98/490/EC: Commission Decision of 20 May 1998 concerning aid granted by France to the Crédit Lyonnais group [notified under document number C(1998) 1454] (Only the French text is authentic) (Text with EEA relevance)
Date: 1998-05-20
Institutions: European Commission
Subjects: France, State aid, competition, control of State aid, private bank

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 20 May 1998

concerning aid granted by France to the Cr(cid:130)dit Lyonnais group

(notified under document number C(1998) 1454)

(Only the French text is authentic)

(Text with EEA relevance)

(98/490/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular Articles 92 and 93 thereof,

Having regard to the Agreement on the European
Economic Area, and in particular Articles 61 and 62
thereof,

Having, in accordance with the abovementioned Articles,
given the interested parties notice to submit their observa-
tions (1),

Whereas:

the French authorities,

amounting to a total of approximately FRF 190 billion (2),
the losses being covered by State guarantee. These
in
measures were the subject of Decision 95/547/EC,
which the Commission decided on 26 July 1995 to
approve on certain conditions the State aid in question,
provided that the net cost to the State did not exceed FRF
45 billion (3). In response to CL’s deteriorating financial
in September 1996,
situation,
submitted a plan to grant emergency aid totalling nearly
FRF 4 billion in order to avoid serious adverse effects. On
25 September 1996 the Commission decided to approve
the emergency aid and at the same time to initiate the
Article 93(2) procedure (4) with regard to the other recov-
ery measures recommended to CL. In that context
it
would examine the compatibility of any restructuring
measure in the light of all the relevant information —
including that on which Decision 95/547/EC was based
and the obligations imposed by that Decision on France
— and of any new facts, including the failure to meet
certain conditions, the new arrangements proposed and
the additional compensating measures.

1.

INTRODUCTION

Cr(cid:130)dit Lyonnais (CL) is a publicly owned financial group
operating in the banking sector. Since 1992 it has ex-
perienced considerable difficulties which led the State in
1994 to grant it aid in the form of a capital increase and
the creation of a hive-off vehicle for property assets worth
about FRF 40 billion. In 1995 other assets were hived off

(1) OJ C 390, 24. 12. 1996, p. 7.

The same day, Mr Van Miert, Member of the Commis-
sion, sent a letter to the French Minister, M. Arthuis,
informing him of
the inevitable difficulties associated
with examination of the new restructuring plan for the

(2) Including the FRF 40 billion of assets hived off in 1994.
(3) OJ L 308, 21. 12. 1995, p. 92.
(4) OJ C 390, 24. 12. 1996, p. 7. The decision was notified to the
French authorities by letter dated 16 October 1996, ref. No
SG(96) D/9029.

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bank, given the extremely large amount of aid already
authorized by the Commission, and that it was therefore
not possible to predict the final outcome of the case. The
French authorities replied to the letter notifying the initi-
the Article 93(2) procedure in the following
ation of
letters:

— that of 8 November 1996, attached to which were an
analysis of the first recovery plan, the consolidated
accounts of CL and the Consortium de R(cid:130)alisations
(CDR) at June 1996, a note on CL’s management and
internal auditing systems and a note on the partial
securitization of the loan to the Etablissement Public
de Financement et de Restructuration (EPFR);

— that of 23 May 1997, enclosing inter alia CL’s draft

annual report for 1996;

— that of 31 July 1997, in which the French authorities
submitted the restructuring plan for
the bank as
requested by the Commission when the present
procedure was initiated.

Other letters were sent by Mr Van Miert to the French
authorities, in particular that of 25 June 1997 explaining
to them the Commission’s concern about the delay in the
transmission of the new restructuring plan for the bank,
and that of 16 October 1997 explaining the principles on
which the Commission would base a decision. On 31
March 1998 the Minister for Economic, Financial and
Industrial Affairs, M. Strauss-Kahn, wrote to Mr Van Miert
informing him of new measures which the French State
was ready to take with a view to securing conditional
approval for the aid to CL. On 2 April, having obtained
the Commmission’s approval, Mr Van Miert wrote to M.
Strauss-Kahn setting out the conditions which,
in the
Commission’s view, would make it possible to regard the
aid in question as compatible with the common interest.
On 6 April, as a supplement to that letter, Mr Van Miert
wrote to M. Strauss-Kahn informing him of the reasons
why the undertakings made in the letter from the French
Minister dated 31 March could not be regarded by the
Commission as sufficient to secure a positive decision. On
24 April M. Strauss-Kahn wrote to Mr Van Miert again,
repeating the position of the French authorities, emphasi-
zing the constraint on the bank’s viability and challenging
the amount of aid calculated by the Commission. On 4
May M. Strauss-Kahn wrote to Mr Van Miert a third time,
proposing additional compensating measures to offset the
distortive effect of the aid. In three separate letters to Mr

Van Miert dated 13 May, M. Strauss-Kahn set out all the
undertakings made by the French authorities.

In evaluating the CL restructuring plan, the Commission
decided to base its analysis on advice from the interna-
tionally reputed merchant bank Lehman Brothers (the
Commission’s consultant bank), which,
in connection
with the bank’s viability, was instructed to examine the
restructuring plan submitted by the French authorities
and to propose any changes which it thought necessary.
The Commission’s consultant bank was also asked to
assess the new compensating measures proposed by the
French authorities and to examine additional ones if
necessary. The CL restructuring plan was submitted to the
Commission at the end of July 1997. The Commission’s
consultant bank carried out a thorough, detailed analysis
in
and submitted its
November 1997. The French authorities and CL were
able to consult the report and did not challenge its prin-
cipal conclusions.

report, which is confidential,

Mr Van Miert gave an oral progress report on the case to
the Commission at its meetings on 25 November 1997
and 28 January, 25 February, 18 March, 31 March and 6
May 1998.

The Commission also consulted a group of ‘wise men’,
former governors of central banks, to discuss the various
problems associated with the case and the possible con-
sequences of the failure of a large bank.

The observations of third parties are set out in section 5.

The measures examined here in connection with the
increase in the aid approved by the Commission in De-
cision 95/547/EC and the Decision of 25 September
1996 comprise:

— the defrayal by the State of the additional losses of the
Consortium de R(cid:130)alisations
through the
mechanism of a participating loan (‘pr(cid:136)t participatif’)
from the Etablissement Public de Financement et de
Restructuration (EPFR) to CDR;

(CDR)

— EPFR’s carrying costs and additional losses, including
the ‘neutralization’ of the loan from CL to EPFR from
1997 to 2014;

— the abandonment of the zero-coupon bond provided
for
in the 1995 business plan and Decision
95/547/EC, the discounted income from which had
been deducted from the approved aid;

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— a number of measures likely to contain additional aid
components, in particular a possible capital increase.

CL, with the result that at the end of financial 1995 CDR
would no longer contain any active banking structure.

2. BACKGROUND

2.1 Aid to CL in 1994 and 1995

After almost five years of rapid growth, CL recorded losses
in 1992 (FRF 1,8 billion) and 1993 (FRF 6,9 billion).
These were very heavy losses in proportion to CL’s own
funds, and its solvency ratio — the ratio of own funds to
risk-adjusted assets — would have fallen below the 8 %
legal minimum if the French authorities, acting at the
request of the authority responsible for supervising the
French banking system (the Commission Bancaire), had
not taken financial support measures in 1994, essentially
consisting of a capital increase of FRF 4,9 billion and the
underwriting by the State of the risks attached to about
FRF 42,7 billion of non-performing property assets trans-
ferred to a special hiving-off company (Omnium Immobi-
lier de Gestion, OIG). At the beginning of 1995 it became
clear that CL would be recording further losses which
would threaten its solvency; the French State put together
a new rescue package, involving the setting-up of another
special hive-off vehicle consisting of,
firstly, CDR, a
hiving-off consortium for taking over CL’s compromised
assets, including those which had already been transferred
to OIG, and secondly of a holding company (SPBI),
responsible for financing the hiving-off and controlled by
the main shareholders in CL (the Government, Thom-
son-CSF and CDC). CDR is a wholly owned, non-consoli-
dated subsidiary of CL. SPBI was subsequently trans-
formed (by the Law of 28 November 1995) into a public
administrative institution, EPFR, which enabled it
to
qualify for an unlimited State guarantee in respect of all
the risks and costs associated with the commitments
transferred to CDR,
including carrying costs. The
setting-up of this vehicle limited CL’s accounting loss for
1994 to FRF 12,1 billion.

According to the plan communicated by the French
authorities and approved by Decision 95/547/EC, CDR
purchased nearly FRF 190 billion of assets from CL,
including those hived off in 1994, to which were attached
FRF 55 billion in liabilities. The net value of the hived off
assets, therefore, would be about FRF 135 billion. All the
assets concerned were to be sold or liquidated. At least
50 % of them were to be sold within three years, and
80 % within five years if market conditions allowed. In
the case of the banking subsidiaries transferred to CDR,
the healthy part of these banks was either to be sold to
third parties or taken back before 31 December 1995 by

To enable it to buy the CL assets, CDR received a parti-
cipating loan of FRF 135 billion from EPFR, with the
possibility of increasing it to FRF 145 billion through an
additional tranche of FRF 10 billion. The arrangement
was financed by CL through a non-participating loan up
to a maximum of FRF 145 billion. With this, EPFR was
able to grant the participating loan of FRF 135 billion to
CDR and should have been able to buy long-term zero-
coupon bonds amounting to FRF 10 billion. The bond
transaction would have enabled EPFR to earn an income
initially estimated in 1995 at about FRF 35 billion by the
end of 2014, thus allowing it to absorb the balance of the
losses which will be recorded at that time in CDR.

The maturity date for both the CL loan to EPFR and
EPFR loan to CDR is 31 December 2014. The CL loan
will be repaid early as the assets are sold, in step with the
amounts received, provided however that the repayments
from CDR to EPFR are greater than the annual interest
charged on the CL loan. The annual rate of interest appli-
cable was initially fixed at 7 % in 1995 and at 85 % of
the money market rate (MMR) from 1996. The participa-
ting loan granted to CDR is partly amortized at the end
of each financial year: EPFR receives a repayment equal
to the amount of the sales during the year and, if capital
losses are incurred on the sales, it abandons the claim (by
activating the guarantee)
the losses
incurred by CDR.

to the extent of

Through the mechanism of the participating loan, CDR’s
losses are borne by EPFR and hence in the last resort by
the State, up to a maximum of FRF 135 billion. However,
the State guarantee was not subjected to a ceiling by Par-
liament when it adopted the Law of 28 November 1995
setting up EPFR, and is therefore de facto unlimited, even
if in the extreme case the hive-off should make losses
whose total exceeds the amount of the participating loan.
Thus CL is covered by the State for the repayment of its
loan to EPFR, which makes it possible for CDR not to be
consolidated either prudentially
accounting
purposes within the CL group. This mechanism has
enabled CL to record reduced provisions and losses and to
comply with the statutory solvency ratio. The diagram
below shows the main features of the arrangement.

for

or

As a quid pro quo, EPFR is entitled to the income from a
‘better fortunes’ clause in respect of CL. Thus it receives a
contribution of 34 % of CL’s net consolidated result,
group share (prior to the entry in the accounts of the
contribution and the appropriation from the financial
year to the fund for general banking risks and prior to
French corporation tax) plus 26 % of the fraction of that
result exceeding 4 % of
the consolidated capital and
reserves, group share.

