EN Official Journal of the European Union L 116/1

COMMISSION DECISION

of 18 February 2004

on restructuring aid implemented by Germany for Bankgesellschaft Berlin AG

(notified under document number C(2004) 327)

(Only the German text is authentic)

(Text with EEA relevance)

(2005/345/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community, and in particular the first subparagraph of Article 88(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having regard to Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (1), and in particular Article 7(3) thereof,

Having called on Member States and other interested parties to submit their comments (2) and having regard to their comments,

Whereas:

I. PROCEDURE

(1) After approval of the rescue aid for Bankgesellschaft Berlin AG (BGB or ‘the bank’) by Commission decision of 25 July 2001 (3) and after notification by Germany of the restructuring plan on 28 January 2002, the Commission informed Germany by letter of 9 April 2002 of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the restructuring aid (4).

(2) On 17 June 2002, after Germany had requested an extension of the deadline for a reply, which was granted, and after German representatives had twice met representatives of the Commission, Germany submitted its observations, with additional documents and information. On 31 July the Commission sent Germany a further request for information.

(3) When it published its decision to initiate the procedure in the Official Journal of the European Communities (5), the Commission also called on other interested parties to submit their comments. On 9 July and, after it had extended the deadline, on 22 July 2002, it received observations from a competitor and from another interested party who requested that his identity remain confidential. On 1 August these observations were forwarded to Germany for comment. Germany’s comments were received, after extension of the deadline, on 23 September.

(4) In response to Commission requests, Germany supplied further information on the notified aid measure by letters dated 16 and 20 September, 14 and 18 November and 18 December 2002 and 14 February and 14 March 2003. The Commission was also informed of the stage reached in the restructuring process at a number of meetings with representatives of Germany, the Land of Berlin and BGB.

(5) At a meeting held on 26 March 2003, Germany informed the Commission of the reasons of the previous day’s failure of the call for bids with a view to the privatisation of Bankgesellschaft Berlin AG, for which an international public tender had been launched back in 2002. On 31 March further information on this point was supplied, as were the balance sheet and profit‐and‐loss account for 2002.

(6) The Commission made further requests for information on 15 April, 6 May and 16 May 2003, which were answered on 15 May, 28 May and 24 June respectively. Further information was discussed in a letter of 1 July and at meetings with representatives of Germany, the Land of Berlin and BGB which took place on 4 April, 11 April, 14 May and 9 July.

(7) On 14 July 2003 the Commission asked the auditing firm Mazars Revision & Treuhandgesellschaft mbH, Wirtschaftsprüfungsgesellschaft, Düsseldorf, as a consultant, to analyse certain aspects of the restructuring plan. The conclusions were discussed with Germany on 3 October, and the final report was presented to Germany on 20 November 2003.

(8) In October 2003 the need for further compensatory measures was discussed, partly in the presence of representatives of the bank. In November the Commission informed Germany of the measures it was contemplating and gave it and the bank the opportunity to comment on the financial implications for the bank, which were discussed in December. On 18 December 2003 it was agreed that Germany would give the Commission an undertaking to divest Berliner Bank separately by 1 October 2006, the sale being effective no later than 1 February 2007, and to privatise the group by 31 December 2007, together with other divestment measures.

(9) Germany submitted to the Commission on 29 January 2004 the revised restructuring plan, which took account in particular of the recommendations of the Commission’s consultants, and on 6 February the commitments relating to the revised restructuring plan.

II. DESCRIPTION OF THE AID

(10) BGB is the holding company that owns the BGB group, which was formed in 1994 by the amalgamation of several credit institutions formerly controlled by the Land of Berlin; BGB also does business as a credit institution in its own right. In 2000 BGB had a group balance sheet total of about EUR 205 billion in 2000, about EUR 189 billion in 2001 and about EUR 175 billion in 2002. This put it in tenth place among German banks in 2001 and in twelfth place in 2002. It employed some 17 000 people in 2000, a little over 15 000 in 2001 and about 13 000 in 2002. For the purposes of the Banking Law (Kreditwesengesetz), its core‐capital ratio was 5,7 % at the end of 2001 (total capital ratio of 9,4 %), while at the end of 2002 its core‐capital ratio was 5,6 % (total capital ratio of 9,4 %). In June 2001, before the rescue aid was approved, the core‐capital ratio had fallen to [...]* (6) % (total capital ratio of [...]** %).

(11) Before the capital injection of August 2001, the Land of Berlin held 56,6 % of the shares in BGB; it now has about 81 %. Other shareholders are Norddeutsche Landesbank (NordLB), with about 11 %, and Gothaer Finanzholding AG, with about 2 %. About 6 % of the equity is in dispersed ownership.

(12) The largest subsidiaries or divisions in the BGB group, which likewise engage in banking, are Landesbank Berlin (LBB) and Berlin‐Hannoversche Hypothekenbank AG (BerlinHyp). LBB is an institution established under public law in which BGB has an atypical undisclosed holding (atypisch stille Beteiligung) of 75,01 %. There is a profit‐and‐loss transfer agreement which means that, in economic terms, BGB can be deemed to be LBB’s sole owner. BerlinHyp engages in real estate financing; BGB owns 89,9 % of the equity.

(13) The group also includes IBAG Immobilien und Beteiligungen Aktiengesellschaft (IBAG), which operates in the real estate services business previously handled by Immobilien und Baumanagement der Bankgesellschaft Berlin GmbH (IBG). Directly or indirectly, BGB also controls or has controlled various other domestic and foreign firms, such as Weberbank, Allgemeine Privatkundenbank AG (Allbank, now sold), BGB Ireland, BGB UK, BG Polska (the retail and Inteligo internet businesses have now been sold, and liquidation of the remaining shell has begun) and the Czech bank Zivnostenska Banka a.s. (now sold).

(14) BGB’s core business is retail banking for private and corporate customers, where it trades under the two names Berliner Sparkasse and Berliner Bank. These are not legally independent subsidiaries, but rather brands or branches. Since 1 July 2003 Berliner Bank has belonged to LBB, as Berliner Sparkasse already did (7). The corporate clients are mainly small and medium‐sized enterprises in the region.

(15) Apart from retail banking, real estate financing and real estate services, BGB and its subsidiaries also operate on capital markets (money and securities dealings) and in two segments which are to be run down or drastically cut back, the large customer/international segment (e.g. project and export financing) and the public sector segment (lending). The investment banking business comprised only some relatively limited share and bond issues and will play no further independent role in future. Geographically, BGB’s business is concentrated in the Berlin area and the Land of Brandenburg, especially as far as retail banking is concerned. But it does also operate countrywide, e.g. in real estate financing, and internationally, e.g. on capital markets.

(16) In the Berlin area BGB is the market leader in retail banking, with shares of individual segments ranging from about 20 % to over 50 % (8). In terms of first giro accounts held by private customers, it estimates its own market share or penetration in 2002 at 48 % (9). In terms of nationwide real estate financing (all mortgage lending), according to the information supplied with the notification, BGB had a market share of about 5 % in 2000, which put it in third place. According to more recent information, its ranking is not as high, or has fallen back in the meantime (10). On 31 December 2001 BGB’s portfolio of mortgages amounted to EUR 33 billion, of which 90 % was in Germany, and the rest related to real estate financing abroad. In other lines of business, BGB is not among the leading banks either inside Germany or internationally. Precise figures for market and segment shares here are not available.

(17) The difficulties at BGB that publicly emerged in 2001 had their origin in the first place in real estate services but also in real estate financing. Two important components in the real estate services provided in the 1990s by BGB’s subsidiary IBG were real estate funds, project development and building work. IBG was set up at the beginning of the 1990s as a subsidiary of LBB; in the second half of the 1990s the shareholders were BGB itself (10 %), Berliner Bank AG (30 %), LBB (30 %) and BerlinHyp (30 %). Berliner Bank AG was then merged into BGB AG, and BGB AG inherited Berliner Bank’s shares in IBG. The ownership structure is currently as follows: 40 % BGB, 30 % LBB and 30 % BerlinHyp.

(18) Prior to 2000 IBG set up an increasing volume of real estate funds. Investors in these funds were given extensive guarantees, particularly long‐term guarantees regarding rent, dividends and renewal. In order to set up new funds, new property was acquired or built. The guarantees were based on an expectation that property values would be high or indeed rising, which meant that risks accumulated as prices and rents in fact dropped, especially in Berlin and the new Länder.

(19) When these problems began to emerge in the course of 2000, BGB considered selling IBG’s main business. In December 2000, therefore, the bulk of IBG’s business was transferred to the newly set‐up IBAG, with the exception of ‘old’ risks and liabilities occasioned by IBG and its subsidiaries, which were transferred to the newly set‐up LPFV Finanzbeteiligungs‐ und Verwaltungs‐GmbH (LPFV). But the plans to sell IBAG came to nothing. Both IBAG and LPFV are now wholly owned subsidiaries of BGB. The old IBG kept only a few peripheral lines of business.

(20) Further problems arising in this period concerned real estate financing, carried on mainly by BerlinHyp but also by LBB and BGB itself. This comprises the granting of loans to finance large property projects, especially commercial projects, rather than the granting of mortgage loans to finance private housing, which falls within the retail banking business. As the property market slackened, there were increasing difficulties in real estate financing, as a result in particular of a level of risk provisions that had not been adequate.

