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State aid: Commission extends investigation into WestLB's bad bank and restructuring
The European Commission has extended its ongoing state aid investigation into Westdeutsche Landesbank (WestLB) after reaching the conclusion that the bank has received an estimated €3.4 billion more in state subsidies than was initially foreseen in the process of transferring its portfolio of impaired assets to a bad bank. Before the Commission can approve the aid, which comes on top of the support received by the bank since the start of the financial crisis, further restructuring measures to address the distortions of competition, or alternatively, its gradual reimbursement, should be considered. In the meantime the Commission continues to doubt the viability of the bank.
“Our estimate is that WestLB has received a further €3.4 billion in the process of transferring its toxic and other impaired assets to the bad bank, bringing the total amount in this regard to €6.95 billion. At this stage either the German government notifies further restructuring measures to compensate for the additional distortion of competition or the aid should be progressively clawed back. Therefore, our assessment of the viability of the bank depends on the way these options will be considered by the German authorities." said Commission Vice President in charge of competition policy Joaquín Almunia.
WestLB operates largely as central bank and provider of services for the saving banks of North Rhine-Westphalia (NRW), Germany's biggest regional bank network. It also has commercial and investment banking operations. The bank has received significant State support through repeated risk shields after its big structured securities portfolio resulted in heavy losses.
In May 2009 the Commission approved the subsidies granted that far on the condition of a restructuring of the bank involving the refocusing of its activities on core, less risky activities and the sale of a majority stake of the bank. This was to ensure the bank shares the burden of its restructuring and to address the distortions of competition (see IP/09/741).
Subsequently, and as part of the restructuring plan, Germany set up a bad bank, the Erste Abwicklungsanstalt (EAA), to which WestLB hived off a portfolio of toxic and non-strategic assets representing approximately 30% of the bank's total assets with a view of their progressive liquidation. As the bad bank was expected to make losses, it received €3 billion in capital from State agency SoFFin.).
This aid was not foreseen in the original restructuring plan but as Germany argued financial stability grounds, the operation was granted temporary approval only. This is because the Commission had doubts whether the asset relief measures complied with the Impaired Asset Communication (IAC) (see IP/09/322). The Commission also doubted the bank's viability and, in view of the additional aid, whether it was bearing an adequate share of the rescue burden and addressing the additional distortions of competition. A new investigation was, therefore, opened under Article 108(2) of the Treaty on the Functioning of the European Union (TFEU) (see IP/09/1996 of 22 December 2009).
Today's decision establishes that the bank's toxic and non-strategic assets have been transferred well above their real long-term economic value (REV), an advantage that is estimated at a total of €6.95 billion. This valuation was finalised in September this year with the help of external experts, as foreseen in the Impaired Asset Communication.
Of this, €3.267 billion represents equity for which SoFFin is supposed to be remunerated. Another €268 million is a transferred embedded liability that is unlikely to materialise. It leaves a total of €3.414 billion in further State support for which WestLB is not providing any remuneration, which further distorts competition and leaves too large a burden on the shoulders of the taxpayer.
In principle this is not allowed. Therefore, at this stage, the Commission believes the additional aid is not in line with the Impaired Asset Communication unless it is accompanied by further restructuring measures or the corresponding amount is ultimately recovered from WestLB. Hence the extension of the probe opened in December.
The Commission's doubts about the viability of the bank have also increased. The bank's adjusted profit and loss projections, shows that the business model still relies on comparatively volatile and risky activities which does not provide the room for manoeuvre necessary for such unstable business. Moreover, Commission at this stage also misses sufficient measures for an adequate burden sharing and to address the increased distortions of competition.
The non-confidential version of the decision will be made available under the case number C40/2009 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.