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COMPOSITION OF THE HIVE-OFF VEHICLE

Recapitalisation

s

STATE

Budget allocations

s

Loan FRF 135 billion

Additional tranche of FRF 10 billion
for the zero coupon

q

EPFR

r

Losses

Loan

145 bill s

CREDIT

LYONNAIS

Wholly owned sub.

Contrib. net assets FRF 135 bill

q

CDR
ring-f.

HIVE-OFF

The CL restructuring plan submitted to the Commission
in 1995 contained several measures concerning strategy
redefinition, the sale of subsidiaries, cost reduction and
risk management and control. These measures should
have enabled CL to make a profit from 1995 on. By the
end of 1999 CL should have recorded a return on its
equity of 12,4 %. Under the better fortunes clause, its
contribution to the cost of the hive-off vehicle should
have been a total of FRF 6 136 million nominal over the
period 1995-99.

2.2 Decision 95/547/EC

‘Article 1

The aid contained in the recovery plan for Cr(cid:130)dit Lyon-
nais in the form of a capital increase of FRF 4,9 billion,
the underwriting of the risks and costs associated with
the assets transferred to the hiving-off structure (up to a
maximum of FRF 135 billion) and tax concessions in-
herent in the “better fortunes” clause, the total net cost of
which to the State, taking into account the revenue
accruing to the State, is estimated at a maximum of
FRF 45 billion, is hereby declared to be compatible with
the common market and with the EEA Agreement under
point (c) of Article 92(3) of the EC Treaty and point (c) of
Article 61(3) of the EEA Agreement.

Article 2

In Decision 95/547/EC the Commission conditionally
approved the aid granted by the French State to CL
during 1994 and 1995, regarding it as compatible with the
common market under Article 92(3)(c) of the EC Treaty
and in particular with the Community guidelines on State
aid for rescuing and restructuring firms in difficulty (5).
The substantive provisions of the Decision are reproduced
below:

(5) OJ C 368, 23. 12. 1994, p. 12.

The aid referred to in Article 1 is authorized subject to
France meeting the following conditions and commit-
ments:

(a) it must ensure that all the recovery measures and all
the arrangements provided for under the scheme
described in Article 1 are implemented;

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(b)

(c)

it must not amend the conditions laid down in the
recovery plan, except with the Commission’s prior
agreement. At all events, the “better fortunes” clause
may be transferred no earlier than at the time of the
privatization of Cr(cid:130)dit Lyonnais, and only at the
market price; that price will be verified by inde-
pendent assessments;

commercial

the deadline

capacity of Cr(cid:130)dit Lyonnais

it must ensure, given the size of the estimated overall
cost of the scheme to the State of FRF 45 billion, that
the
is
reduced by means of a cut of at least 35 % in its
commercial operations abroad, including its Euro-
pean banking network, by the end of 1998 in accord-
ance with the commitments given by France in its
letter of 18 July 1995. If that objective cannot be
causing
achieved by
substantial losses that require the shareholder in
question to provide further financial assistance in
order in particular to ensure compliance with the
Community solvency ratio, the Commission under-
takes to examine the possibility of extending that
deadline. If the costs of the scheme, estimated at FRF
45 billion, are exceeded, it will be necessary to re-ex-
amine the scale of the reduction in the commercial
operations of Cr(cid:130)dit Lyonnais as accepted by the
abovementioned letter;

set without

(d)

it must prevent Cr(cid:130)dit Lyonnais from benefiting
from a carry-over of tax losses in respect of the 1994
tax loss covered by the capital increase of FRF 4,9
billion;

(e)

it must prevent Cr(cid:130)dit Lyonnais from repurchasing
hived-off industrial and commercial assets, except at
the price at which the assets were transferred to CDR
or at the market price if that is higher than the price
at which the assets were transferred to CDR, and at
all events subject to an overall limit of FRF 5
billion;

(i)

it must eliminate any possibility of a carry-over of
residual tax losses for years prior to 1995 for Cr(cid:130)dit
Lyonnais if, at the time of privatization, the “better
fortunes” clause is transferred;

(j)

it must ensure that Cr(cid:130)dit Lyonnais uses the proceeds
of sales to restructure non-performing assets and
activities;

(k)

it must ensure that Cr(cid:130)dit Lyonnais pays to SPBI the
levy sums in accordance with the “better fortunes”
clause;

(l)

it must pay to SPBI the proceeds of privatizing
Cr(cid:130)dit Lyonnais, particularly those deriving from the
sale of the shares currently held by SPBI, and ask
Parliament
the
to endorse payment
proceeds of privatizing the remaining shares.

to SPBI of

Article 3

The Commission has taken account of the French author-
ities’ statement that their firm objective is to privatize
Cr(cid:130)dit Lyonnais and that the anticipated recovery should
enable it to be ready for privatization within five years.
Any deferment of privatization beyond five years will
have to be notified to the Commission.

Article 4

The French authorities must cooperate fully in monit-
oring compliance with this Decision and must submit
the following documents to the Commission every six
months as from 1 March 1995:

(f)

it must prevent Cr(cid:130)dit Lyonnais from sharing in any
of the proceeds of sales from CDR;

(a) a detailed report on the application of the plan, to-
gether with the reports presented to Parliament;

(g)

it must achieve a separation between CDR and
Cr(cid:130)dit Lyonnais as regards their managers, their
administration and the system of monitoring and
supervising the management of the hived-off assets;

(b) the balance sheets, profit and loss accounts, and
reports of the directors of the companies involved in
the hiving-off operation, namely OIG, CDR, SPBI
and Cr(cid:130)dit Lyonnais;

(h)

it must ensure that the committees responsible for
managing the hived-off assets are independent of
Cr(cid:130)dit Lyonnais;

(c) a list of the hived-off assets that are liquidated or
sold, with details of selling prices, the names of
purchasers, and the names of the banks to which the
selling instructions have been given;

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(d) a detailed list of abandonments of CDR claims to be
set against the participating loan granted by SPBI;

(e) a detailed list of the banking assets sold by Cr(cid:130)dit
Lyonnais outside the hive-off vehicle, with an evalu-
ation, based on objective and verifiable criteria, of
the reduction in its commercial operations abroad;

(f) detailed figures for Cr(cid:130)dit Lyonnais’s contributions
to the hive-off vehicle in the form of a levy or divi-
dends.

The Commission may ask for these documents and the
implementation of the plan to be assessed by means of
special audits.

Article 5

This Decision is addressed to the French Republic.’

As a supplement to this decision it should be pointed out
that, in its letter of 18 July 1995, France undertook to
ensure that CL reduced its commercial presence in
Europe outside France by 50 % in balance-sheet terms
by the end of 1998, on the same conditions as in Article
2(c).

2.3 Emergency aid

In late September 1996 the French authorities submitted
further aid for CL, amounting to nearly FRF 4 billion, to
the Commission. In order to prevent considerable losses
for CL and the deterioration of its rating, which could
have had negative consequences for other financial insti-
tutions, the French authorities declared that emergency
aid measures were necessary, namely:

— emergency aid which was designed to preserve the
liquidity position and the solvency of the institution
and which related to 1995 and 1996;

— restructuring aid which was designed to facilitate the
recovery of CL beyond 1996 and which would not be
implemented before the Commission had taken a
final decision in its respect.

The proposed measures consisted in altering the condi-
tions attaching to the loan from CL to EPFR, so as to
‘neutralize the weight of the past in CL’s accounts’. Since
the results in the other activities were less good than fore-
cast, the interest arrangements on the loan, according to

the French authorities, imposed a net burden on CL of
FRF 3 billion in 1996, 2,7 billion in 1997 and 2,5 billion
in 1998. The calculation took into account the difference
between the rate for the loan to EPFR (85 % of MMR)
and the weighted average rate for the CL refinancing
secured by the corresponding liabilities.

Initially and at 25 September 1996 these measures were to
be implemented in respect of 1995 (retroactively, through
incorporation of exceptional proceeds in 1996) and 1996.
Subsequently, and subject to the Commission’s final deci-
sion, they could possibly be introduced for the whole
term of CL’s loan to EPFR, in the form of restructuring
aid.

The proposed changes were designed to compensate CL
fully for the burden of the said loan. Thus it was planned
that the rate of interest on the loan should offset the cost
to CL of collecting the funds necessary to finance the
loan. Consequently,
the French authorities decided to
increase the rate of interest from 7 % to 7,45 % in 1995
and from 85 % of MMR to 5,84 % in 1996. In particular,
in respect of 1996, the French authorities did not confine
themselves to cancelling the 15 % subsidy on the rate for
the original loan so that CL would be remunerated at the
MMR level, but they also proposed to increase the rate on
the loan beyond the MMR by a percentage that would
offset CL’s higher refinancing cost caused by its long-
term liabilities. The increase compared with MMR was
about 2 %. The changes in respect of 1995 and 1996
would have the effect of giving CL an advantage of FRF
3 560 million, which was to be sufficient to prevent any
liquidity and confidence problem for the bank in 1996.

As the French authorities have admitted, part of the plan
approved by the Commission in 1995 has never been
implemented. This is the FRF 10 billion part of the FRF
145 billion loan from CL to EPFR enabling the latter to
issue long-term zero-coupon bonds which would have
earned it an income of FRF 35 billion nominal by 2014,
or FRF 7,8 billion discounted. The French authorities
planned therefore to abolish this part of the plan. As with
the other measures described above, the change was first
introduced on 25 September 1996, in respect of 1996, in
the form of a suspension of the operation. Subsequently,
and in accordance with the Commission’s final decision,
the change would be proposed by the French authorities
for the following years, in the form of restructuring aid.

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Implementation of the zero-coupon operation would have
had the result of further increasing the above-mentioned
losses of CL by imposing on it an annual burden of
carrying additional outstanding loans of FRF 10 billion, at
an interest rate not covering its refinancing cost.

approved the aid granted by France to CL in 1994 and
1995,
regarding it as compatible with the common
market under Article 92(3)(c) of the EC Treaty and in
particular with the Community guidelines on State aid for
rescuing and restructuring firms in difficulty (6).

The French authorities also affirmed, when submitting
their request for emergency aid, that such aid was not
sufficient to sustain the definitive recovery of CL, since
the new redundancy programme and the shedding of
retail banking activity outside France, provided for in the
measures submitted, involved substantial provisions and
capital losses in respect of several non- or poorly perfor-
ming subsidiaries (a capital loss of about FRF 6.5 billion).
For this reason, the French authorities proposed to effect
a capital injection, probably when the 1996 accounts were
closed, ‘for an amount exceeding those capital losses’. The
Commission had, in 1996, estimated the possible amount
of such an additional transaction at FRF 8-10 billion.