(21) In the first half of 2001 BGB found itself in acute difficulty. The main causes were loan defaults in real estate financing and guarantee obligations on IBG/IBAG/LPFV that were falling due in the funds business, for which provisions of about EUR 1 billion had to be set aside at the end of 2000, along with the need to adjust the value of building projects in progress and to increase risk provision in real estate financing. In May BGB's own‐funds ratio fell below the 8 % required by law. The shortfall that needed to be made up to reach a core‐capital ratio of 5 % and thus to return to the own‐funds ratio of 9,7 % that had obtained before the crisis was estimated at the time at about EUR 2 000 million. The Land of Berlin issued in May 2001 a declaration of intent guaranteeing that the necessary capital would be injected. The Commission authorised the aid as rescue aid, and in August 2001 BGB received a capital injection of exactly EUR 2 000 million: EUR 1 755 million from the Land of Berlin, EUR 166 million from NordLB, EUR 16 million from Parion (Gothaer Finanzholding AG) and EUR 63 million from small shareholders.

(22) In the months following, however, further risks were identified, especially in the real estate services operated by IBAG/IBG/LPFV. There was a danger that BGB’s capital might once again fall below the required minimum solvency ratios. These risks arose once again out of the guarantee obligations in the real estate funds business and the sinking value of property that had been bought with a view to the setting up of new funds (reserve property). According to the information supplied by Germany, the interlocking profit‐and‐loss transfer agreements, guarantees and loans within the group made BGB liable for the bulk of these risks.

(23) In November 2001 the then Federal Credit Business Supervisory Office (Bundesaufsichtsamt für das Kreditwesen, ‘BAKred’) (11) threatened BGB with temporary closure if it did not take measures to provision these risks by the end of 2001. On 20 December 2001, therefore, the Land of Berlin, BGB, LBB, BerlinHyp, IBAG, IBG and LPFV concluded an agreement in principle to cover these risks by means of comprehensive guarantees. The agreement in principle was replaced by a detailed agreement finally concluded on 16 April 2002. The guarantees assumed in this agreement were known as the ‘risk shield’ (Risikoabschirmung); they are described in more detail below.

(24) The aid measures form part of the restructuring plan initially submitted in January 2002 and revised in the course of the investigation procedure, most recently in January 2004; the plan provides for a substantial reduction in the BGB group’s business and a concentration on private and corporate customers in the Berlin area. The capital market business and real estate financing are also to continue, though on a smaller scale (see paragraph 172 et seq.). Other areas, such as large customers and international business, including structured finance and mergers and acquisitions consultancy, are to be wound up, and others again, such as public sector business, are to be cut back drastically. Initially, real estate services were also to continue. But at an early stage in the procedure Germany undertook to see to it that this area was hived off and transferred to the Land of Berlin (see paragraph 277 and 278). With a view to reducing BGB’s very large share of the Berlin retail market, Germany has also undertaken to sell Berliner Bank separately.

(25) As already mentioned, the Land of Berlin’s shares in BGB are to be sold. The Commission has received a commitment to this effect. As part of the privatisation of BGB, BerlinHyp will be sold either together with BGB or separately (see paragraph 285). IBB is to cut its ties with BGB, and IBB’s special reserve (being the capital of the old Wohnungsbau‐Kreditanstalt (WBK) transferred to LBB as described above) is to be repaid to the Land of Berlin, in so far as this does not result in a core‐capital ratio of less than 6 % or a total capital ratio of less than 9,7 % on the reference date of 1 January 2004 (see paragraph 279).

(26) One component of the restructuring aid notified on 28 January 2002 is the capital injection of EUR 1,755 million granted by the Land of Berlin as rescue aid in August 2001, following the authorisation given by the Commission on 25 July 2001 (12); BGB is now to retain this amount as restructuring aid.

(27) The other component of the restructuring aid is the ‘risk shield’ already referred to, which was agreed in principle in December 2001 by the Land of Berlin, BGB, LBB, BerlinHyp, IBAG, IBG and LPFV, and subsequently modified, supplemented and superseded by a detailed agreement concluded on 16 April 2002. The risk shield comprises the following guarantees, which are given by the Land of Berlin for 30 years in order to cover the risks arising out of the real estate services business carried on by the subsidiaries IBAG, IBG and LPFV: — Loan guarantees: BGB, LBB and BerlinHyp are guaranteed the contractual interest and capital repayments on loans granted by them to IBAG, IBG and their subsidiaries and certain other companies up to 31 December 2001. The companies and loans concerned are listed exhaustively in the annexes to the detailed agreement, which also lays down restrictions in respect of certain loans and a number of express exclusion clauses (negative list). — Book value guarantees: IBAG, IBG and certain other companies in the group, primarily direct and indirect subsidiaries of IBAG and IBG, are guaranteed the value of the individual assets entered in the relevant audited balance sheet, with the exception of certain designated items such as intangible assets, cash, balances at the Bundesbank and credit institutions, and prepayments and deferred income (Rechnungsabgrenzungsposten). These book value guarantees are likewise subject to restrictions and exclusions (negative list). — Performance obligations taken over from LPFV: LPFV is indemnified in respect of obligations arising out of the earlier real estate business of IBG and its previous subsidiaries Bavaria, Arwobau and Immobilien‐Beteiligungsvertriebsgesellschaft der Bankgesellschaft Berlin GmbH (‘IBV’): LPFV is liable for the first EUR 100 million, and thereafter such obligations are taken over by the Land. This does not apply to obligations in respect of funds newly set up after 31 December 2000 or in respect of new IBAG business described in the detailed agreement. — BGB indemnified in respect of guarantees: BGB is indemnified in respect of all obligations arising out of the guarantees it gave up to 31 December 1998 on transactions entered into by IBG, IBV and Bavaria. Like the preceding indemnity, this does not apply to obligations in respect of funds set up after 31 December 2000 or in respect of new IBAG business described in the detailed agreement.

(28) Article 45 of the detailed agreement sets the maximum liability that may be incurred by the Land of Berlin as a result of these obligations at EUR 21,6 billion. It states that this is the theoretical nominal value of the risks covered, adjusted for duplication. In the agreement in principle, the ceiling was set at EUR 35,34 billion because the guarantees listed above sometimes covered the same risks. Article 45 explains that, where an outside creditor puts forward a claim under a rent guarantee, the Land may, for example, be liable both under the performance obligation taken over from LPFV and under the indemnity given to BGB in respect of guarantees. The detailed agreement states that, in such cases, the Land will be liable only once. The theoretical ceiling is therefore adjusted for such duplication, and this reduces it to EUR 21,6 billion. According to the provisional calculations submitted by Germany, the largest item in the EUR 21,6 billion figure is the performance obligation taken over from LPFV: it amounts to EUR [...]**, comprising EUR [...]** to indemnify LPFV in respect of liabilities arising out of rent and dividend guarantees and EUR [...]** to indemnify it in respect of risks arising out of the renewal guarantees for buildings.

(29) However, this theoretical ceiling is based on the assumption that all the risks will, in fact, materialise in full. For the indemnity given to LPFV in respect of rent guarantees (ceiling of EUR [...]**), this means, for example, that all rents until 2025 would remain unpaid, and, for the indemnity given to LPFV in respect of renewal guarantees (EUR [...]**), it would mean that all buildings would have to be replaced in their entirety. However, even on very pessimistic assumptions, a 100 % rent default and the demolition and reconstruction of all buildings concerned is not realistic. Article 45 accordingly also states that, on the information currently available and after careful examination of the main economic risks, the probable rate of take‐up can be put substantially lower. The real risk is estimated at EUR 2,7 billion in the best‐case scenario, at EUR 3,7 billion in the base‐case scenario and at EUR 6,1 billion in the worst‐case scenario. The assumptions on which these estimates are based were communicated in the course of the procedure (see paragraph 138).

(30) In order to minimise the liability arising out of the guarantees, the detailed agreement also provides that the Land may entrust contract management under the detailed agreement wholly or partly to a third party. The Land has availed itself of this possibility and has set up a company wholly owned by it, BCIA Berliner Gesellschaft zum Controlling der Immobilien‐Altrisiken mbH, which has been conducting this business on the Land’s behalf since January 2003. The detailed agreement also provides for a guarantee commission and a better‐fortunes clause for 15 years. According to this, the Land receives from BGB an annual fixed guarantee commission of EUR 15 million until 2011 inclusive, which can as of 2012 be adapted for the remaining duration of the risk shield by mutual agreement between the parties. Moreover, if in one or more months of a financial year BGB achieves an own capital ratio of 12,5 % and a core‐capital ratio of 7 %, BGB will pay 15 % of its annual profit to the Land of Berlin.

(31) The Law empowering the Land Government to issue a guarantee (13) provides that the shares in BGB held by the Land of Berlin are to be sold as rapidly as possible on terms fair to the Land and that, as part of a reorganisation of BGB’s ownership structure, Investitionsbank Berlin (IBB) is to have its ties with BGB cut, leaving it as a separate development bank established under public law (see below).

(32) In its decision to initiate the procedure in the present case (14), the Commission also drew attention to an important fact that had not been taken into account in the initial restructuring plan. At the end of 1992 Wohnungsbau‐Kreditanstalt (WBK) was transferred to LBB with all its assets; at the same time, all WBK’s functions were transferred to the newly set‐up IBB. The transfer increased LBB’s own funds by about DEM 1,9 billion. From 1995 onwards, LBB paid a remuneration of 0,25 % of the amount taken up. As the Commission doubted whether this remuneration was compatible with the principle of the investor operating in a market economy, it initiated the investigation procedure (C 48/2002) in July 2002 (15). If the Commission were to conclude that the remuneration paid was not compatible with the principle of the market‐economy investor and if none of the tests for compatibility laid down in the Treaty were met, the difference between the remuneration paid and the ordinary market return on such an investment would constitute state aid incompatible with the common market that would have to be repaid by LBB to the Land of Berlin.

(33) The possibility that repayment might be required constitutes a substantial threat to the prospects for a restoration of profitability under the restructuring plan. In the decision initiating the procedure, therefore, the Commission asked Germany to identify an appropriate solution and noted that Germany was working on such a solution.

