated. LBBW serves corporate and private clients and is the local savings bank in Stuttgart. Its core regions are Baden-Württemberg, Saxony and Rhineland Palatinate. LBBW is also active in real estate financing and has financial market activities. LBBW’s balance sheet totalled €448 billion at the end of June 2009.
LBBW is owned by Land Baden-Württemberg, the Savings Banks Association of Baden-Württemberg, the city of Stuttgart, and the Landeskreditbank Baden-Württemberg.
The bank received two support measures; an injection of €5 billion of Tier 1 capital and an impaired assets relief measure through guarantees of €12.7 billion for two portfolios of structured securities amounting to €35 billion in total (see ).
The restructuring plan
The restructuring plan provides that LBBW will substantially change its business model by focussing on its regional core banking businesses and reducing capital market activities and proprietary trading. Overall, balance sheet reductions will amount to about 40% compared to 2008 year end figures.
In addition, LBBW will implement a series of corporate governance changes with the aim of increasing corporate oversight and reducing the potential for undue influence on its day-to-day management. LBBW will – inter alia – change its current legal status to that of a joint stock corporation. New requirements regarding the qualification of board members set out in EU Banking Directive (2006/48/EC) will be complied with immediately. Additionally, key elements of the voluntary German corporate governance codex will be implemented by LBBW before the end of 2010.
The Commission's doubts regarding the remuneration of the impaired assets measures as initially notified have been confirmed. However, in the meantime LBBW has made the commitment to increase the remuneration to be paid to the Land of Baden Württemberg, bringing the measure in line with the Commission Guidelines on impaired assets (see ).
Moreover, the Commission concluded that the restructuring measures will enable LBBW to restore its long-term viability. In particular, there will be a clear focus on lending activities and the remaining capital market activities should no longer have the potential to jeopardise the bank's soundness. LBBW will also make a sufficient own contribution to the costs of the restructuring. In particular, LBBW has accepted to meet the Commission's criteria on burden sharing by enabling loss-participation by the holders of hybrid capital through the non release of reserves (for details of the rules applied regarding proper burden sharing, see ). Finally, in view of the appropriate remuneration of the aid and burden sharing the Commission is satisfied that the measures set out in the restructuring plan will sufficiently offset the distortions of competition brought about by the aid.
In addition, the Commission considers that the corporate governance changes should ensure that LBBW's soundness will not be put at risk any more and thus support its return to viability.
The non-confidential version of the decision will be made available under the case number in the on the . New publications of state aid decisions on the internet and in the Official Journal are listed in the .