On 26 September 1996 the Commission therefore
decided to approve the emergency aid and to initiate the
procedure with regard to the other measures concerning
CL. It announced that, as part of the procedure, it would
examine the compatibility of any restructuring measure
concerning CL on the basis of all the relevant informa-
tion — including that on which Decision 95/547/EC had
been based and the obligations which that Decision had
imposed on France — plus any new facts — including
failure to satisfy certain conditions, the new arrangements
proposed and the additional compensating measures.

It should also be emphasized that the approval of the
in no way
emergency aid for 1995 and 1996 has
prejudged the present decision, with the result
that
France’s and CL’s obligations concerning the introduction
of the zero-coupon bond and the financing of the loan to
EPFR, as defined in Decision 95/547/EC, have remained
unaltered as from 1 January 1997.

2.4 Background to the examination of the supple-

mentary restructuring aid for CL

‘aid for restructuring raises
As the guidelines affirm,
particular competition concerns as it can shift an unfair
share of the burden of structural adjustment and the
attendant social and industrial problems on to other
producers who are managing without aid and to other
Member States. The general principle should therefore be
to allow restructuring aid only in circumstances in which
it can be demonstrated that the approval of restruc-
‘aid for
turing aid is in the Community interest’. Thus,
restructuring should therefore normally only need to be
granted once’.

The Commission finds that to the substantial amount of
aid accepted in 1995 further aid is now being added on
an unprecedented scale. In the September 1996 Decision
initiating the procedure, the Commission noted that the
considerations presented lead inevitably to the conclusion
that such supplementary aid can be regarded as com-
patible with the State aid rules of the EC Treaty only if
serious, substantial quid pro quos are provided. These
should be made both inside and outside France, in retail
banking and in CL’s other areas of activity. The Commis-
sion assessment of the compatibility of the supplementary
aid will also depend on the extent to which it exceeds the
amount approved in 1995. Consequently, the Commis-
sion must ensure that such aid is not declared compatible,
if at all, without a particularly substantial contribution
from CL, which takes account of the circumstances in
which the French authorities
aid
measures to the Commission, the scale of the supplemen-
tary aid compared with the FRF 45 billion authorized by
Decision 95/547/EC, and the recurrent nature of the aid.
It will ensure in particular that CL makes compensating
arrangements proportionate to the exceptional nature and
size of the aid it has been granted. Such arrangements
must not be limited to businesses which are no longer
part of the bank’s strategic priorities but must also relate
to businesses whose sale may compensate for the damage
caused to competitors by the aid, and everything which is
not strictly necessary to the viability of CL’s core business.

submitted these

In its examination of the supplementary aid for CL, the
Commission takes account of the fact that it has already

(6) See footnote 5.

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3. DESCRIPTION OF CL AND ITS RECENT PERFORMANCE

Table 1:

Breakdown of the functions of CL at end 1996

Function

France

Europe

Rest of world

Commercial banking

Personal banking:
1 954 branches
Business banking: 201 business
centres
Corporate banking: 143 business
centres and corporate offices
Regional banking subsidiaries
Leasing
Factoring
Specialist financing

Third-party management

Management of 120 UCITS
Management under mandate: for
private individuals,
institutions
and firms

(Italy),

Personal and corporate banking:
679 branches
BfG Bank (Germany),
CL Austria,
CL Belgium,
CL Espana, Banca Jover (Spain),
CL Greece,
Credito Bergamasco (1)
CL Luxembourg,
CL Sweden,
CL Switzerland,
CL Portugal,
Woodchester (1)
(Ireland),
CL branches in the UK
14 branches in Eastern Europe
(CL Russia, CL Bank Praha, CL
Ukraine, CL Bank Hungary, CL
Bank
International
Slovakia,
Bank of Poland)
Leasing
Factoring

Management of 80 UCITS
Specialist subsidiaries
CL International Asset Manage-
ment (Hong Kong, Milan, New
York, Singapore, Tokyo)
CL Private banking directed by
(other
CL Switzerland
sites:
Paris, Monaco,
Luxembourg,
London, Vienna)

Insurance

UAF
broker’s offices

Broker’s offices

Merchant banking

4 trading rooms
17 trading counters
Stockbroking
Cholet-Dupont and Michaux

companies:

rooms

Trading
in Brussels,
Frankfurt, London, Luxembourg,
Madrid, Milan, Zurich
Specialized subsidiaries
CL Capital Markets
Iberagentes (Madrid)

(London)

Corporate banking: 564 branches
Of which 265 in N and S
America, 39 Asia, 224 in Africa,
36 in the ODT

CL Private banking in Hong
Kong, Singapore, Miami, Monte-
video

36 trading rooms including: Hong
Kong, Montreal, New York,
Singapore, Seoul, Sydney, Taipei,
Tokyo
Specialized
CL
Capital Markets Asia, CL Sec.
(USA)

subsidiaries:

Source: CL Annual Report 1996.

(1) The Credito Bergamasco (It) and Woodchester (Ire) subsidiaries were sold in 1997 and are no longer consolidated in the 1997 accounts.

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CL is a banking group engaged in various areas of financial intermediation. Its business includes
retail and wholesale commercial banking, merchant banking, third-party asset management,
leasing, factoring and insurance. At the end of 1997 CL employed 50 789 people, slightly less
than two thirds of them in France. Its balance sheet total then stood at FRF 1 499 billion, FRF
692 billion of which related to activity in France (46,2 %) and FRF 474 billion to activity in
Europe excluding France (32 %). After buying up Thomson’s shareholding in December 1996,
the French State held 78,05 % of the capital and 96,01 % of the voting rights in CL (including
the shares held by EPFR). The Caisse des D(cid:130)p(cid:147)ts et Consignations, a publicly-owned specialist
credit institution, held 3,7 % of the capital and 3,99 % of the voting rights. The rest of the
capital (18,25 %) consisted of non-voting preference shares quoted on the stock exchange. The
breakdown of CL’s functions and the number of its establishments in France and abroad at the
end of 1997, plus the geographical distribution of some of its key financial elements are given in
the tables below.

Table 2:

Geographical distribution of some of CL’s key financial elements at end 1997

Financial elements

France

Europe

Customer applications (loans)

Customer resources (deposits)

Staff

Net receipts from banking (NRB)

Gross operating result (GOR)

Total assets (balance sheet)

Source: CL Annual Report 1997.

46

58

68

58

50

46

30

30

21

28

30

32

(%)

Rest
of world

24

12

11

14

20

22

CL’s activities are organized by function and grouped in a
i.e. French business (DCAF),
number of directorates,
European business outside France (DCAE), other interna-
tional business outside Europe (DCAI), capital markets
(DCMC), management and relations with institutional
financial engineering and asset and
investors (DGRI),
project financing (IFAP), and miscellaneous. DCAF is the
main division in the group, since it contributes nearly
half of CL’s consolidated income and one third of its net
profit (excluding holding and intra-group adjustments).
Table 3 below gives the contribution of each directorate
to certain group financial aggregates in 1996.

Table 3 shows that, compared with weighted commit-
ments and capital allocated, the result for European activi-
ties was very modest in 1996, whereas the opposite is true
for other international business. French business, for its
part, produced substantial gross revenue, but its net result
was not so high, in particular on account of overheads
and the high level of risks and asset-related losses. The
situation evolved significantly in 1997 (see below).

Since the first aid was granted in 1994, CL has under-
taken a major restructuring of its organization and all its

activities. The restructuring has covered strategy, opera-
tions and finance.

CL has abandoned its aspiration to become a universal
bank on a world scale. While retaining this objective in
France, where it is at once a personal bank, a bank for
small and medium-size firms, a bank for large firms and
institutional investors, an insurance bank, and a business
and merchant bank,
in the rest of the world CL has
reduced its commercial presence, as constrained by De-
cision 95/547/EC, by disposing of foreign banking subsi-
diaries specializing in retail operations, in Europe (CLBN,
Credito Bergamasco and Woodchester), in Latin America
(Banco Frances e Brasileiro) and in Africa. Since 1
January 1995 international sales have concerned 17,9 %
of the assets in that field, which corresponds to about
FRF 171,2 billion, of which FRF 136,1 billion in Europe
and FRF 35,2 billion in the rest of the world (principally
in Latin America). By contrast,
it has maintained and
reorganized its wholesale and capital market banking
business throughout the world. It has also set up alliances
with specialist partners, acquiring a pre-eminent role on
their markets (in particular with Allianz in non-life in-
surance and Cetelem in France in consumer credit).

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Table 3:

Contribution of the group’s activities to certain financial aggregates (1996 data)

Weighted
commitments

Net receipts form
banking

Gross operating
profit

Net result

DCAF and subsidiaries

[ . . . ] (*)

DCAE inc trading rooms

DCAI inc trading rooms

DCMC inc trading rooms

DGRI and subsidiaries

IFAP and subsidiaries

Total absolute values (FRF billion)

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

872

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

44,5

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

11,4

32 %

6 %

30 %

23 %

5 %

4 %

0,3

(*) In the published version of this Decision, some information has been omitted pursuant to the provisions concerning

non-disclosure of business secrets.

Excluding holding and intra-group adjustments. — Source: CL’s business plan.
N.B. The loan of FRF 135 billion to EPFR is not included in the weighted commitments.

From the operations standpoint,
two main courses of
action have been followed. First, the portfolio has been
improved, having benefited from the transfer to CDR of
FRF 190 billion of
largely non-performing assets and
from the introduction of more efficient instruments for
the control, management and monitoring of risks and of
suitable management and internal auditing systems. The
ratio for the coverage of doubtful debts by provisions was
increased to 65 % in 1997. Secondly, a major effort has
been made to reduce overheads. Successive redundancy
programmes have reduced staff from 59 323 in 1995 to
50 789 in 1997 and total
labour costs over the same
period from FRF 20,6 billion to FRF 19,8 billion. Staff
numbers have fallen by 14,4 % (7) compared with 1995, a
much bigger reduction, even assuming a constant range of
business, than that achieved by CL’s principal French
competitors. A further decline in staff numbers
is
expected in 1998 as part of the implementation of the
third redundancy programme, which envisages a reduc-
tion of 5 000 jobs in 1996-98. Measures to retain customer
loyalty and safeguard net receipts from banking (NRB)
have been taken to halt the decline in the latter recorded
in 1996.

decline in market rates. CL’s credit rating has remained
particularly low and unfavourable compared with the
strategy pursued by the bank. Despite the recent im-
provement
in its operational performance, CL’s debt
rating, as attributed by the international rating agencies, is
currently BBB+ (Standard & Poor’s) and A3 (Moody’s),
defined as adequate capacity to pay interest and repay
principal, but with great sensitivity to changing economic
circumstances (8). This compares with the ratings of
AA-/Aa3 for Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale and A+/Aa3 for BNP, the
two private French banks of roughly comparable size to
CL, and with the generally higher ratings of the other
publicly-owned banks. A rating in the range AAA-A-
is normally a necessary
(S & P) or Aaa-A3 (Moody’s)
condition for the long-term viability of a bank, in parti-
cular so that it can finance itself under competitive condi-
tions on markets. The rating also reflects CL’s weak capi-
talization compared with the functions exercised and with
the extensiveness of its activities, which are subject to
changes
the
world. The solvency ratio went up from 8,4 % in 1995 to
9,3 % (in 1997) and its tier one from 4,4 % to 4,8 %.
Although these ratios are normally quite sufficient for an
the markets
they remain below what
average bank,
normally require for banks which claim to pursue a broad
strategy such as that of CL. In January 1998 Moody’s

in economic circumstances

throughout

Financial restructuring has been slower. Compared with
the plan submitted to the Commission in 1995, CL has
not managed to achieve the objectives it had set itself, for
several reasons. On the liabilities side, CL has continued
to be saddled with its long-term liabilities contracted
several years ago, whose rate conditions have become
increasingly burdensome compared with the gradual

(7) Data not corrected for changes in the consolidation limits.