(34) To meet this need, an agreement was concluded between the Land of Berlin and BGB on 23 December 2002, entitled the ‘Agreement on the treatment of any claims to repayment brought by the Land of Berlin arising out of state aid case C 48/2002 Landesbank Berlin — Girozentrale, currently being examined by the European Commission’ (the repayment agreement).

(35) By this agreement the Land of Berlin undertakes that, in the event of a Commission decision requiring repayment, it will provide as a contribution to LBB’s capital a reorganisation grant to the value necessary to prevent the threatened repayment requirement from forcing LBB or the BGB group, or both, to fall below the minimum capital ratios specified in the agreement. The minimum ratios specified in the repayment agreement are a total capital ratio of 9,7 % and a core‐capital ratio of 6 %. The agreement is subject to the suspensory condition that the Commission must approve such aid.

(36) Although this measure had not yet been taken at the time of the decision to initiate the procedure, the risks arising from a possible repayment decision by the Commission were mentioned in the decision as a factor to be taken into account. The repayment agreement was finally concluded in order to take account of this misgiving. Given that this measure is essential to the success of the restructuring plan, the Commission considers it appropriate to assess this agreement together with the other aid measures, having been able to set the upper limit in this respect.

(37) In its decision initiating the formal investigation procedure laid down in Article 88(2) of the EC Treaty, the Commission provisionally classified the measures under examination as state aid within the meaning of Article 87(1) of the EC Treaty and Article 61(1) of the EEA Agreement because they were granted through state resources and because, by improving the recipient’s financial position, they were likely to affect the economic position of competitors from other Member States (16) and consequently distorted or threatened to distort competition and affected trade between Member States.

(38) On the basis of its provisional assessment, the Commission concluded that the aid had to be assessed in the light of the Community guidelines on state aid for rescuing and restructuring firms in difficulty (‘the guidelines’) (17) and that there were no other provisions of the Treaty or other Community guidelines that might render the aid compatible. It agreed with Germany that BGB was a firm in difficulty within the meaning of paragraph 2.1 of the guidelines, but it seriously doubted whether the aid measures were compatible with the common market.

(39) Paragraphs 31 to 34 of the guidelines state that, in the case of all individual aid measures, the Commission will examine the restructuring plan to establish whether it is capable of restoring the long‐term viability of the firm within a reasonable timescale and on the basis of reasonable assumptions.

(40) The Commission took the view that in the restructuring plan initially submitted there was no explanation of future strategies on the market in investment banking. As regards future strategy in the real estate business, it wanted to see more detailed specification of the difference in costs between liquidation and continued operation of the real estate services subsidiary IBAG.

(41) The Commission doubted whether the market assumptions in the initial restructuring plan and the forecasts of supply and demand were sufficiently precise to allow conclusions to be drawn regarding the prospects of success of the restructuring measures proposed. It was difficult to see on what market assumptions the restructuring measures were based.

(42) The Commission also found that the information supplied by Germany with regard to the causes of the firm’s difficulties in the past was relatively superficial. The following three causes were cited: (a) bad loans; (b) the issue of extensive guarantees for real estate funds; and (c) the late introduction (1999) and slow implementation of systematic risk control. The information supplied was essentially a summary of the financial difficulties. Only one real reason for these difficulties was put forward, namely ineffective group and management structures, including the lack of an effective system of risk control. There was no in‐depth analysis of these structures or of specific management shortcomings, such as the implications of state ownership. However, the Commission took the view that an analysis of this kind was necessary if there was to be a proper assessment of the prospects for the restructured BGB. It doubted therefore whether the causes of BGB’s difficulties were properly identified and addressed in the restructuring plan. It thus asked Germany to provide an in‐depth analysis of past shortcomings and of future prospects and problems, in the context of group structures, management and supervisory methods, control and reporting patterns and techniques for the introduction of commercially based decision‐making processes.

(43) Germany spoke of negotiations with potential buyers with a view to a possible privatisation but gave no details of the procedures envisaged, the terms of sale or other relevant factors. The Commission therefore wondered whether privatisation, in whole or in part, was being seriously considered and whether, if privatisation did take place, it would be conducted by means of an open, transparent and non‐discriminatory procedure.

(44) The initial notification referred to target profitability of just 7 %. The Commission doubted whether this could really be reached, especially given the problematic institutional and management structure of the group, the unclear market assumptions on which the restructuring measures were based, and the continuation of the problematic real estate business. Even if 7 % profitability were to be achieved, the Commission doubted whether such a return on the capital invested was enough to be compatible with the principle of the market‐economy investor.

(45) The Commission also drew attention to the fact that the possibility of a claim for repayment resulting from the LBB case represented a substantial risk to the prospects of success of the restructuring plan and so, in the decision initiating the procedure, it called on Germany to come up with a solution.

(46) The exception laid down in Article 87(3)(c) of the EC Treaty is subject to the condition that the aid does not adversely affect trading conditions to an extent contrary to the common interest. Paragraphs 35 to 39 of the guidelines state that measures must be taken to mitigate as far as possible any adverse effects of the aid on competitors. This condition usually involves limiting or reducing the company's presence on the relevant product markets by selling production capacity or subsidiaries or reducing activities. The limitation or reduction should be in proportion to the distortive effects of the aid and, in particular, to the relative importance of the firm on its market or markets.

(47) The compensatory measures originally proposed, such as the divestment of major shareholdings, reductions in the financial services, debt finance and real estate businesses, in the number of subsidiaries and staff and in lending to public authorities, and the giving‐up of branches and business with large and with foreign customers, were imposed in order to reduce BGB's balance‐sheet total by 26 % (from EUR 190 billion to EUR 140 billion). Given the description of the compensatory measures, which was vague in parts, and their individual contribution to the desired effects on BGB's assets and employment situation, the Commission was not in a position to assess whether this entire effect could realistically be achieved or how the measures would affect BGB's future position in the markets or segments defined by Germany. It therefore needed detailed information as to the effect of each measure on BGB's assets, employment situation and future market/segment positions.

(48) Even if the above reduction (26 % or EUR 50 billion of the balance‐sheet total) were achieved in full, the Commission questioned whether it would be sufficient in view of the large amounts of aid and its practice in previous decisions on restructuring aid for banks. (18) In this connection, the Commission suggested that the legal minimum capital requirements could serve as a guide for assessing the appropriateness of the compensatory measures since a bank that was undercapitalised would have to reduce its activities accordingly (undercapitalisation of EUR 1 billion with a legal minimum capital ratio of 4 % would require a theoretical reduction of risk‐adjusted assets of up to EUR 25 billion). Such ‘opportunity reductions’ could serve as a rough guide for the degree of market distortion and the corresponding compensatory measures required. According to this approach, the EUR 1,755 billion capital injection from the Land of Berlin in the summer of 2001 would alone correspond to a theoretical asset reduction of up to EUR 44 billion. However, the Commission pointed out that this guide should not be applied ‘mechanically’ but should be subject to discretion in order to take account of specific circumstances and factors important for the survival and viability of the bank.

(49) When new risks were discovered following the capital injection, the solvency ratios again threatened to become insufficient. In order to avoid a new capital injection, the Land of Berlin opted for the solution of general guarantees by means of a risk shield. As a result, the guarantees have an effect similar to that of a capital injection. The problem with the risk shield, however, was that the amount of aid which would ultimately be granted was not clear. The nominal theoretical maximum specified in Article 45 of the detailed agreement is EUR 35,34 billion; when multiple coverage is taken out, the maximum is EUR 21,6 billion. This, however, is still a nominal value, i.e. it assumes full materialisation of all risks, something which is unlikely (see above). Consequently, for reasons of prudence, the Commission had to work with the only limit available, i.e. EUR 35,34 billion. Since this amount would though probably not be called in, it would be out of proportion to take it as a basis for establishing the necessary compensatory measures. The Commission was therefore unable to assess whether the proposed compensatory measures were sufficient in view of the amount of aid. It also had doubts that, even in the best‐case scenario with aid of some EUR 3 billion in addition to the capital injection, the compensatory measures would suffice in the light of the above rough guide. Moreover, experience with restructuring cases had shown that best‐case scenarios rarely came about.

(50) The Commission stated that BGB’s extremely strong market position in retail banking at local and regional level would have to be taken into account when finally assessing the appropriateness of the compensatory measures. Given the absence of sufficient information, however, the Commission was not able to estimate the effects of the reduction measures on the individual markets or segments. However, the planned reduction in retail and corporate banking by way of the divestment of Weberbank and Allbank seemed relatively modest and would possibly be insufficient to mitigate the distortive effect of the aid. In view of the fact that BGB also appeared to be a key player on the real estate market, the Commission further wondered whether the reductions planned in this connection would be sufficient.

(51) To summarise, the Commission lacked important information needed for a proper and sufficiently thorough assessment of the effects of the proposed compensatory measures. On the basis of the available facts, therefore, it had serious doubts as to whether the planned reduction measures would suffice to mitigate the distortive effects of the very large amount of aid, the exact amount of which or the ceiling for which could not even be established. Accordingly, BGB’s strong local and regional market position in the retail sector in particular also had to be taken into account.

(52) Under paragraphs 40 and 41 of the guidelines, aid must be limited to the strict minimum needed to enable restructuring to be undertaken and to avoid providing the company with surplus cash which could be used for aggressive, market‐distorting activities or even for expanding. The guidelines also state that aid beneficiaries will be expected to make a significant contribution to the restructuring plan from their own resources, including through the sale of assets that are not essential to the firm's survival.

(53) On the basis of the available information, the Commission was not in a position to assess accurately whether the aid, the amount of which was not even clear, represented the strict minimum necessary and whether, for example, the risks in the course of the restructuring might have been overstated or whether measures had been or would be taken to rule out multiple risk coverage.

