Brussels, 4 June 2008
(see also IP/08/849)
Why did the Commission open proceedings against Sachsen LB?
The Commission had to investigate whether the measures in favour of Sachsen LB would have been acceptable for a market economy investor.
Under EU state aid rules, public investments in companies can be considered free of aid if they are made on terms that a private investor, operating under market conditions, would have accepted.
On that basis the Commission has for example considered that a number of capital injections in German Landesbanken in the specific circumstances of the respective cases complied with the market economy investor principle and therefore did not confer an advantage on the banks concerned (HSH Nordbank and Bayern LB - see IP/05/1096; WestLB and NordLB - see IP/07/1112). However, in the current situation the Commission had doubts whether a private investor would have invested on equal terms and the Commission had thus to investigate the cases.
What is the purpose of the opening of a formal investigation?
The purpose of initiating formal investigation proceedings according to Article 88(2) of the EC Treaty is to carry out an in-depth investigation of complex cases by exploring doubtful matters further with the Member State concerned and by hearing the views of interested third parties. The opening of a formal investigation is without prejudice to the final decision, which may still find that the aid is compatible or that the measure under investigation does not constitute aid.
What is the need for state aid control in the banking sector?
In a functioning market economy the exit of inefficient firms is a normal and even essential element. It would be detrimental for the functioning of markets if every company in difficulties were to be rescued by the state, because this would mean tolerating inefficiencies and creating adverse incentives for companies (the moral hazard problem). Moreover aid to firms in difficulty raises particular competition concerns as it can shift an unfair share of the burden of structural adjustment and the attendant social and economic cost to competing companies operating without aid and to the economies of other Member States.
Therefore, aid to firms in difficulty is one of the potentially most distortive types of state aid.
As in any other sector, crisis situations in the financial sector are usually triggered by excessive risks, bad management, defective supervision and/or fraud. In the banking sector, this can be aggravated by the risk of contagion through transmission in the interbank market. Also, the danger of moral hazard may be particularly acute in the banking sector. In such situations unchecked subsidies to one or more banks which committed management or judgment errors have, for the above mentioned reasons, the potential to significantly distort competition between banks and between the economies of the Member States.
What are the specificities of state aid cases in the banking sector?
A crisis in one or more individual banks may have particularly harmful spill-over effects on other banks or the financial system as such. History shows that a serious financial crisis can have a significant impact on GDP. Preventing those spill-over effects may require:
What are the conditions to authorise rescue aid?
The criteria laid down in the EU Rescue and Restructuring Guidelines (see MEMO/04/172) can be summarised as follows:
Which rescue aid decisions in the banking sector has the Commission approved in the past?
Our case experience so far shows that Member States have found it relatively easy to comply with the rescue aid conditions. The Commission has always approved rescue aid in a timely manner, allowing the banks to stay temporarily on the market, even in crisis situations.
Crédit Lyonnais, at the time the biggest European banking group, had run into financial difficulties in 1994 and 1995. The Commission opened its investigation in March 1995 and authorised the restructuring plan in July 1995 (see IP/95/829). A subsequent crisis triggered an urgent need of further aid in the form of a rescue and restructuring package that the French authorities notified in late September 1996, amounting to nearly frf4 billion (= €610 million). Reflecting the urgency, especially the deterioration of the bank´s rating below the investment grade, the Commission approved the rescue part of the aid package within 4 working days.
In July 2001, the Commission approved rescue aid of about €2 billion to Bankgesellschaft Berlin (BGB) with a view to enabling it to restore its solvency in the short term. The aid had become necessary following substantial losses by BGB, notably in the real estate sector.
More recently, in the Northern Rock case, the Commission received details of the measures on 26 November 2007 and decided on 5 December 2007 that the guarantee by the Treasury could be authorised as rescue aid (for details see IP/07/1859 and MEMO/07/545).
What are the conditions to authorise restructuring aid?
The aid must
Moreover, as for rescue aid, the beneficiary may not have received any rescue or restructuring aid during the past 10 years, unless rescue aid was necessary to prepare the restructuring plan under assessment.
Which restructuring aid in the banking sector has the Commission approved in the past?
Our case experience so far shows that the rescue and restructuring guidelines provide an appropriate framework to deal with restructuring cases, also in the banking sector.
In the BAWAG case, the fourth-largest bank in Austria had run into difficulties following speculative financial investments during the period 1995 to 2004. BAWAG made considerable losses and was not able to close its 2005 balance sheet. As depositors withdrew large amounts of money from saving accounts in spring 2006, the Austrian Parliament adopted a law in order to avoid a severe liquidity crisis. The law provided for a financial guarantee worth €900 million to the bank, subsequently authorised by the Commission, under the condition that the restructuring plan and compensatory measures, including the sale of the bank, would be implemented (see IP/07/898).
In the Bank Burgenland case, the Commission approved restructuring aid totalling €360 million. Bank Burgenland's privatisation was an essential component of the restructuring plan which was approved by the Commission.
In February 2004, the Commission approved three aid measures granted in favour of Bankgesellschaft Berlin AG (BGB) with an economic value of about €9.7 billion (see IP/04/234). In order to compensate for the distorting effects of such significant aid measures, Germany and the Land Berlin committed to a variety of divestitures. This included the commitment to divest Berliner Bank, one of BGB's two retail brands, to hive off the real estate services subsidiaries which were the main cause for the crisis and, finally, to sell BGB by the end of 2007.
All these cases are good examples for in-depth investigations that did not disturb the banks or the financial sector but were the start of a successful restructuring story.
How did the Commission manage to conclude an in-depth analysis of the restructuring aid in less than four months?
The Commission and the German authorities engaged in a very effective collaboration in this case. A dedicated team has been set up in DG Competition to deal with the rescue and restructuring aid cases linked with the on-going banking crisis. Contacts were held between this team and the German authorities on a weekly basis. Intense negotiations took place to agree notably the restructuring plan and the compensatory measures necessary to limit competition distortions. A positive result was supported by the fact that LBBW had already agreed to purchase Sachsen LB and was keen to a rapid resolution of the case in order to optimise synergies from the merger.
What is the current status of the WestLB case?
On 30 April 2008 the Commission approved a risk shield of €5 billion granted by the State of North Rhine-Westphalia to protect WestLB against the volatility of its €23 billion special purpose vehicle which will be ring-fenced from WestLB's balance sheet (see IP/08/665). The measure was approved as compatible rescue aid because strict conditions ensure that the aid is limited in time and is reversible. This approval does not prejudice the Commission's assessment of the restructuring plan Germany has committed to submit by 8 August 2008.
What is the current status of the IKB case?
On 27 February 2008, the Commission opened the formal investigation procedure (see IP/08/314) and has since then been in close and regular contact with the German authorities. In contrast to Sachsen LB, which was immediately sold to LBBW, the selling process of KfW's shares in IKB is still ongoing.
What is the current status of the Northern Rock case?
On 2 April 2008 the Commission initiated a detailed investigation into the State aid measures which support the restructuring plan of Northern Rock (see IP/08/489). Notably, the Commission raised doubts whether the restructuring plan will allow the firm to restore its long term viability and therefore requested further information from the UK authorities in this regard. The decision also invited third parties to comment on whether the measures proposed by the UK for avoiding undue distortions of competition are adequate.
The decision should be published in the EC's Official Journal beginning of June. All interested parties will be invited to submit their comments within one month following the publication. Thereafter, the UK will have the possibility to reply to any comments submitted by interested parties.