(8) The rating definitions of Standard & Poor’s-ADEF are the fol-
lowing: AAA: capacity to pay interest and repay principal ex-
tremely strong; AA: very strong capacity; A: strong capacity al-
though susceptible to adverse effects of changes in circum-
stances and economic conditions; BBB: adequate capacity to
pay interest and repay principal but with great sensitivity to
changing economic circumstances; BB and B: speculative
characteristics and uncertainty of payments; CCC, CC and C:
doubtful claim; D: already in payment default. Moody’s scale
is as follows: Aaa, Aa1, Aa2, Aa3, A1, A2, A3, Baa1, Baa2.

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8. 8. 98

placed all CL notes under surveillance on account of the
bank’s exposure to Asia and of the uncertainty surroun-
ding approval of the aid plan by the Commission.

which is lower than the market rates (85 % of MMR), has
affected the bank’s accounts, which led to the granting of
the emergency aid in 1996.

Despite these difficulties on the liabilities side, the main
problems for CL lie with its assets, on account of the
delayed repayment of the loan to EPFR, which hampers
its operation, and also of the decline in its market shares
in 1995-96 (halted in 1997). A further factor was the unfa-
vourable
situation in those years, which
explains the inadequacy of the NRB and the results —
the reasons behind the rescue aid approved by the
Commission in 1996.

economic

On the assets side it will also be noted that the return on
the claims portfolio declined automatically as a result of
the fall in market rates and of the greater competition
associated with the disintermediation on the more sophis-
ticated levels of the financial markets and with technolo-
gical progress and the integration of markets. The decline
interest
in interest
payable) has been progressively offset by the increase in
commissions on securities and on third-party asset man-
agement. The loan to EPFR is still at a high nominal
level (more than FRF 100 billion), and its remuneration,

receivable

(interest

income

less

Table 4 provides a financial and operational analysis of
CL over the period 1994-97.

the

the

loan. After

It should be stressed that CL’s accounts in 1995 and 1996
include the neutralization of the loan to EPFR. Similarly,
the 1997 accounts were drawn up by the bank on the
the Commission would approve the
assumption that
neutralization of
results were
announced on 19 March 1998, the Commission made it
known, through a statement by Mr Van Miert, that the
inclusion in the bank’s results of the aid relating to the
neutralization in 1997 of the loan to EPFR was premature
and had not yet been approved, that the Commission
could not anticipate the present decision and that there-
fore, pursuant to the State aid rules, it was unlawful at this
stage. Without this aid in 1997 — it amounted to more
than FRF 3 billion — the bank would have recorded a
loss. Despite this reservation, the results, as presented, are
comparable to those for 1996 and 1995, which contained
similar aid, and give an important indication of the trend
of CL’s activities.

Table 4:

CL’s financial results and indicators from 1994 to 1997

Net receipts from banking

Overheads and depreciation

Gross operating result

Allocations to provisions

Current result (1)

Exceptional items and miscellaneous

Corporation taxes

Results of associated companies

Depreciation of goodwill

Better fortunes clause

Overall net result

1994

1995

1996

1997

(FRF million)

variation
1997/1996

45 677

(39 502)

6 175

(13 981)

(7 809)

(485)

(1 300)

451

(2 192)

—

43 355

(36 709)

6 646

(5 835)

811

546

(931)

920

(197)

(6)

44 509

(35 049)

9 460

(5 711)

3 749

(1 623)

(1 296)

831

(68)

(107)

46 020

+ 3,4 %

(34 981) – 0,2 %

11 039 + 16,6 %

(5 073) – 12,2 %

5 966

(1 800)

(982)

110

(70)

(850)

+ 59 %

Not
specified

n.s.

n.s.

n.s.

n.s.

(11 274)

1 143

1 486

2 370

+ 59 %

Net result, group share

(12 102)

13

202

1 057

Capital and reserves,

of which: group share

fund for general banking risks

Minorities

Balance sheet total

Return on equity, group share, beforeclause (ROE)

Return on assets (ROA)

45 545

26 304

5 492

14 749

42 148

24 282

5 018

12 848

44 421

25 603

5 054

13 763

44 074

28 293

4 985

10 796

1 752 971

1 663 030

1 623 682

1 498 698

n.s.

– 0,64 %

0,08 %

0,07 %

1,24 %

0,09 %

6,74 %

0,15 %

n.s.

n.s.

n.s.

n.s.

n.s.

n.s.

—

—

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1994

1995

1996

1997

L 221/39

(FRF million)

variation
1997/1996

Solvency ratio, of which:

Tier 1

Operating ratio

Staff

Loans to customers

Deposits from customers

Managed capital

8,4 %

na

8,5 %

4,5 %

8,7 %

4,6 %

86,5 %

84,7 %

78,7 %

68 845

830 758

684 600

441 400

59 373

878 500

700 800

401 200

56 748

878 489

694 000

452 600

9,3 %

4,8 %

76 %

50 789

845 800

712 700

—

—

n.s.

n.s.

n.s.

n.s.

491 300

+ 8,5 %

Source: CL Annual Reports.
N.B. 1997 data as presented by the bank, including the neutralization of the loan from CL to EPFR.
(1) The current result in 1997 excludes provisions in respect of Asia, which are included in the balance of exceptional items.

The table shows that after a very noticeable fall in 1995, the bank’s net receipts from banking
stabilized in 1996 and recovered appreciably in 1997. The noticeable rise in NRB in 1997 is due,
firstly, to a significant increase in commissions (+ 11,5 %, assuming constant consolidation
limits) resulting from the high level of activity on financial markets in 1997. Commissions now
account for 33,8 % of CL’s NRB and have increased in all the major activities of the bank, both
in France (where they have gone up from FRF 6,6 billion to FRF 7,1 billion) and internationally.
Secondly, lending activity was steady in 1997: outstanding loans grew in Europe (+ 11 %,
assuming a comparable range of activity) and in the rest of the world (+7,6 %). The rise in
Europe is due to the marked increase in loans from the BfG and a sterling exchange effect
(+ 20 %). The figure for the rest of the world includes a dollar effect (+ 14 %). Capital market
operations and the operations of the other foreign subsidiaries, notably in the United States and
Asia, made a considerable positive contribution to the bank.

According to the bank, CL’s market shares in France, after the fall recorded in 1995-96,
stabilized, both in the granting of loans and in the collection of resources.

Table 5:

CL’s market shares in France

Dec. 1995

Dec. 1996

Sept. 1997

(%)

6,1
4,1

5,9
6,3

5,7
4,3

5,7
5,5

5,6
4,4

5,7
5,4

Customer applications

— individuals
— firms

Customer resources
— individuals
— firms

Data: CL Annual Report 1997.

In 1997 there was a rapid improvement in the profitability of CL’s commercial banking in
France: NRB France remained stable on account of the slight fall in outstanding loans to custo-
mers (– 2,6 %, excluding securitization) and the erosion of rate margins (intermediation margin,
debtor rates less creditor rates), but the control of overheads in connection with activity in
France, which fell by 1,4 %, was a favourable factor, as was the fall in provisions resulting from
better risk control. The level of provisions for commercial banking activities in France fell
considerably in 1997 compared with 1996, from FRF 3,7 billion, or about 1 % of weighted
assets, to less than FRF 2 billion, thus making possible an improvement in the result (the pre-tax
result went up by FRF 2 billion).

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8. 8. 98

it

Overheads for the group as a whole have fallen signi-
ficantly since 1995, as a result in particular of the reduc-
tion in staff numbers and total staff costs. The operating
ratio has thus been reduced from 84,7 % to 76 %.
is still particularly high in France (about
However,
82 %), a level which has to be compared with that of the
bank’s main
(approximately
70-72 %). By contrast, international overheads increased
appreciably in 1997. The overall result is that the opera-
ting ratio (ratio of overheads to NRB) is falling slowly
despite the rise in NRB. This is much better than forecast
for 1997 in the plan (80 %), but CL is still a long way
from the ratio of
its main competitors and from the
objective it set itself (ratio of 70 % in 2000).

competitors

French

Provisions reached a total of over FRF 8 billion in 1997,
i.e. twice as much as forecast. The increase is due mainly
to the exceptional provision of FRF 3 billion for Asia.
Compared with 1996, provisions (excluding Asia) are
declining, falling from FRF 5,7 billion to FRF 5,1 billion.
They are nevertheless FRF 1 billion higher than was fore-
cast in the plan and have increased, on a constant activity
basis, as a result in particular of a substantial provision for
risk-countries of FRF 900 million in 1997 (further to a
provision of FRF 333 million already made in 1996).

items (neutralization of

The bank’s net result increased appreciably in 1997 but is
difficult to interpret in view of the size of the non-recur-
rent exceptional
the loan to
EPFR, provision for Asia, capital gains from sales). The
solvency ratio (Cooke ratio), taking account of the im-
provement in the results (positive effect on the numerator,
after allocation of the result) and of the stability of the
weighted assets (the denominator in the ratio)
is in-
creasing appreciably, rising from 4,6 % to 4,8 % (tier one)
and from 8,7 % to 9,3 % (overall solvency ratio).

The results now available show that CL’s recovery is still
fragile and its profitability insufficient to provide a return
on equity of the level which a private shareholder would
normally expect. Without the emergency aid approved by
the Commission in 1996, the bank’s results would still be
negative. It should also be remembered that without the
neutralization of the loan (anticipated and, in accordance
with the State aid rules, unlawful at this stage), CL would
still have recorded losses in 1997.

the recent

On this basis alone, therefore, the Commission cannot
conclude that
the bank’s activity
shows that it has returned to profitability and viability. It
is essential in this respect to examine the restructuring
plan submitted by the authorities in July 1997 (see
below).

trend of

4. ANALYSIS OF THE PROGRESS MADE IN IMPLE-
MENTING THE MEASURES PROVIDED FOR IN
DECISION 95/547/EC

In Decision 95/547/EC the Commission subjected the aid
to a series of conditions, the implementation of which is
examined below. The most important conditions are:

(a) full

implementation of
the
submitted to the Commission;

restructuring

plan

(b) a 35 % cut in the bank’s commercial presence outside

France in balance sheet terms;

(c) introduction of the EPFR loan and the zero-coupon

bond;

(d) payment of the better fortunes clause;

(e) payment of the dividends from CL to the State as

shareholder;

(f) use of the proceeds of sales for restructuring purposes;

(g) abolition of the carry-over of tax losses relating to the

aid.