(54) The Commission questioned whether the provisional authorisation as rescue aid of a core‐capital ratio of 5 % and an own‐funds ratio of 9,7 % and, as targets from 2003 onwards, a core‐capital ratio of some 7,5 % and an own‐funds ratio of some 12 % were really necessary for the firm’s survival, including a solid rating by the rating agencies. In this context, it also had doubts about whether BGB's own contribution through the sale of assets or subsidiaries not essential for the firm's long‐term viability met the ‘significant contribution’ requirement in view of the large volume of aid granted even in the best‐case scenario. Given the strong position of BGB, together with its subsidiaries and merged entities, on several markets and segments, it was questionable whether more and larger subsidiaries or assets could not be divested, not only from the viewpoint of compensatory measures but also as a serious own contribution in addition to taxpayers' money.

III. COMMENTS FROM GERMANY

(55) Germany submitted its comments regarding the initiation of the state aid procedure on the basis of the restructuring plan at the time, which essentially still applied in the summer of 2003 and which formed the basis for the advisers' report for the Commission. At the Commission’s request, it subsequently provided further information in addition to the original restructuring plan, in particular regarding the following points of key importance for the Commission’s decision:

(56) Investment banking would in future no longer be a strategic focus or target product of the capital market business, which would concentrate on fields with a high yield potential, such as customer business with share, interest and credit products and, to a lesser extent, own‐account business, and would diminish still further in its importance.

(57) The difference in costs between winding up and continuing the activities of IBAG was described in greater detail. The total costs of winding up comprised the operational liquidation costs (EUR [...]**) plus a balance‐sheet shortfall. To determine the latter, a mock consolidated balance sheet was produced for three scenarios (best‐case, real‐case, worst‐case), giving a figure of EUR [...]**, EUR [...]** and EUR [...]** respectively. To keep the firm going, on the other hand, the costs for the period from 2001 to 2005 would, depending on the scenario, amount to between EUR [...]** and EUR [...]** (for the real‐case scenario, EUR [...]*)*. Winding up IBAG, as opposed to continuing its activities, would therefore, depending on the scenario, involve additional costs of between EUR [...]** and EUR [...]**. Moreover, winding up the firm would mean forgoing an annual positive profit contribution of EUR [...]** from 2006.

(58) The market assumptions for the real estate and funds business were explained in greater detail. According to information from the Central Association of the German Construction Industry, after contracting slightly in 2002 by some 2 %, the volume of construction output for the whole of Germany would come close to stagnation in 2003. In residential construction there would be no turnaround (2003: decline of some 1 % after contracting by about 3 % in 2002), with the fall‐off being much greater in the eastern than in the western Länder, owing to the surplus supply of accommodation. Commercial construction would see only a slight increase of about 1 % in 2003. The firm Bavaria’s capacity and turnover forecasts had been adjusted accordingly and a more targeted orientation adopted. In future, Bavaria would focus, in residential and commercial construction, on the top end of the market and, in view of the strong regional differentiation in residential development, on the regions of Hamburg, Munich, Stuttgart and Rhine‐Main in western Germany. In the funds business, the closed funds segment was expected to grow significantly in future, following a decline in 2001. Real estate funds would continue to play a key role, with close on 50 % of the placing volume, as an alternative form of investment, with yields and risk between those of fixed‐interest securities and shares. New IBV funds would be launched only for premium commercial buildings and would be accompanied by significantly reduced guarantees. This higher‐quality real estate could also help to improve yield security, although in any event business would be cut by more than half overall.

(59) Regarding the market assumptions for the retail sector, Germany explained that in the Berlin conurbation each bank branch looked after 4 000 inhabitants on average, which was significantly more than the average for Germany as a whole (1 400). Although there was not a surplus of branches in Berlin, it was to be expected that the number would drop further in the coming years on account of other channels such as call centres and the Internet. The plan for sustainable improvement in the profitability of the retail sector addressed both cost and yield. Key measures to lower costs included reducing branches according to current profitability, regional coverage and the estimated costs of closure/merger. The aim was to increase principal customer accounts per branch to [...]* at Berliner Sparkasse and [...]* at Berliner Bank by the end of 2003, as compared with an average of 2 300 customers in the case of direct competitors in Berlin. Further savings would result from the replacement of cost‐intensive traditional cash‐desk facilities by more modern facilities, thereby saving on 300 staff. Income could be increased still further by reallocating advice capacity to bring in the most attractive customer groups possible. Pure transactions business was to take place increasingly via online and self‐service facilities, while branches should focus more on customer advice. The forecast of increased demand in the retail sector was based on information from the Landeszentralbank Berlin, broker reports and assessments by the Federal Statistical Office in recent years. As regards BGB’s market position in the individual segments of the local and regional retail sector, Germany supplied corrected figures showing lower volume‐based market shares ranging from a little over 20 % to more than 40 % in Berlin (see paragraph 291 et seq.). The growth forecast for Berlin, which, as a structurally weak region, lagged behind the national average of 2,5 %, was 2 %. Germany explained that, despite market shares of around 40 % in the retail deposit sector, BGB could not be said to be in a dominant position since the Berlin retail market was very competitive and customers could move from one bank to another without significant cost or effort. Furthermore, savings were overrepresented, whereas BGB was underrepresented compared with its market penetration when it came to more sophisticated forms of investment such as time deposits, savings bonds, security deposit accounts and other complex products, such as insurance, on account of its overwhelmingly low‐income customers.

(60) The market assumptions for corporate banking were based, among other things, on broker reports and assessments by the Federal Statistical Office. Targeted portfolio management and the related exclusion of risk‐bearing loans, the introduction of risk‐geared pricing, and the focusing of business on the core segments of commercial customers and regional corporate banking would lead to a slight drop in the volume of loans from EUR [...]** to EUR [...]** despite average market growth in Berlin in the period 2001 to 2006 of 1 %. The reduction in risk assets was in order to avoid high cluster risks, especially in the large corporate customer segment (turnover of more than EUR 50 million). Outside Berlin, there would be a further reduction of EUR [...]**. The volume of deposits by corporate customers was expected, despite a targeted reduction in large‐volume credit business through cross‐selling, to remain more or less constant. For the regional and local corporate segments, Germany also supplied figures that had been adjusted downwards and showed market shares of a little over or just under 25 % in Berlin (see paragraph 291 et seq.). An average annual growth rate of 2 % was assumed for Berlin. Profitability would be significantly increased through the optimisation of marketing and service processes and the introduction of standard products. The number of locations was to be reduced from 73 to 35 across all customer segments. Improved contribution margins would result from a rearrangement of the Berliner Bank and Berliner Sparkasse price model by standardising (increased) lower limits and exhausting all cross‐selling potential, together with greater division of labour among account managers.

(61) What had led to the troubled real estate loans and the provision of guarantees in the real estate funds sector were, as already mentioned in the notification, the extremely optimistic expectations of a rise in the value of properties in Berlin and the new Länder following the unification of Germany. On the basis of these expectations, BGB had granted a large number of commercial real estate loans and, in the period prior to 1999, had set up increasingly large real estate funds with extensive guarantees for which, at the beginning of the real estate crisis in the late 1990s, a valuation adjustment and liability reserves were sorely needed. On account of incomplete implementation of an early‐warning system to identify risks throughout the group and inadequate risk analysis at divisional level, these risks were not sufficiently recognised, with the result that countermeasures were not taken early enough. It was only in 2000, at the instigation of the group's executive board and auditors and on the basis of BAKred's special audit, that a value audit was conducted with stricter criteria, requiring the updating of numerous real estate data. It was established in the course of this audit that the form and practical implementation of the early‐warning system did not yet meet legal requirements.

(62) When in 1994 the various divisions were brought together under BGB’s roof, this was because the Land of Berlin, as shareholder, wanted to create a strategic entity with as many synergy effects as possible. It was not possible to set up a standardised institution under the Banking Law without forgoing, pursuant to Section 40 of that Law, the name ‘Berliner Sparkasse’ and BerlinHyp’s mortgage bond privilege. The absence of a single management feasible under company law meant that group‐wide risk management could be introduced only in stages. There were also technical IT constraints and delays in establishing adequate data quality. Risk management received little support and had to compile risk‐relevant data manually. It was therefore potentially always subject to error, was incomplete and was characterised by long lead times. Internal rating procedures were not validated using statistical methods.

(63) The introduction of efficient risk monitoring and a new data bank system by the end of 2002, however, constituted an operational guarantee that future problems could be identified and corrected in time. All activities of the entire group relevant in credit risk terms were consolidated in a risk register data bank. These data formed the basis for a limit management system for assessing credit risks for their risk potential and subjecting them to various limits. An information platform was therefore available on a same‐day basis for all credit risk assessments. On this basis, a new credit risk report was developed for the executive and supervisory boards. The rating procedures had been completely reworked in cooperation with the DSGV and the German Landesbanken. The extensive exchange of managerial staff and the reduction in areas from 63 to 34 also helped to improve risk control.

(64) Simplifying the group and management structures and introducing efficient control systems involved, among other things, structural improvements in the areas of corporate governance, risk control, control/management of the real estate services subsidiaries and alignment of the IT infrastructure. Under the new structure, BGB itself would in future cover wholesale and real estate financing activities and centralise the staff. Landesbank Berlin would combine all marketing activities, including the entire corporate and private retail segment, but with the exception of the wholesale business and commercial real estate financing. The objective of a single management for the group had largely been achieved. Measures to improve structural and operational processes consisted in the appointment of a Risk Review Committee to conduct a comprehensive analysis of all the group’s risks, the establishment of an independent risk register area to assess operational risks and the setting up of risk management units in the corporate banking and real estate financing business areas. A project team was also set up to deal with problems identified in audit reports. Existing loans at significant risk would in future be monitored centrally by the risk management area to improve risk assessment.