(a) Implementation of the restructuring plan submitted

to the Commission

Since the approval by the Commission in July 1995 of
the aid plan for CL, including the protocol between the
French State and CL of 5 April 1995 concerning the hive-
off vehicle, the French authorities have sent the Commis-
sion several amendments to the protocol, some of them
in order to comply with Decision 95/547/EC (separation
of CL and CDR) and with the Commission’s Decision of
September 1996 (emergency aid). Attention is drawn here
to Amendment No 9 of 6 May 1997, which adapted the
arrangements for the repayment of the participating loan
by CDR to EPFR by doing away with the obligation on
CDR to repay in advance each year to EPFR a sum
corresponding to the sums collected from the assets less
sums made available to controlled companies, operating
expenses and interest owing to EPFR. Since the date of
the amendment, CDR must submit each year to EPFR a
multiannual financing and cash-flow plan, under which it
repays in advance to EPFR, on 30 June, an amount equal
to its estimated available cash flow at that date less one
sixth of the sale proceeds set out in the budget for the
year in progress.

The same amendment introduced a guarantee from EPFR
to CDR making it easier for the latter to obtain external
financing up to a limit of FRF 10 billion. The amount of

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L 221/41

the additional drawdowns under EPFR credit which CDR
can make from 1 January 1998, up to a limit of FRF 10
billion, is reduced by the amount of the guarantees in
existence at the date of each drawdown. The changes
reflect CDR’s increased cash-flow needs, which were a
factor behind the delayed repayments of the participating
loan and, consequently, of the loan from CL to EPFR.

On 16 December 1997 the French authorities informed
the Commission of the reform of the structures for super-
vising CDR presented to the Finance Committee of the
National Assembly by the Minister, Mr Strauss-Kahn.
According to the French authorities,
the reform was
necessary in order to correct the defects in the previous
arrangements, in particular:

— the fact that liquidation was the sole objective, and the

binding nature of the timetable;

— the

fact

that CDR was not made

sufficiently

responsible;

— a plethora of supervisory bodies and procedures;

— political interference;

— uncertainty as to the outcome of lawsuits.

The reform is based on three principles: independent and
responsible management, rigorous and effective supervi-
sion, and the State to be impartial and concerned to see
justice. In practice this means that:

— in order to obtain the best value for them and op-
timize the financial result for the State, the assets will
no longer be managed with a view simply to their
liquidation;

— CDR will alone be responsible for the sell-off process,
as part of a strategy to be reviewed each year, and
profit-sharing arrangements will be introduced;

— internal control will be strengthened by the transfor-
mation of CDR into a company with a supervisory
and management board, the assumption of the func-
tions of the advisory committee by the supervisory
board, the creation of a risks division, and the simpli-
fication of
internal accounting arrangements and
middle management structures;

— EPFR will exercise vis-(cid:133)-vis CDR the prerogatives of
the State as shareholder, in a supervisory function for
which it may bring in outside experts;

— political interference is prohibited, and instances will
courts, whose

be
resources will be strengthened for the purpose.

systematically referred to the

The Commission supports the principle of a management
which is keen to defend the asset-related interests of the
State; this should have the effect of minimizing the aid
granted by the State to CL through the hive-off vehicle.
The Commission notes that CDR’s operations during the
1996 and 1997 financial years have already shifted from a
liquidation perspective and that, in particular, CDR has
abandoned claims and effected recapitalizations, and
granted fresh guarantees to its subsidiaries or their buyers,
under conditions likely to include the grant of State aid to
the beneficiaries of these transactions. The Commission
stresses that the abandonment of the liquidation rationale
makes it less likely that the original (indicative) timetable,
whose target was that 80 % of the hived-off assets should
be sold within five years (i.e. by the year 2000), will be
complied with. The advantages which the authorities see
in such non-liquidation management must be evaluated
in the light of the increased carrying costs associated with
extending the hiving-off of a number of assets. The
authorities have not provided any evidence on this point
to show that they are minimizing the aid in the process.

obligations

from such

The Commission would point out that CDR’s resources
are state resources within the meaning of Article 92 of the
Treaty, not only because CDR is the wholly owned sub-
sidiary of a public undertaking but also because it is
financed by a participating loan guaranteed by the State
and because its
losses are borne by the State. The
Commission notes that such transactions do not qualify
for any derogation exempting them from the obligations
arising out of Articles 92 and 93 of the Treaty, and in
particular that the French authorities and CDR cannot be
exempted
under Decision
95/547/EC or under this Decision. It should be noted
that CDR’s operations with regard to its subsidiaries are
deemed not to include any aid component only if they
conform with the ‘market economy investor’ principle
and that any injection of
funds (or abandonment of
claims) complies with this principle. In its communica-
tion to the Member States (9) concerning the principles to
be applied to determine whether public intervention
should be regarded as aid, the Commission considers that
injections of capital
into public undertakings contain
elements of State aid if, in similar circumstances, a private
investor, in view of the expected return on the contribu-
tion of funds, would not have made the capital injection
in question. In a letter dated 16 October 1997 addressed
to the Minister for Economic, Financial and Industrial
Affairs, Mr Van Miert pointed out that CDR operations
involving a recapitalization of its assets, a sale at a loss or
a cancellation of debt were likely to include aid and
should be notified to the Commission. Similarly, sales of
CDR assets other than by open, transparent tendering
procedures must also be notified to the Commission.

(9) OJ C 307, 13. 11. 1993, p. 3.

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8. 8. 98

Only operations definitely below the de minimis aid
threshold of ECU 100 000 are exempt from this obliga-
tion.

The other aspects of the implementation of the restruc-
turing plan submitted to the Commission in 1995 are
examined below.

larger part of this loan (FRF 135 billion) has made it
possible to finance the transfer of assets, the balance (FRF
10 billion) should have been used by EPFR to purchase
zero-coupon bonds for the same amount, which would
have enabled it to earn an income of FRF 35 billion
(nominal) in 2014, which the Commission estimated in
Decision 95/547/EC to be worth about FRF 8 billion in
present value terms.

(b) Reduction of the bank’s commercial presence outside

France

In accordance with the undertakings given by France in
the letter from the Minister, Mr Madelin, dated 18 July
1995, Decision 95/547/EC called for a reduction of at
in-
least 35 % in CL’s commercial presence abroad,
cluding the European banking network, by the end of
1998. The letter states that the reduction will have to be
valued in balance sheet terms and that an international
the above percentage
reduction of
represents a reduction of 50 % in the European network.
The contribution of the international assets to the bank’s
total assets at the end of 1994 was FRF 960 billion,
whereas the contribution of the European assets was equi-
valent to FRF 620 billion. Consequently, 35 % of the
international assets corresponds to FRF 336 billion, of
which FRF 310 billion are in Europe (= 50 % of CL’s
European assets outside France).

the magnitude of

At 31 October 1997, CL had sold assets with a balance
sheet value at 1 January 1995 of FRF 171,2 billion, or
17,9 % of international assets. The reduction is the result
of sales of FRF 136,1 billion in Europe and FRF 35,2
billion in the rest of the world. The reduction in Europe
corresponds
to 22 % of European activities. Conse-
quently, CL must still sell, by 31 December 1998, nearly
FRF 174 billion of European assets in order to fulfil this
obligation.

(c) Introduction of the loan to EPFR and the zero-

coupon bond

In order to buy the FRF 135 billion of assets, net of
liabilities, transferred from CL to the hive-off vehicle,
CDR received a participating loan of FRF 145 billion
from EPFR (of which FRF 10 billion were converted into
an EPFR guarantee in for CDR borrowings from third
parties). EPFR, for its part, obtained its finance from CL
through a non-participating loan of FRF 145 billion. The
two loans have a maturity date of 31 December 2014. The
annual rate of interest applicable to the loan from CL to
EPFR was originally set at 7 % in 1995, then at 85 % of
the money market rate (MMR) from 1996 (10). Since the

(10) Overdue interest is paid at the monthly rate for 13-week
Treasury bills (TMB), published by the Caisse des D(cid:130)p(cid:147)ts et
Consignations.

Several changes have been made to this plan. The loan
from CL to EPFR has been set up, but only the first part
relating to FRF 135 billion, which means that EPFR has
not been able to set up the zero-coupon bond. Since the
expected income for EPFR from the zero coupon had
been deducted by the Commission from the gross aid to
CL, the failure by CL to grant the FRF 10 billion loan to
EPFR and the consequent failure to set up the zero-
coupon bond constitute an additional cost to the State
and additional aid to CL (compared with what was au-
thorized in 1995), of an amount equal to the deduction of
approximately FRF 8 billion calculated in 1995. Part of
this aid, estimated at FRF 400 million and relating to the
failure to set up the bond in 1995-96, was however
approved by
the Commission in its Decision of
September 1996 concerning emergency aid for CL.

The same Decision approves other emergency aid of
about FRF 3,5 billion deriving from the increase in the
interest rate for the loan from CL to EPFR for 1995 (ex
post facto) and 1996. The Commission also decided to
initiate the procedure with regard to the application of
this change in the years ahead.

Amendments to the 1995 protocol between the State and
CL were made after it had been signed,
in order to
change other clauses that had been approved by the
Commission. Thus, as regards the mechanism for finan-
cing the hive-off, the failure by EPFR to draw down FRF
10 billion from CL did not result in a reduction by a
similar amount of the participating loan from EPFR to
CDR, but in the transformation of this possibility of an
additional drawdown by CDR into a guarantee for the
same amount enabling it to borrow direct from third
parties.

In addition, although progress on CDR sales is in keeping
with the original objective of selling 80 % of the hived-
off assets within five years and 50 % within three, the
increase in the proceeds from sale to EPFR, and hence
the repayment of the loan from CL, have been much
slower and more limited than initially planned, since
CDR has kept the bulk of these sale proceeds for finan-
cing its operating costs, the costs of carrying its assets (in
particular the repayment of third-party liabilities), and for
supporting certain hived-off assets
forms
(through recapitalizations, advances and abandonments of
claims).

in various

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The delay in repayments and the unexpected trend of interest rates have had an effect on CL’s
accounts. The assets transferred to CDR were partly financed by long-term liabilities not trans-
ferred to the hive-off vehicle and contracted by the bank in its expansion phase (1988-93) at
rates higher than the return on the EPFR loan after 1995 (85 % of MMR). From 1996 on, this
should have entailed carrying costs for CL (projected at the time as FRF 2,1 billion in 1997, FRF
1,8 billion in 1998 and FRF 1,4 billion in 1999). In accordance with the intentions of the French
authorities, this constituted a contribution from CL to the costs of the mechanism, and therefore
to its own restructuring. The projections of the bank’s net receipts from banking indicated in
1995 that CL would be fully able to support these costs. In reality, the delayed repayment of the
loan to EPFR and the unexpected trend of market interest rates increased these costs. However,
the increase would not have required emergency aid if CL had lived up to its NRB projections.
It is therefore this latter element, namely the lower than forecast outturn of NRB, which is at the
root of the emergency aid. In the 1996 decision, the Commission had concluded, on the basis of
the data supplied by the French authorities, that the effect of the rate would have additional costs
for CL of only FRF 1 billion over the three-year period 1996-98 (11).