(65) Target yields before tax of around 6 to 7 % (according to the original notification) or [...]** % (according to the revised medium‐term plan of 24 June 2003) for BGB in 2006 were sufficient. Yield rates before tax in Germany in the period from 1995 to 2000 ranged from 12,6 % to 17,6 % for regional banks/savings bank and from 13 % to 16,5 % for all banks (top 100). Over time, however, a reduction in equity return could be observed. In the regional banks/savings bank sector in particular, it had fallen from 17,6 % in 1995 to 12,6 % in 2000. Given the worsening of the economic situation that followed and the faltering consolidation process in Germany, the figures in the following years remained lower, ranging from 7 % (2001) to 8,5 % (2006) for regional banks/savings banks and from 9,9 % (2001) to 12 % (2006) in the sector as a whole. For regional banks/savings banks, the potential for recovery was severely restricted both by the loss of institutional liability and guarantor liability (Anstaltslast and Gewährträgerhaftung) and by Basle II. The target yields before tax of around 6 to 7 % (according to the original notification) or [...]** % (according to the revised medium‐term plan of 24 June 2003) were not directly comparable with the yields of competitors since BGB’s core‐capital ratio during the restructuring phase contained a ‘safety buffer’ to ensure refinancing on the capital market, partly to offset the total absence of hidden reserves. Consequently, the future core‐capital ratio of [...]** % had to be significantly higher than the average core‐capital ratio of 6,1 % for regional banks/savings banks in the period from 1995 to 2000. As a result of the safety buffer of some [...]** %, the equity return — for the same pre‐tax earnings — also fell by about [...]** % compared with competitors since the pre‐tax earnings related to a larger amount of own funds.

(66) The mere fact of being publicly owned did not call into question the possibility and value of restructuring the group. Giving black marks to public undertakings ran counter to Article 295 of the EC Treaty. Possible unlawful use of influence in connection with public ownership would be investigated by a parliamentary committee and by the Berlin public prosecutor. The Land of Berlin also intended to privatise BGB.

(67) Furthermore, LBB’s business activity would be critically influenced by two special factors. First, under Section 3(6) of the LBB Law, it would in future have to continue to carry out development activities such as promoting saving and managing giro accounts also for private customers with limited creditworthiness (accounts for the man in the street). As a result, it had a disproportionately large number of customers in low‐income brackets, and this significantly affected its yield potential. Changes could be made only over a long period of time. Second, it was still burdened by the structural weaknesses in the economy of the Berlin region, which were reflected in income per private customer that was some 15 % lower than the national average. Most of its competitors in Berlin could offset this through their presence in other regions. The takeover of the former Ost‐Berliner Sparkasse gave LBB a far higher share in eastern Berlin, which was particularly weak structurally. Of LBB’s customers, 55 % were from eastern Berlin, although they accounted for only 37,5 % of all Berlin residents. These special factors would continue to play a role after any privatisation.

(68) On the basis of the revised medium‐term plan of 24 June 2003, Germany also provided a quantification of the effects of the proposals by the Commission's advisers (e.g. increase in risk provisioning), of the divestment of the real estate services business, to which it was already committed, and the hive‐off of IBB, finding that the medium‐ to long‐term effects of these three measures were insignificant.

(69) At the Commission’s subsequent request, Germany and the bank outlined further the consequences of a separate sale of Berliner Bank by 2005 for the survival of the rest of the group. In Germany’s view, this sale would have a negative effect on the group’s medium‐term plan. In total, there would be one‐off effects in the period 2003 to 2005 of around minus EUR [...]**, [...]** of which would be accounted for by the extraordinary costs of the sale and the remainder by reserves for staff, IT, buildings and additional restructuring costs. In the medium to long term, the planned result before tax in 2006 of EUR [...]** (according to the revised medium‐term plan and on the basis of the above three measures) would fall by about EUR [...]** to just under EUR [...]**, [...]** of this amount on account of the loss of Berliner Bank’s income to the group and the remainder on account of the delays in staff cutbacks, the loss of the planned increase in fee income and remaining (fixed) costs (especially in the context of back‐office diseconomies of scale). The return on equity would decline by [...]** percentage points to [...]** % in 2006. This calculation was based on the assumption that Berliner Bank would be sold as an independent bank to maximise the number of bidders, something which would entail higher costs than the sale of assets or of an operating division. Furthermore, the hive‐off of Berliner Bank would reduce the retail business’s share in the profits of BGB as a whole from a little over [...]** % to around [...]** %, while there would be a corresponding increase in the share of the capital market business from a little over [...]** % to around [...]** %.

(70) The Commission asked Germany and the bank to quantify the consequences of a separate sale of BerlinHyp by the end of 2006 for the survival of the rest of the group. According to Germany and the bank, this would have the following negative consequences for the rest of the group or would impose the following requirements, which the buyer could not necessarily meet: the buyer would have to take over as far as possible internal refinancing (currently some EUR [...]**) on comparable terms, i.e. have at least as good a rating as Landesbank Berlin, and BGB’s guarantee for BerlinHyp in order to avoid applying the methodology for large credits (current estimated volume: about EUR [...]**). The buyer would also have to offer at least the book value of BerlinHyp as the purchase price since otherwise book value write‐downs of [...]** might result, endangering the survival of the rest of the group. Even a negative outcome of the bidding procedure would involve a risk of further book value write‐downs. A sale without serious consequences for the restructuring plan would be possible only if the marketing cooperation between BerlinHyp and the group could be maintained. An obligatory separate sale would require a one‐off write‐down of the current book value of EUR [...]** by EUR [...]** to the book value of BerlinHyp’s own funds of EUR 519 million. The expected earnings before tax in 2006 for the rest of the group would fall by a further EUR [...]** or so (difference between the loss of BerlinHyp’s expected income of about EUR [...]** and the interest income from the expected proceeds of the sale of about EUR [...]**). This, together with the separate sale of Berliner Bank, would result in a further fall in the target equity return in 2006 for the rest of the group of some [...]** %, to just over [...]** % in all, and a core‐capital ratio of just under [...]** %.

(71) Germany submitted a ‘medium‐term plan’ for the development of individual balance‐sheet and profit‐and‐loss account items during the period from 2001 (actual situation) to 2006 (planned situation). It updated the plan several times in the course of the proceedings in line with the further sales, closures and reduction measures that were promised. The revised medium‐term plan submitted in June 2003, which already takes into account the divestment of the real estate services business and of IBB as well as all the measures originally intended, suggests the following consequences in individual business areas over the restructuring period 2001 to 2006. The various items listed in the medium‐term plan are presented here by way of illustration mainly in terms of segment assets and number of employees only.

(72) In the private customer segment, assets were to fall (by EUR [...]** or EUR [...]** %) from a little over EUR [...]** to just under EUR [...]** as a result of sales, closures and other reduction measures. Around 90 % of this fall was accounted for by sales of holdings (in particular in Allbank, Weberbank, BG Polska and Zivnostenska Banka). The workforce was to be cut by a disproportionately high figure of [...]** %. These figures take no account of the sale of Berliner Bank, promised for a later date.

(73) Assets in the other retail banking segment, corporate customers, i.e. business with small and medium‐sized enterprises (rather than large customers), were expected to fall from almost EUR [...]* in 2001 to around EUR [...]* in 2006 (down by just under [...]* %). At the same time, the number of employees would be reduced by just over [...]* %. Once again these figures take no account of the promised sale of Berliner Bank.

(74) The compensatory measure in the real estate financing sector consisted mainly in a reduction in the risk portfolio and a refocusing on less risk‐prone business. This was to reduce the segment assets by around [...]* %, from around EUR [...]* in 2001 to around EUR [...]* in 2006. The workforce is to be cut by around [...]* %.

(75) Scaling back the capital market business would lead to a reduction in the workforce of around [...]* %, while the segment assets would fall by approximately [...]* %, from around EUR [...]* in 2001 to around EUR [...]* in 2006. Compared with the original plan, there was to be a stronger emphasis on less risk‐prone business. Segment liabilities would be reduced disproportionately by over [...]* %.

(76) With the gradual winding‐up of the large/foreign customer business the assets in that segment would fall by about [...]* and the number of employees would be cut by around [...]* %. Items still remaining at the end of the restructuring phase, mainly as a result of long‐term contracts and agreements, would be reduced further after 2006.

(77) In the public sector business sector, abandonment of all supraregional business reduced the assets in that segment by almost [...]* %. This sector was to be assigned to corporate business.

(78) The planned divestment of real estate services, which was offered as an additional compensatory measure, will reduce the segment assets almost to zero.

(79) Combined with further reductions in asset items, e.g. in interest rate management or through the divestment of IBB’s government assistance business (around EUR 20 billion of segment assets), and the effects of consolidation, these measures would reduce the balance‐sheet total by some EUR [...]* — or [...]* % — from around EUR 189 billion in 2001 to around EUR [...]* in 2006. Leaving aside the divestment of the IBB, it being doubtful whether it qualified as a compensatory measure, (19) the balance‐sheet total would fall by about [...]*.

(80) On the question of market shares, private and corporate retail banking were regional businesses, and so the relevant market shares referred to Berlin. By contrast, real estate financing and the capital market business formed national — and, in the latter case, largely international — markets. Compared with the figures submitted in the notification, the market shares in private and corporate business in Berlin were revised downwards (to between a little 20 % and over 40 % in the private business sector and just over or just under 25 % in the corporate business sector), as BGB’s reports to the Land central bank on the statistics used to calculate them failed, according to Germany, to give the requisite regional and thematic breakdown (see paragraph 291 et seq. below).

(81) BGB’s share of the Berlin market in loans to private customers was expected to increase slightly by 2006, accompanied by only a slight dip in its share of the deposit business market. The reason for this was a refocusing of BGB’s business activities on the Berlin market. However, at the same time it would withdraw completely from the supra‐regional market in line with the restructuring plan. The compensatory measures in the private customer sector would have barely any impact on the Berlin market shares, as reductions here primarily affected supra‐regional operations.