(d) The better fortunes clause

The terms of the better fortunes clause have been applied correctly since the adoption of Deci-
sion 95/547/EC. However, under this clause, CL paid only FRF 6 million in 1995 and FRF 107
million in 1996, amounts which are well below the FRF 339 million and FRF 505 million
initially scheduled for these two years, owing to the bank’s performance, which was less good
than originally forecast. The new plan submitted in July 1997 foresees, on the basis of a
complete neutralization of the EPFR loan and the other assumptions concerning the sales of
assets, an improvement in the bank’s results from the year 2000 compared with the 1995 plan,
and hence payments under the clause, if it is maintained.

Table 6:

Payments under the better fortunes clause

1995

1996

1997 P

1998 P

1999 P

2000 P

(FRF million)

Revised estimate, 1997

Projection, 1995

Differential

6

339

107

505

1 018

1 247

2 309

1 065

1 901

2 326

3 553

2 487

(333)

(398)

(47)

(654)

(17) + 1 066

Source: CL’s business plans, 1995 and 1997.

Such an improvement should compensate, subject to the clause being maintained, for the lack of
initial payments. However, the plan submitted to the Commission in July 1997 (see below)
leaves a question mark as to whether the clause will be kept or replaced by an alternative solu-
tion.

(e) Payment of dividends to the State as shareholder

As with the clause, the fact that CL has recorded results which are worse than forecast has
reduced the dividend payments from CL to the State as shareholder and the value of the shares
held by the latter, compared with the estimates initially used. The Commission would point out
that in Decision 95/547/EC it estimated that the value of the State’s share of CL’s results was
FRF 10 billion discounted. The following table shows the original projections and the revised
estimates of CL’s net, post-clause results.

(11) For further details of the emergency aid, see the Commission Decision of September 1996, published in

the Official Journal on 24 December 1996.

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Table 7:

CL’s net results, group share, after payment of the clause

1995

1996

1997 P

1998 P

1999 P

2000 P

(FRF million)

Revised estimate, 1997

Projection, 1995

Differential

13

659

202

912

1 270

1 318

1 452

1 923

2 217

2 252

3 095

2 385

(646)

(710)

(48)

(471)

(35) + 710

Source: CL’s business plans, 1995 and 1997.

(f) Use of sale proceeds for restructuring purposes

5. COMMENTS FROM THIRD PARTIES

CL stated that it used FRF 14,8 billion from the proceeds
of sales to finance all the restructuring measures. The
actual amount used was FRF 7,5 billion, the rest being
invested in cash flow or in debt refinancing. It will be
noted, however, that CL also invested nearly FRF 254
million abroad. These investments were small-scale and
represent only 1,7 % of the proceeds from sales made
since the beginning of 1995.

(g) Abolition of the carry-over of tax losses relating to

the aid

In accordance with the principles of the guidelines on
restructuring aid,
the Commission obliged the French
State to remove from CL the possibility of carrying over
the tax loss associated with that part of its negative results
covered by the 1994 capital increase of FRF 4,9 billion.
The Commission also requested the French authorities to
remove from CL the possibility, at the moment of privat-
ization, of carrying over the other tax losses, if the better
fortunes clause is transferred.

With regard to the first condition, CL stated that, in its
view, this concerns only the 1994 losses corresponding to
the capital increase financed by the State and the Caisse
des D(cid:130)p(cid:147)ts et Consignations (FRF 3,75 billion). The
Commission would observe that in Decision 95/547/EC it
considered that all the assistance from CL shareholders,
including the Thomson group, in which the State had a
majority holding, and whose resources are therefore state
resources within the meaning of Article 92(1) of the EC
Treaty, was to be regarded as State aid. Consequently, it
confirms that this condition applies to the total amount
of the capital increase (FRF 4,9 billion). The Commission
also confirms that it is necessary to fulfil the second
condition.

5.1 Comments from third parties

As part of these proceedings, the Commission received
comments from Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale (SG) and the UK au-
thorities by letters dated 21 and 23 January 1997 respect-
ively, which were forwarded to the French authorities.
The latter replied by letters dated 10 and 27 February
1997. Other written comments were received on 19 May
1997 from the British Bankers’ Association, on 2 July
from Nederlandse Vereniging van Banken and on 26
August 1997 from Bundesverband deutscher Banken. The
comments cannot, however, be taken into account as they
were sent after the deadline for receipt of comments
provided for in the Commission notice published in the
Official Journal of the European Communities.

SG decided to refer to the Court of First Instance of the
European Communities the Commission Decision of
September 1996 approving emergency aid to CL, as it had
already done with regard to Decision 95/547/EC.

As regards the additional restructuring aid covered by
these proceedings, SG considers that it is not intended to
facilitate the development of an activity within the
meaning of Article 92(3)(c) of
the Treaty, although it
acknowledges that the sole prospect of the crisis that
would be caused by the failure of CL justifies and indeed
demands that the State, as both shareholder and guardian
of the market place, take steps to reassure the depositors
and intrabank creditors of this major institution.

SG takes the view that the Commission must require the
French authorities to consider alternative solutions such
as controlled liquidation and selling in blocks. This would
be especially justified in view of the recurrent nature of
the aid. Whilst its main argument is that the alternative

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solutions referred to above are the only outcome that
the
complies with the Treaty, SG also considers that
Commission should compensate competitors
the
for
damage caused them by requiring CL to sell not only all
its foreign businesses (including those in the United
States and South-East Asia, which are the most profitable),
but also activities in France such as collective and indi-
vidual third-party asset management, consumer credit and
life insurance subsidiaries or certain sections of the retail
network itself. Similarly, SG points out that the assistance
provided by the French authorities and the Commission
for the redundancies envisaged by CL would not con-
stitute a binding condition for the grant of financial aid
but rather an additional form of aid, as private banks
would not receive such assistance and would thus be
prevented from raising their profitability to the level of
their European competitors.

Lastly, SG drew the attention of the Commission to the
conditions of the future privatization of CL, in particular
the plan to strengthen the solvency ratio before privatiza-
tion to nearly 6 % in tier one (i.e. the ‘hard’ ratio of own
funds in the narrow sense), which would seriously distort
competition, in view of the effects in terms of the rating
given by rating agencies and in comparison with the 1987
privatization of SG with a solvency ratio of only 3 %,
which it was able to increase to 6% only ten years later.

The UK authorities support the Commission’s in-depth
investigation and note that
the recurrent aid could
generate future expectations of aid on the part of the
bank’s management, which could distort competition.
They stress that CL should give serious and substantial
quid pro quos which would involve all the activities of the
bank not strictly necessary to the viability of its basic
activity. For that reason, they suggest that future aid be
staggered over time and that their approval should be
subject to restructuring measures and compensating arran-
gements.

5.2 Comments from the French authorities and CL

By letter dated 6 December 1996 to the Commission, the
Chairman of CL stated that he had informed the French
Government of the prospects for 1996 very early that
same year, and again in July, pointing out that a rapid
decision was needed. He also disputed the reference date
for the reduction in CL’s commercial operations abroad,

stating that the letter of 18 July 1995 from the Minister,
Mr Madelin, forwarded to the bank only several months
after
fix a
reference date at all and that the restructuring of the bank
began at the end of 1993.

to the Commission, did not

it was sent

The French authorities commented on the letter from SG
forwarded to them by the Commission, pointing out that
they had fully assumed their twofold responsibility as
shareholder and guardian, as acknowledged by SG when
the emergency aid was notified. They disputed the
analysis of SG and the UK authorities concerning the
distorting effect of the emergency aid and the need for
compensating measures, claiming that CL had been
severely restricted in the 1995 plan and that refocusing on
a more limited core of activity was provided for in the
new restructuring plan. They nevertheless
said that
restructuring aid was needed, chiefly to neutralize the
CL-EPFR loan, but also possibly to recapitalize the bank
in order to ensure its viability, the amount of the increase
being strictly in proportion to CL’s financial requirements
for rapid privatization. They also stated that, when con-
sidering methods of providing the bank with financial
support, they would bear in mind that state resources
should be granted in step with completion by the bank of
the targets contained in its strategic plan.

5.3 Observations of

the Commission on the

comments submitted

The comments of third parties are examined in the fol-
lowing sections of this Decision.

for

The comments made by CL call
the following
response from the Commission. As regards the date on
which CL informed the French authorities of the deter-
ioration of the bank’s financial position and the need for
assistance from the State,
the Commission can only
deplore the fact that the French authorities concealed the
true position of the bank instead of meeting their obliga-
tion to provide the Commission with regular reports on
the progress of the plan approved by it in July 1995.
Although it may not alter the need for the aid approved
by the Commission in September 1996, especially as the
Commission could not completely rule out the risk of
serious consequences for CL without aid, it is obvious that
the French authorities should have notified the aid in
question much earlier.

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As regards the reference date for assessing the reduction
in CL’s commercial operations abroad, the Commission is
unable on legal grounds to agree with the date suggested
by CL, i.e. 1 January 1994. The French authorities did not
notify the Commission in 1994 of the first instalment of
State aid to CL; the restructuring plan was notified to the
Commission, at its request, only in 1995 and only after a
new aid plan had been set up. Nor can the fact that the
terms of the letter from the Minister, Mr Madelin, of 18
July 1995 were officially communicated to CL only later
be invoked against the Commission. The most appro-
priate legal basis for defining the date by which that obli-
gation should have been fulfilled continues to be the
letter of 18 July 1995 from Mr Madelin, in which the
words ‘d’ici fin 1998’
(by the end of 1998) are unequi-
vocal.

Accordingly,
in order to assess the reduction in CL’s
commercial operations abroad, the Commission takes as
reference the contribution at 31 December 1994 from the
various geographical areas to the bank’s total assets as
shown in the annual report of CL, the balance sheet at
the end of 1994 thus constituting the sole and last public,
objective basis which can be taken into account.

6.

THE RESTRUCTURING PLAN PRESENTED BY
THE FRENCH AUTHORITIES IN JULY 1997

6.1 Chief characteristics of the plan

The plan submitted to the Commission in July 1997 was
drawn up with a view to the gradual bringing in of new
shareholders to CL, approved in principle by the State in
the preceding plan approved by the Commission in 1995.
The plan is based on a macro-economic environment
characterized by an average growth in gross domestic

product in France of 2,3 % and inflation of some 2 % a
year. The strategy is based on two large centres of activity:
on the one hand, a bank for private individuals, bus-
inesses and SMEs in France; on the other, in the main
including France and Europe, a
regions of the world,
‘wholesale’ bank for big businesses and institutions. The
two large centres would continue to rely on CL’s skills in
market activities,
financial engineering and third-party
asset management, which the bank plans to retain.