(82) In the corporate business sector, the market share for loans would contract slightly between 2001 and 2006, while the share of the deposit market would remain almost constant.

(83) In the real estate financing sector, the national market share indicated initially had to be revised, on the basis of updated statistics, from around 5 % to around 3 %, falling further to around 2 % by 2006. There would probably be no change in the capital market sector by 2006.

(84) In the course of the proceedings, Germany stated that BGB had examined very closely the possibility of further compensatory measures. However, apart from the sale of the real estate services business — promised at an earlier stage, but not part of the original plan — no further compensation was possible [...]*.

(85) Overall, according to Germany, the compensatory measures were also appropriate. The total amount of aid used as a point of reference for assessing its appropriateness included the EUR 1,755 billion capital injection by the Land and the aid value of the risk shield, which in a worst‐case scenario was equivalent in financial terms to EUR 6,07 billion. As remuneration for the risk shield, BGB would pay a guarantee commission of EUR 15 million each year.

(86) In its decision to initiate proceedings, the Commission had used as an indication of market distortion the scope for extending business on the basis of the solvency ratios required under banking supervisory legislation. However, Germany argued that the assumption that a core capital injection of EUR 1 billion could boost the risk‐adjusted assets by up to EUR 25 billion could not be inferred directly from the basic rules of banking supervisory legislation. Only if core and supplementary capital were injected simultaneously could a bank boost its risk‐adjusted assets by 25 times the amount of the core capital injection. Unless a bank had previously ineligible supplementary capital corresponding to the amount of the core capital injection, it was impossible a priori to apply a factor of 25. It was wrong to regard an extension of business that was possible only as a result of supplementary capital that was available to the bank in any case as a market distortion caused by an injection of core capital classified as aid. It was therefore considered that, from the very outset, the maximum possible market distortion should be set at no more than 12,5 times the amount of aid granted in the form of a capital injection.

(87) The Land of Berlin injected only core capital totalling (EUR 1,755 billion) into BGB, and not supplementary capital. The core capital injection meant that the previously ineligible supplementary capital of EUR 877,5 million could be taken into account. But, as explained above, this could not be regarded as market distortion caused by the core capital injection.

(88) Moreover, the (theoretical) core‐capital ratio of 4 % and the own‐funds ratio of 8 % constituted the minimum capital base required by law. Institutions needed a much larger capital base if they were to run an orderly business and to have the room for manoeuvre necessary to operate in the financial markets. BAFin estimated that, from a market standpoint, BGB required at the time a core‐capital ratio of [...]* % and an own‐funds ratio of [...]* % in order to guarantee its liquidity and safeguard the restructuring process (cf. letter from BAKred dated 29 June 2001).

(89) On the basis of these considerations and the relevant capital ratios, the capital injection would cause market distortion equivalent to around EUR 18 billion (core capital injection of around EUR 1,8 billion multiplied by a factor of about 10).

(90) In response to the Commission's decision to initiate proceedings, Germany had already proposed as a further compensatory measure that the real estate services businesses (IBAG, IBG, LPFV) be separated from BGB. The effect of the risk shield was focused on the real estate services sector, which in itself was not subject to the solvency ratio requirements and could just as easily be carried out by another company not authorised to engage in banking. The risk shield related to old business, mainly investments already placed, and not to new business. It could though be argued that new business was possible only because of the risk shield. But in that case the size of the market distortion could be no more than the total volume of new business. In 2002 IBV was expected to sell fund investments totalling EUR [...]*. Bavaria anticipated a total project volume of EUR [...]* in 2002. IBAG’s new business amounted to around EUR [...]*. At most, IBAG’s new business up to the end of the restructuring period (end of 2006) could be attributed to the risk shield. After that, IBAG would be an efficient, reorganised undertaking able to compete in the market. So the risk shield could be regarded as constituting a market distortion only in relation to IBAG’s new business up to the end of 2005, i.e. a total of EUR [...]* from 2002 to 2005. This total volume of market distortion lay between the best‐ and worst‐case scenarios for the actual cover provided by the Land of Berlin under the risk shield (EUR 2,7 billion and EUR 6,1 billion respectively). In determining the market distortion caused by the risk shield, the Commission should therefore take as a basis the value established for IBAG’s new business up to the end of the restructuring period, i.e. EUR [...]*. Otherwise, the market distortion caused by the risk shield could be estimated at best on the basis of the aid value of the risk shield in the worst‐case scenario (EUR 6,07 billion).

(91) Accordingly, the market distortion to be taken as a starting point for assessing the compensatory measures consisted of: — a new amount for BGB in the form of the capital injection: EUR 18,3 billion, — a new amount for the real estate services sector — to be divested — in the form of the risk shield: EUR [...]* to EUR 6,1 billion.

(92) In its decision to initiate proceedings, the Commission had assumed that BGB enjoyed an extremely strong market position and had drawn appropriate consequences for the determination of compensatory measures. However, this assumption, based on the information then available, was not borne out by the low market shares actually held by BGB. Overall, the proposed measures to offset the market distortion appeared to be appropriate, even allowing for any possible state aid implications that WBK's assets might have for LBB.

(93) Germany also argued that on competition grounds it was inadvisable to sell Berliner Bank before selling the Land of Berlin’s shares in BGB. The remedies in the retail sector were sufficient: divestment of Weberbank, Allbank and the foreign subsidiaries BGB Polska and Zivnostenska Banka, the relinquishing of the six German private customer centres and the closure of around 90 branches, predominantly in Berlin. Moreover, the compensatory measures as a whole were in line with or went even further than the demands placed by the Commission on banks in previous restructuring decisions.

(94) After further objections from the Commission, especially in view of the fact that the closures and sales already undertaken or still to be implemented left BGB’s position in the Berlin retail banking market virtually intact, Germany and the Land of Berlin finally agreed to sell the Berliner Bank after all. In so doing, Germany promised to ensure that the Bankgesellschaft group sold the ‘Berliner Bank’ division as an economic unit, including its trade mark, all customer relations, branch offices and accompanying staff, by way of an open, transparent and non‐discriminatory procedure, with the sale to be legally effective by 1 October 2006.

(95) The divestment of Berliner Bank will reduce the assets in retail banking by EUR [...]* (EUR [...]* in the private customer sector and EUR [...]* in the commercial customer sector). Together with the measures already planned, the reduction in the assets will amount to EUR [...]*. The balance‐sheet total will be reduced from EUR 189 billion to EUR [...]* billion.

(96) Germany argued that the risks had not been overstated in the course of the restructuring, although they were based on the information on LPFV available in January 2002. Assessment of the risks could change during the period covered by the guarantees as a result of macroeconomic factors and intensive real estate management. However, LPFV’s indemnification agreements with IBG and the detailed arrangements of the Land of Berlin’s risk shield for LPFV served to ensure that only the actual claims on guarantees by the Land of Berlin were refundable. The Land of Berlin had the right to intervene and issue instructions in respect of LPFV in order to guarantee high‐quality management.

(97) Furthermore, appropriate control measures had been introduced to rule out multiple risk coverage in practice. The risks arising from renewal and the right of offer were not cumulative but interchangeable. This factor was taken into account in the description of LPFV’s risks. However, there was actually multiple risk coverage in the case of rent guarantees and credit guarantees for the BGB group. LPFV verified claims on rent guarantees to ensure they were legally and factually in order and calculated correctly. Since January 2003 the BCIA Berliner Gesellschaft zum Controlling der Immobilien‐Altrisiken mbH, wholly owned by the Land of Berlin and acting on its behalf, had carried out checks to rule out simultaneous calls on the loan guarantee. All services performed by LPFV for which the Land had assumed obligations were checked by BCIA in detail from a legal, factual and accounting standpoint, with further checks on the legality of each claim on the credit guarantee and on balance‐sheet guarantees. BCIA provided the Land with a powerful and effective means of minimising damage, as the Garantiegesetz (Guarantee Law) of 16 April 2002 explicitly stated that no payments may be made to third parties in connection with risk‐shielding, except where there is a legal obligation to do so.

(98) More specifically, under the detailed agreement, the Land or BCIA, on whose activities the Land Parliament must receive a report every quarter, enjoyed the following rights with regard to approval, inspection, the issuing of instructions, etc. vis‐à‐vis companies protected by the risk shield, the exercise of which was more closely regulated by a regulation on responsibilities and procedures: — right to reserve approval of payments on loan commitments, where certain value limits were exceeded, — right to have a say in drawing up the positive list and the annual accounts for balance‐sheet guarantees, — right to reserve approval of sales of assets underlying the book value guarantee, where certain value limits were exceeded, — right to reserve approval of investments which lead to additional acquisition and production costs, where certain value limits were exceeded, — right to reserve approval of certain payments by LPFV, — right to issue instructions to IBG and LPFV on protection against claims, — right to reserve approval of assignments and other measures concerning claims arising from the detailed agreement, — comprehensive rights to information and inspection, — right to reserve agreement on the appointment of auditors by IBG, IBAG and LPFV, — right of audit by the Berlin Audit Court (Rechnungshof), — right to reserve approval of restructuring operations.

(99) The bank made its own significant contribution by selling assets or subsidiaries which were not essential for its long‐term viability. The holdings in question were both substantial and profitable and were sold by open and transparent procedures. It was also planned to sell the real estate services business. BGB could make no further contribution of its own, having already done its utmost in 2001 to counter the extensive loss of own resources and to prop up its own‐funds ratio by reducing its risk‐bearing assets.

(100) The core capital and own‐funds ratios targeted from 2003 under the restructuring plan and provisionally approved as rescue aid were also necessary. If the undertaking was to survive and obtain a solid rating from rating agencies, it was vital that it achieved the provisionally approved core‐capital ratio of 5 % and the own‐funds ratio of 9,7 % and, from 2006, the target core‐capital ratio of around 7,5 % and the own‐funds ratio of around 12 %. Given [...]* and BGB’s [...]* liquidity situation, an above‐average capital base was essential if [...]*.

(101) Between 1995 and 2000 the average core capital and own‐funds ratios of Land banks/saving banks ranged from 5,7 % to 6,8 % and from 8,9 % to 10,2 % respectively. BGB’s provisionally approved core‐capital ratio of 5 % was therefore below the long‐term average of comparable banks, while the provisionally approved own‐funds ratio was a mere 0,1 % above the mean value for the years 1995 to 2000. These ratios appeared to be very conservative and failed to take account of BGB’s specific problems.

(102) In the market as a whole, i.e. private and public banks in Germany, solvency ratios ranged between 6,3 % and 7,3 % (core‐capital ratio) and between 10,4 % and 11,3 % (own‐funds ratio), partly because of the absence of guarantor liability in private banking. Even before the guarantor liability for public banks was discontinued, it was likely that the solvency ratios of Land banks/saving banks would gradually be aligned on the higher ratios of private banks. As a result, the average own‐funds ratios of Land banks/saving banks would ceteris paribus increase from 9,6 % to around 10,9 % in 2006. The restructuring plan estimates BGB’s own‐funds ratio in 2006 at [...]* %; on this basis, BGB’s own resources cushion would be reduced to no more than around [...]* %.

(103) When it came to assessing the own‐funds ratio, what counted therefore was not the statutory minimum of 8 %, which BAFin had in fact increased to 8,4 % and which, allowing for volatility, actually lay around 8,6 %. Instead, the capital market and rating agencies tended to use appropriate benchmarks which entailed considerably higher own‐funds ratios and hence reduced the apparently large own resources cushion from just under [...]* % to around [...]* %.

(104) An above‐average own‐funds ratio in 2006 was vital [...]*. Rating agencies attached considerable importance to capital structure and in the past have called for improvements in BGB’s core‐capital ratio. Given the close correlation between the financial strength rating and the long‐term rating, on the one hand, and the forthcoming end of guarantor liability, on the other, a significant improvement in the financial strength rating was required to avoid negative consequences for the scale and cost of refinancing. Moreover, the reappraisal of risk‐bearing assets under Basel II would probably result in a higher own resources requirement from 2006 onwards because of the increasing volatility of risk‐bearing assets.

IV. COMMENTS FROM OTHER INTERESTED PARTIES

(105) In response to the publication of the decision to initiate proceedings in the Official Journal of the European Communities, the Commission received comments from two other interested parties, namely Berliner Volksbank and a third party which asked for its identity to be kept secret.

(106) Berliner Volksbank argued that there could be no question of authorising the notified restructuring aid under Article 87(3) of the EC Treaty. The aid was also not covered by the statutory arrangements of institutional liability (Anstaltslast) and guarantor liability (Gewährträgerhaftung) and hence was not existing aid.

(107) The aid measures for BGB were on a completely new scale. The bank’s financial difficulties were due in the first place to its extremely exposed business in closed‐end real estate funds. The reason for BGB’s losses was that virtually no checks had been made when the property had been acquired. Yet investors had been guaranteed an income. The undertaking had been regarded throughout the Federal Republic as the market leader — primarily, in all probability, on account of the favourable conditions for investors.

(108) Restructuring aid could be justified in individual cases given the serious negative consequences of a bank failure for the banking system and public confidence. Unlike in previous cases decided by the Commission, however, the aid recipient here operated on a limited regional scale so that the effect of the aid was concentrated on only a few competitors. These would be hit all the harder by the distortive effects, especially Berliner Volksbank, which competed with the BGB right across its business.

(109) The level and intensity of the aid should be limited to the minimum necessary for the restructuring. But this was not apparent. The Land guarantee for risks in the property sector was an unlimited additional funding commitment since the Land of Berlin’s associated liability could not currently be estimated and was therefore a ‘blank cheque’ for future losses. No excess liquidity could be allocated to the undertaking, however. Given its amount (EUR 21,6 billion) and its duration (30 years), the guarantee was already disproportionate: it gave the bank virtually unlimited creditworthiness and distorted competition quite considerably. By being completely indemnified against the risks of property servicing in operational banking, BGB was receiving an ‘unconditional licence’ to submit offers on whatever terms it wanted, e.g. when selling or leasing property. Even if the bank were to make losses in the process, these would be fully compensated by the Land of Berlin. Consequently, the guarantee was an additional funding commitment of unlimited amount which, by its very nature, could not be authorised and which was also not defined in the underlying legislation. In addition, the capital injection combined with the risk‐hedging guarantee provided double cover. When determining the grant equivalent of the guarantee, the fact that much of it would definitely be used should be taken into account. In the least favourable scenario, the Land was assuming EUR 6,1 billion. Since it was realistic to expect that the guarantee would be invoked (though, plainly, a precise figure could not be given), its aid intensity would correspond to the nominal amount.

(110) The market for financial services was characterised by strong competition on terms, with considerable pressure on margins. It was therefore to be expected that BGB would pass on the full advantage conferred by the aid to the market and thus considerably distort competition to the detriment of its competitors. This was a particular cause for concern because the aid was being granted to the market leader in the Berlin/Brandenburg region, whose market share in that region relative to the lending business as a whole was, on BGB’s own estimation, just under 50 % and which owned just over 50 % of all branches of credit institutions in Berlin. BGB was a direct competitor of Berliner Volksbank in the latter’s main fields of business, i.e. personal banking and banking for medium‐sized corporate clients, and already had a market share many times larger than Berliner Volksbank’s. The aid thus contributed to a further economic ‘consolidation of power’ in the Berlin banking market. The bank’s comparatively strong market presence was also a consequence of the multibrand strategy of BGB, which was operating with several institutions under different brands or business names. BGB was pursuing a business strategy which had detached itself from profitability strategies and, through its subsidised conditions, had become predatory.

(111) Because it lacked a cogent plan for a sustained recovery, the proposed restructuring programme would not restore the long‐term profitability of the undertaking. It was based on overly optimistic assumptions, was not sufficiently specific and overemphasised positive aspects. Moreover, it was not suited to ensuring the long‐term profitability and hence the viability of the undertaking since it set out to achieve a target profitability of only some 6 to 7 %, which was only half as much as the usual average for the sector. Lastly, the restructuring programme did not mention future aid reimbursement obligations associated with the pending investigation of the transfer of WBK to the Land bank in 1993.

(112) Insufficient attention was paid to the need, identified in the Commission’s guidelines, to reduce the adverse effects on competitors by limiting the presence of the aid recipient on the relevant markets after restructuring since business activities in the relevant markets would actually expand. The restructuring programme would make it possible to increase profits in the private and corporate customer segments and to compensate for the closure of various sites outside Berlin, in particular by focusing and expanding those activities in Berlin. BGB was planning to retreat only from those geographic markets in which it had not so far acquired considerable importance. The announced closure of branches might not lead to a reduction of BGB’s market presence but it corresponded more to a general trend in the markets for financial services in Germany, which was regarded as ‘over‐banked’. The extent of the remedies to be provided by BGB would have to be calculated using its current dominant position in the Berlin banking market, since this was where the distortive effects were strongest. As a condition for offsetting the distortions caused by the aid, the Commission should consider the sale of part of the BGB group. One possibility would be to sell Berliner Bank, which in the relevant market segments had market shares similar to those of Berliner Volksbank. The advantage of selling Berliner Bank was that, organisationally, the institution was largely independent and had its own entrance to the market; it could therefore be taken over by a competitor with relative ease. Given the amount of aid, the size of the business sold off would be appropriate compensation for the aid’s considerable distortive effects.

(113) Along with the public liability guarantees (Anstaltslast and Gewährträgerhaftung) and the transfer of Wohnbau‐Kreditanstalt to the Berlin Land bank, the present aid measure was only one of the many financial public support measures for BGB. This resulted in a combination of aid which would also have to be taken into account in determining the remedies for the granting of the restructuring aid.

(114) Raising the own‐funds ratio to 9,7 % was not essential. Only the 8 % minimum laid down in the German Banking Law (Kreditwesengesetz) was legally binding and, in the words of the guidelines, the ‘strict minimum needed’.

(115) The combination of risk hedging and capital injection was not essential since the former by itself would cover the risk of losses in the property sector. The capital injection led to the Land of Berlin compensating for losses twice over. BGB might use the additional funds obtained for other business segments.

(116) Furthermore, there were indications of other aid. The Land government was negotiating with selected investors over the takeover of the bank. The sale was not at the market price since the tendering procedure was not open to all, was not transparent and was not being conducted without discrimination.

(117) The bank’s future strategy seemed in particular to be to reduce its activities, capacities and infrastructure and to concentrate on regional personal and corporate banking. This plan could be based only on the assumption that these regional markets and the bank’s share of them would grow. There were some doubts and contradictions, however, about the bank’s shares of these markets. It was also unclear whether the bank could build on a sound customer basis at all. The Berliner Bank brand had weaknesses in this respect. Because of the problems of the property financing business in the past, there were doubts about its future success. Maintaining a large share of the capital market business was not typical of a regional bank.

(118) The successful implementation of the restructuring programme depended substantially on whether it managed to achieve the ambitious plans for reducing staff, introducing a new risk control system and improving information systems. There was a question mark against this, however, since staff reduction measures to date had not achieved their targets and since resistance from employees and unions was to be anticipated. Moreover, many of the reductions to date were attributable to outsourcing measures, but no long‐term reduction in costs could be expected from these. Rather, it should be reckoned that the costs of the transferred workers would have to be borne by the bank in the form of higher service charges.