The plan is built around the following hypotheses:

— total neutralization of the net costs of carrying the

loan from CL to EPFR;

— sale of a substantial portion of the bank’s retail opera-

tions in Europe;

— reinvestment in cash flow of the proceeds from the

asset sales.

The strategy presented by the French authorities was re-
latively conservative in terms of growth,
its chief aim
being to restore the profitability of CL. Net receipts from
banking (NRB) at consolidated level would, overall, stag-
nate in nominal terms as against the 1996 level (taking
account of sales) and overheads would fall by nearly FRF
4 billion, so that the bank operating ratio (ratio of over-
heads to NRB) would drop from 79 % in 1996 to about
70 % in 2000, i.e. close to the level of CL’s main French
competitors, Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale and BNP. In practice, the
plan provided for a recovery in net receipts from banking
which, following a sharp dip forecast for 1997 (– 7 % in
value, or nearly – 9 % in volume), should become stable
by 1998 and rise in 1998 and 1999. Whilst the recovery
would be appreciable in 1998 as regards the bank’s acti-
vities in France, it would, because of the sales in the Euro-
pean network, be deferred to the end of the period for the
group as a whole.

Table 8

(FRF million)

1996

1997

1998

1999

2000

44 509

35 049

79 %

41 404

33 059

80 %

56 748

50 773

1 593

107

3 377

1 018

[ . . . ]

[ . . . ]

77 %

[ . . . ]

3 608

[ . . . ]

[ . . . ]

[ . . . ]

74 %

[ . . . ]

5 468

[ . . . ]

[ . . . ]

[ . . . ]

70 %

[ . . . ]

7 640

[ . . . ]

3,9 %

7,9 %

40 626

42 565

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

Net receipts from banking

Overheads and depreciation

Operating ratio

Staff

Net result (before better fortune clause)

Better fortunes clause

Return on equity

— before better fortunes clause

Own funds ‘Tier one’

‘Tier one’ ratio

4,56

4,93

4,91

5,07

5,39

Source: French authorities, plan submitted to the Commission.

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An improvement in risk control, reflected in a reduction in the provisioning rate (12) from
0,78 % to 0,55 %, was to have made a significant contribution to the results. In particular,
however, the bank had planned for two major variables to restore its margins and profitability:

(i) a very significant reduction in operating costs in France

For a universal bank like CL, having a domestic market is a considerable advantage and provides
a relatively stable turnover. It is vital for the bank to be able to operate with the most performing
operators on the French market in order to be able to produce the margins which improve its
position in France as a reliable and strategic base point. Thus by the end of the plan, the
anomaly of the bank’s inability to produce satisfactory margins would be corrected: CL would
again secure substantial profits on its domestic markets, especially at retail level, and obtain most
of its cash flow from that source.

Table 9:

A major effort in the French network

1996

1997

1998

1999

2000

(FRF billion)

Variation
1996-2000

22,4

7,8

21,5

7,5

34 339

32 454

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

Net receipts from banking

Staff costs

CL SA (France) staff

Source: French authorities.

The plan provides for several packages of measures aimed at the recovery of CL on the French
market. An overall project to ‘re-engineer’ the decision-making processes (projects with the title
of ‘challenges’) should lead to a radical restructuring of the bank’s commercial activity and the
information processing chain. New risk assessment tools will be set up for credit for SMEs. An
agreement with Cetelem, a consumer credit specialist, will allow CL to expand its position on
the consumer credit market, until now dominated by specialized establishments. Lastly, CL will
launch telephone banking in order to improve contact with its retail customers.

The plan presented by the French authorities has a large number of social measures. The job
cuts under the third redundancy programme, started in mid-1996 and finishing at the end of
1998, should involve some 5 000 persons, chiefly those in the bank’s mainland network. The
reductions will affect the network staff (3 140 persons) and operational units (1 860 persons).
According to the plan submitted to the Commission, they were not intended to reduce the
bank’s commercial capacity significantly but essentially to cut operating costs and improve the
operating ratio.

Table 10:

Successive redundancy programmes

(1) From 30.3.1994 to 30.3.1995

(2) From 30.3.1995 to 30.6.1996

(3) From 30.6.1996 to 31.12.1998

Additional redundancies 1999-2000

Source: French authorities.

(12) Ratio of provisions to weighted amounts outstanding.

Redundancies

1 124

2 398

[ . . . ]

[ . . . ]

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Further reductions are planned after 1998, in 1999 and 2000, involving [ . . . ] persons, of whom
[ . . . ] in the branches and [ . . . ] in the bank’s functional units. All in all, the workforce would
shrink by [ . . . ] in France compared with 1996 (and [ . . . ] at consolidated level, taking account of
the sales of subsidiaries). The reductions would produce savings in staff costs of 9 % in France
over the life of the plan, thus significantly cutting CL’s charges and helping it return to profit-
ability.

Table 11:

Workforce trend, France

Employees

31.12.1997

31.12.1998

31.12.1999

31.12.2000

Variation

France (DCAF)

Other

Total

Source: French authorities.

25 520

6 934

32 454

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

The plan provides for rationalization of the network outlets in France, involving the closure of
243 loss-making branches in 1997 and 1998 (out of a total of 1 954 branches for retail customers
in 1996), and the reorganization of business centres and retail outlets for business customers (see
Table 12 below). Overall, the number of branches in the parent company in France would fall in
the period 1996-2000 from 2 100 to 1 750, i.e. a reduction of some 17 %. On the basis, however,
of information forwarded by CL to the Commission’s consultant bank, it would seem that the
total number of CL outlets in its French network should fall from 2 298 at the end of 1996 to
2 146 at the end of 2000, i.e. a reduction of only 6,6 %. The difference between the data
supplied in July to the Commission and those sent by CL appears to be due to the scope of the
commitments which, in CL’s presentation, includes all CL’s outlets in France, including the
parent company and subsidiaries.

Together, these measures should help to improve profits in the French network. The bank’s aim
is to increase the net result of DCAF (central directorate for activities in France) from FRF 1
billion to FRF 4,3 billion by 2000. If it succeeds, CL will not only have restored the French
network’s contribution to the result, in proportion to the turnover produced, it will have made
the activity in France one of the most profitable of the group.

Table 12:

Development of agency network, France

Branches

1994

1995

1996

1997

1998

1999

2000

Authorities’ plan — July 97

2 100

% change since 1996

1 750

–16,7 %

Data from CL

2 475

2 385

2 298

2 248

2 146

2 146

2 146

% change since 1996

–6,6 %

Breakdown:

Personal

Business

Business
centres

2 063

2 010

1 954

1 924

1 899

1 899

1 899

and

corporate

215

197

215

160

201

143

181

143

136

111

136

111

136

111

Source: French authorities and data supplied by CL to the Commission’s consultant bank.

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A sensitivity analysis conducted by CL showed that, if
consumer credit were to grow twice as slowly as forecast,
if the new measures to finance the NRB (for the DCAF)
were to contribute twice as little as expected and the
reduction in the provisioning rate was not as large as
predicted, the contribution of the French network to the
result would be reduced by half, but would still be pos-
itive.

that CL expected interest

cost of the rate for the emergency aid (relating to the loan
to EPFR) for 1996, i.e. 5,84 %. In view of these considera-
tions, and the very partial rate risk cover set up in 1995, it
is clear however,
rates to
develop differently, thus reducing its costs. Hence, the
higher losses incurred by the bank on the loan granted to
the hive-off are attributable to it in part, to the extent of
the risk rate it contracted. At the end of 1997, the French
authorities commissioned an independent firm to audit
the transactions connected with the loan to EPFR, but
they have not forwarded the results to the Commission.

(ii) neutralization of the loan to EPFR

The various sections of the 1995 CL rescue plan included
a plan for CL to finance the hive-off by granting a soft
loan of FRF 145 billion to EPFR. This below-market rate
would thus enable the State, which would ultimately bear
the final cost of the CDR debt write-off through EPFR, to
reduce the financing cost of carrying the CL assets trans-
ferred to CDR.

As stated above, the plan provided that the CL loan to
EPFR would be remunerated at 7 % in 1995 and then at
85 % of MMR (short-term money market rate) from 1996.
The State benefited from this: for EPFR the benefit can
be estimated annually on the basis of the differential
between the short-term rate for the CL loan and the long-
term rate for the refinancing it would have to obtain
without the CL loan, i.e. currently some 2,5-3 % annually
on the loan outstanding. In 1997,
the
special scheme set up by the State was worth, in respect
of the amount outstanding, some FRF 2,8-3,3 billion to
EPFR. From CL’s standpoint, however, the loan, which is
partially secured with refinancing liabilities contracted at
a higher rate and which preceded the 1995 hive-off, is
penalizing and makes a negative contribution to its opera-
ting result, amounting to the differential between the
borrowing rates for its loan refinancing liability and the
lending rate for the loan. As a large part of CL’s refinan-
cing liabilities are fixed-rate liabilities, any cut in rates,
taking account of the definition of the rate for the loan to
EPFR, results in an increase in the net loan-carrying costs.

the benefit of

its

According to CL, from September 1995 to the end of
1996, it set up an instrument providing partial cover for
the rate risk it was incurring on account of the structure
of
type
loan refinancing liabilities. These ‘swap’
hedging derivatives enabled the bank, it claims, to limit
its carrying costs in 1995-96 to some FRF 670 million (i.e.
only very partial cover for the rate risk incurred, as is clear
from the amount of
the neutralization subsequently
necessary), which it took into account in calculating the

As far as the Commission is aware, the bank has not had
recourse to any methods of covering the rate risk on the
loan to EPFR since the end of 1996, largely rendered
meaningless by the fall in rates of more than two points
since the adoption of Decision 95/547/EC.