(119) In the future, the bank had to be able to compete in the marketplace on its own merits, in accordance with point 34 of the guidelines. There were doubts whether the target return on own resources of 7 % for 2006 was sufficient for this. It could not be assumed, therefore, that long‐term viability would be restored. Nor could that low return be justified by the performance of public functions by the savings bank since these were irrelevant to an assessment of the return.

(120) With continuing public ownership, there were considerable doubts as to whether the bank’s viability could be restored and guaranteed. The Land of Berlin would be exposed to considerable political pressure when terminating employment relationships. In general, it would not be able to implement the restructuring plan. The bank’s bodies would still have political appointees on them, which would give rise to conflicts of interest. Even if it were taken over by another German regional bank, these problems would continue.

V. GERMANY’S REACTION TO THE COMMENTS OF OTHER INTERESTED PARTIES

(121) Germany commented on the observations of Berliner Volksbank and the anonymous third party. Berliner Volksbank’s submission about alleged existing aid was unfounded. There were no substantial financial resources that had been built up through alleged aid. Otherwise the group would not be in difficulties. Further, the Commission had assessed the liability systems of institutional liability and guarantor liability as existing aid and these should not therefore be regarded as encumbering BGB. The capital injection provided through the rescue aid would indeed be made available to the bank permanently, but this was in accordance with the guidelines and the Commission’s practice as regards restructuring aid. The transfer of WBK to LBB was being investigated by the Commission in a separate proceeding but was not described by Germany as aid.

(122) While BGB had a relatively strong position on the Berlin banking market in both personal and corporate banking, its market shares were not as high as Berliner Volksbank claimed. The market shares based on volumes were clearly smaller than those based on customers since Berliner Sparkasse had many accounts with small credit and deposit volumes, which was proving to be more of an additional cost factor.

(123) The restructuring programme was fully documented in sufficient detail. Germany viewed the current programme as a stable basis for ensuring BGB’s profitability. The profitability of the entire banking sector in Germany had declined significantly on account of the difficult general economic situation. The average return on own funds had fallen from 11,2 % in 1999 to 9,3 % in 2000 and to as little as 6,2 % in 2001. In the Federal Government’s communications, the results of each business segment for the period 2001 to 2006 were consistently shown separately and were derived in comprehensible stages. The general layout followed the same pattern: total earnings, operating result before and after provision for risks, and pre‐tax profit.

(124) The steps necessary for implementing the restructuring programme were being planned by BGB in two stages: — at conceptual level, it had first of all worked out a subdraft for each of the current business segments, irrespective of whether it was to be kept, liquidated, reduced or sold, — at a practical level, it had then allocated to each subdraft specific measures necessary for its implementation and costed them in turn.

(125) Thus a complete draft was available. Since then, the individual measures had been filled out, with more detail added at segment level, and incorporated in a comprehensive overall plan. Two special instruments which complemented the usual monitoring of results had been developed for implementation purposes: one for general measures and the other for personnel measures. These made it possible to compare planned and actual values on a monthly basis and hence to run a permanent check on the success of the implementation.

(126) Only property financing was regarded by the bank as a typical task for a regional bank. This did not include property services, which was where the losses that had originally made the reorganisation of the bank and the authorities’ risk shield necessary had largely occurred. BGB had offered to sell this business segment as a compensatory measure. The provisioning ratio in respect of real estate loans was not too small.

(127) In future, several measures would be taken in new and existing business and as regards monitoring in order significantly to reduce the risks in the property financing segment. As regards new business, activities would be concentrated at attractive locations, risk diversified by interregional activities within Germany, foreign business largely terminated and high‐risk segments, especially building, discontinued. In the existing business sector, risk specialists would be used for troubled exposures and asset portfolios would be critically reappraised and revalued. As regards controls, risk monitoring throughout the group would be introduced which would in turn provide the framework for individual control instruments. These included a limitation system for market and counterparty risks, an early‐warning system, reorganisation strategies and a task force for exposures affecting more than one banking subsidiary.

(128) Contrary to Berliner Volksbank’s view, the restructuring would lead to a reduction of market presence since the large customer and public authority segments would be discontinued and other segments reduced. It did not make sense commercially to discontinue the retail business segments since that would impair the undertaking’s core business and hence jeopardise privatisation prospects. In addition, market presence in the retail segments would not be increased. The bank would withdraw completely from Brandenburg, except for Potsdam. In the Land of Berlin its market presence was being appreciably reduced through branch closures.

(129) The risk shield was not a ‘blank cheque for future losses’ since the risks covered by it were all existing risks. Risks from transactions conducted after 31 December 2001 were generally not covered, and risks from real estate funds were covered only if the fund concerned had been invested in before 31 December 2000.

(130) Nor was the risk shield an ‘unconditional licence to submit offers on whatever terms it wanted, e.g. when selling or leasing property’. In Articles 17(2), 35(2) and 42(5) of the detailed agreement there were several conditions that were dependent on the Land’s consent. Moreover, Article 46 laid down a comprehensive ‘avoidable consequences’ requirement whereby the beneficiary companies were obliged to do their utmost to keep the Land’s involvement as small as possible, to utilise the assets covered by the book‐value guarantee as favourably as possible and to lease or otherwise use property items on optimum terms. Infringement rendered the company concerned liable for damages.

(131) The risk shield did not constitute an unlimited additional funding commitment. Unlike an additional funding obligation under company law, for instance, the Land of Berlin’s obligation under the risk shield was limited as to its total and its object, namely to those risks which were exhaustively listed in the detailed agreement and to which funds had already been committed by 31 December 2001. The risk shield had also been made sufficiently specific. The agreement in principle of 20 December 2001 already contained a complete list of the companies entitled to the credit guarantees and the balance‐sheet guarantees, and the detailed agreement had altered the list in respect of a few details only. The shareholdings and legal relationships were enumerated in the detailed agreement and the contracts referred to in it. The extent of the risks covered by the risk shield had also been made sufficiently specific.

(132) The own‐funds ratio targeted by BGB was not too high. Lenders’ and investors’ confidence in BGB was shaken. BGB, moreover, no longer had [...]*; normally these would be taken into consideration, together with the own‐funds ratio, when assessing a bank’s ability to access the capital market. Further, privatisation of the bank required that, once the Land’s share had been abolished, capital could be raised in the capital market on tolerable terms. This meant that the own‐funds ratio must permanently be significantly higher than the statutory minimum.

(133) For the rest, the privatisation procedure contained no aid elements and revealed no shortcomings. There had been no discrimination during the procedure.

VI. ASSESSMENT OF THE AID MEASURES

(134) The capital injection, the risk shield and the contribution promised in the refund agreement were provided by the Land of Berlin and therefore comprise state resources. The resources were granted on conditions which would not be acceptable to a market‐economy investor. The total amount involved is several billion euros, which are being made available to an undertaking in serious financial difficulties.

(135) Through the capital injection of EUR 1,755 billion, on which it could not expect an appropriate return, the Land increased its share in BGB from just under 57 % to about 81 %.

(136) The risk shield was granted for a period of 30 years. The guarantees agreed amount to a nominal theoretical maximum of EUR 21,6 billion. This amount covers all theoretically conceivable risks and comprises, for example, the total loss of all rents in the case of the rental guarantees (EUR [...]*), the application of full production costs for all buildings and outside facilities in the case of the renewal guarantees (EUR [...]*) or the complete loss of the guaranteed book values of IBG/IBAG and its subsidiaries (EUR [...]*). A 100 % loss of rent, the demolition and reconstruction of all buildings and a complete loss of book values are, however, even on very pessimistic assumptions, unrealistic. Germany has therefore estimated the probable take‐up as follows: EUR 2,7 billion in the best‐case scenario, EUR 3,7 billion in the base‐case scenario, and EUR 6,1 billion in the worst‐case scenario.

(137) In the course of the proceedings, Germany also communicated the basis for these estimates. For the three scenarios, assumptions are made regarding the various risks of default. In the case of rent guarantees, there are, for example, different loss‐of‐rent assumptions concerning inflation (actual inflation remains lower than forecast inflation), rental shortfall or vacancies. The forecast loss of rent is EUR 1,4 billion in the best‐case scenario, EUR 1,9 billion in the base‐case scenario and EUR 3,5 billion in the worst‐case scenario.

(138) Germany also explained that, from a commercial standpoint, the total take‐up expected corresponded to the worst‐case scenario, with an estimated value of EUR 6,1 billion (EUR [...]* in rent guarantees, EUR [...]* in maximum price guarantees, EUR [...]* in renewal guarantees, EUR [...]* in book value guarantees and EUR [...]* in residual amounts), and hence to the economic value of the aid. This economic value was underpinned by an alternative calculation submitted by Germany: without the guarantees in the risk shield, liability for all the risks would have had to be ‘discharged’ with a capital injection of some EUR [...]*‐ [...]*. About EUR [...]* of this capital would be accounted for by the cash value of the guarantees described above (nominal economic value: EUR 6,1 billion); EUR [...]*‐ [...]* by the capital injection for supporting the group banks' loans, committed for the same purpose and utilised, to property service companies (which, if the nominal theoretical extreme risks are not covered from rent, renewal and book value guarantees, would have to be attributed to the risk assets at a value of EUR [...]*); and EUR [...]* to [...]* by a security premium.

(139) Germany also explained in this connection that it was nevertheless not possible for supervisory reasons to limit the maximum liability under the risk shield to the economic value of just over EUR 6 billion. Only if the amount were EUR 21,6 billion would all conceivable risks mentioned above be covered, so that the group banks’ loans to property service companies, which on account of the risks were being committed and drawn down from rent, renewal and the other above‐mentioned guarantees, play no role in the calculation of the subsidiary banks’ and the group’s own‐funds ratios because they have a 0 % weighting in