In September 1996, when the emergency aid was notified,
the French authorities asked for the complete neutraliza-
tion of the effects of the CL loan to EPFR until 2014
through an increase in the interest rate from 85 % of
MMR to a rate corresponding to the cost of refinancing
CL (it was subsequently established in work done by the
Commission’s consultant bank that the rate would fluc-
tuate between MMR + 2,5 at the start of the period to
MMR + 0,2 at the end of the period). The request was
confirmed in the plan presented to the Commission in
this
July 1997. According to the French authorities,
measure should make it possible to draw a line below the
past, as CL would no longer be penalized for the financial
consequences of the expansion strategy that led it to the
crisis of 1993-95.

it

the Commission, however,

in fact
In the view of
amounts to ‘over-neutralization’, as the proposed increase
in the rate takes it above the market rate and also
compensates for initial errors in the cover against the rate
risk on the CL loan to EPFR. On the basis of a scenario
involving repayment of the loan and ‘rate spread’ data (the
gap between the asset rate for the EPFR loan and the
weighted average of the rates applicable to the refinancing
liabilities) submitted by CL to the Commission’s consul-
tant bank, this component of the aid can be estimated at
FRF 20,2 billion in the period 1997-2014 (by discounting
future flows at the money market rate used to define the
rate spreads in this scenario,
is worth
noting that the bank and the French authorities, using a
long-term discounting rate, arrive at a different figure for
the discounted aid relating to the neutralization, which
they estimate at some FRF 17,2 billion over the period
from the
1997-2014, using the same method (apart

i.e. 3,19 %). It

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8. 8. 98

if

discounting rate applied), which was validated by the
Commission’s consultant bank. It should also be noted
that,
the conventional hypotheses underlying that
calculation were to change substantially, in particular the
timetable for repayment of the CL loan to EPFR, the
calculation of the neutralization aid would be invalid and
would have to be revised on new bases. The Commission
is not aware at the date of this Decision of any such
changes and notes
the French authorities have
retained their estimate based on similar underlying hypo-
theses.

that

At the request of the consultant bank, CL carried out a
study on the sensitivity of the neutralization value of the
CL-EPFR loan to an increase in interest rates. All other
things being equal, the study shows that in the event of a
1 % rise in short-term rates (and of a 0,5 % increase in
long-term rates), the cost of neutralizing the loan would
vary by FRF 500 million from the FRF 17,2 billion calcu-

lated by the bank. The Commission therefore concludes,
in view of the 0,3 % increase in MMR between mid-1997
and this Decision, that the conditions on the basis of
which it estimated the cost of neutralizing the loan at
FRF 20,2 billion at the end of 1997 are still valid.

In their letter of 31 March 1998, the French authorities
propose to alter the mechanism by totally neutralizing the
loan until 2000 (as in their preceding notification) and,
from 2001 to 2014, by neutralizing it at a short-term rate
(not specified, but possibly the PIBOR which, depending
on market
from MMR to
conditions,
assessed the
MMR + 0,2 %). The Commission has
economic effects of the new proposal from the French
authorities. The difference is small, i.e. (discounted to 31
December 1997) FRF 2,3 billion, the aid falling from FRF
20,2 billion to FRF 17,9 billion. The minimal difference
is explained by the fact that CL incurs carrying costs on
the loan to EPFR in respect of the portion exceeding
MMR, chiefly in the period 1997-2001.

ranges

Table 13:

Financial impact of ‘neutralization’

1997 estim.

1997 actual

1998

1999

2000

(FRF billion)

Financial impact of neutralization

Net result (before clause)

— without neutralization

— with neutralization

3,3

0,1

3,4

–1,4 (1)

1,9

3,0

0,5

3,5

2,7

1,8

4,5

2,4

4,6

7,0

NB: The data used to draw up this table were submitted in March 1998 to the Commission by the French authorities. They

are based on the July 1997 plan, although certain items have been updated.

(1) estimated.

In support of their proposal, the French authorities considered that if the carrying costs of the
loan to EPFR were not neutralized, the bank’s viability could be jeopardized owing to the
possible reactions of its customers, the compensating measures and the rating agencies which
could downgrade CL’s rating. The French authorities also justified the measure on the ground
that it should help to bring new shareholders to the bank.

The plan submitted by the French authorities to the Commission in July 1997 also considered
another possibility: instead of the annual neutralization of the carrying costs of the EPFR loan,
CL would be repaid in advance and would receive an adjustment for the discounted difference
between the cost of the liabilities securing the EPFR refinancing (13) until they are extinguished
and the cost of refinancing short-term liabilities. However, in subsequent discussions with the
Commission, the French authorities made no further reference to that option. It is worth noting

(13) Liabilities not transferred to the hive-off described above.

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that, as stated above, the existing mechanism was relatively advantageous to the French Govern-
ment as, throughout the period of the loan (potentially until 2014), it financed long-term ap-
plications (the carrying by EPFR of the participating loan to CDR) with resources obtained at a
lower rate, i.e. at a short-term rate. The neutralization option has the advantage of being less
expensive for EPFR than early repayment of the loan coupled with a long-term borrowing: in
view of the gradual restructuring of the CL liabilities backing the loan, the rate of the loan after
neutralization should gradually fall until it reaches PIBOR in 2004 or 2005. As the reference rate
for the loan is still MMR, the State could thus continue, although the terms would not be as
good, to bear the carrying costs of the hive-off at a rate similar to the short-term rate.

6.2 Measures presented by the French authorities in exchange for aid to CL

In addition to the restructuring of the French network, which includes branch closures described
by the French authorities as compensating measures for aid to CL, the July 1997 plan includes
the sale of most retail operations in Europe, including CL’s largest subsidiary, Bank f(cid:129)r Gemein-
wirtschaft (BfG, Germany, of which it owns 50 % plus one share). The plan earmarks major
provisions (FRF 4,4 billion) for the financial years 1998 and 1999 in anticipation of the negative
impact, forecast in 1997, of the sale of BfG at a loss in 2000. The French authorities also
proposed that the rigid timetable imposed in 1995 for completion of the compensating measures
in the first aid plan (i.e. the sale of 50 % of the bank’s assets in Europe by 31 December 1998)
should be relaxed to avoid CL having to call on its shareholder to finance the erosion of own
funds resulting from the sales. Strategic disinvestments would be staggered until 2000, sales
being decided as and when financial circumstances permitted.

Table 14:

Impact of the strategic disinvestments proposed by the French authorities

Reallocation of establishments outside France

1996

1997

1998

1999

2000

Variation
1996/2000

Net receipts from banking
(FRF billion)

Staff

Number of establishments

DCAE

DCAI

DCMC

DCAE

DCAI

DCMC

Europe

Rest of the world

Total

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

728

292

1 020

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

[ . . . ]

270

250

520

–62,9 %

–14,4 %

–49,0 %

DCAE: Central Directorate for European Affairs

DCAI: Central Directorate for International Affairs

DCMC: Central Directorate for Capital Markets

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The French authorities took the view that CL’s decision
to sell its subsidiaries before the introduction of the Euro
deprived it of the opportunities afforded by a more inte-
grated personal banking market in Europe and therefore
constituted a substantial effort which released market
shares for its competitors in Europe.

Outside France, once the bank had pulled out of retail
banking in Europe, its strategy would be to refocus on the
functions of credit for large firms, structured financing
and financing of projects, capital markets, asset and flow
management, private management
and international
trading. These would in future be organized as ‘world
lines’ in order to provide better support for the bank’s
transactions. The re-
customers in their
international
focusing would reflect CL’s move
away from the
‘universal’ bank strategy abroad.

7. ASSESSMENT OF ADDITIONAL AID TO THAT

APPROVED BY THE COMMISSION IN 1995

7.1 Uncertainty concerning the total amount of aid

The Commission having placed a ceiling of FRF 45
it is
billion on the amount of aid approved in 1995,
necessary to assess the amount of additional aid before
determining its compatibility with the Treaty. It will be
recalled that, in addition to the FRF 45 billion authorized
in 1995, the Commission also authorized some FRF 4
billion in emergency aid in September 1996.

The costs incurred by the State and included in the total
aid to CL are as follows:

— the recapitalization of CL in 1994 (i.e. FRF 4,9
billion), to which the French authorities envisaged, in
the plan submitted to the Commission in July 1997,
possibly adding a second recapitalization for an
unspecified amount;

— the discounted losses of CDR borne by EPFR, which
abandoned claims (with activation of guarantees) in
respect of the participating loan of FRF 145 billion (of
which FRF 10 billion were converted into a guarantee
for CDR borrowings from third parties);

— the discounted carrying costs of the CL loan of FRF
135 billion to EPFR; these costs might rise if the CL
loan is neutralized between 1997 and 2014, giving a
discounted cost of some FRF 20 billion;

— the extra discounted carrying costs if EPFR exercises
its right to draw on additional credit of FRF 10 billion
which CL undertook to grant it from 1 January 1998;

— the extra discounted carrying costs which EPFR could
incur if, in view of its cash flow, it had to borrow on
the market in addition to its loan from CL.

All the hive-off costs are to be settled by the State by
recapitalizing EPFR through budget allocations, whose
amounts and timetable are not known at this stage but
which are likely to be spread over the period of the CL
loan to EPFR, until
it matures in 2014, and through
receipts from the better fortunes clause (14) and from the
privatization of CL.

First of all, as is clear from the aid calculation set out
below, some of the aid in question, especially the neutra-
lization of the CL loan to EPFR for 1995-96 (approved by
the Commission in September 1996 as part of the CL
emergency measures) and its neutralization from 1997
(proposed by the French authorities), are an integral part
of the costs of carrying the loan from CL to EPFR. The
Commission nevertheless regards the neutralization of the
loan as a specific aid: it is additional in relation to the
plan approved in 1995, and its implementation would
mean that CL would be relieved of a cost with an esti-
mated discounted value of some FRF 20 billion over the
period from 1997 (inclusive) to 2014.
‘Neutralization’, as
the French authorities interpret it, means that CL would
be relieved of the net charges connected with the EPFR
loan and that the discounted value of the bank would be
immediately increased by the correction in proportion (15)
to the discounted amount of the neutralization. The bank
would thus benefit immediately from the future effects of
the neutralization. The Commission therefore considers
that the discounted value of the neutralization throughout
the period 1997-2014 must be taken directly into account
in full, as fresh aid to the bank. The Commission notes
that the French authorities, in a letter dated 3 April 1998,
appear to take the same approach to this point, and
include the total value of the neutralization in their esti-
mate of the amount of aid to CL.

There are further difficulties in assessing the amount of
aid to CL owing to the specificities of the hive-off plan
drawn up by the French authorities and to a number of
uncertainties not clarified by the French authorities in the
plan submitted to the Commission in July 1997.

The losses eventually borne by the hive-off and hence by
the State are not yet known. The potential losses include
one component,
the losses of CDR, estimated at 31
December 1996 at FRF 100,2 billion. It is pointed out

(14) Provided it is retained.
(15) Subject to a difference due to taxation of the results.

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that the latter figure, presented on 1 July 1997 in the
EPFR report to the Minister for Economic, Financial and
Industrial Affairs and to the French Parliament, is not
certified by the auditors of CDR. The French authorities,
questioned on this matter by the Commission, indicated
that they would be unable, in view of the specificity of the
hive-off, to produce certified accounts for CDR. Only the
losses already recorded by CDR and charged to EPFR by
activating the guarantee on the participating loan,
i.e.
some FRF 45 billion at the end of 1996, could at the
beginning of 1998, before the closure of
the 1997
accounts, be regarded as certain, on the basis of the infor-
mation available. At meetings held at the beginning of
May 1998, the French authorities informed the Commis-
sion that the estimated additional losses of CDR in 1997
amounted to a further FRF 3 billion, i.e. a total loss of
FRF 48 billion at end 1997. In view of the remaining
assets (about FRF 80 billion, assets of FRF 110 billion
having already been sold or wound up), the French auth-
orities conclude that losses cannot be more than FRF 128
billion. The Commission agrees that part of the residual
risk to EPFR in respect of CDR (the portion relating to its
assets) diminishes as the asset sell-off plan progresses: by
the end of 1997, 58 % of the gross assets transferred to
CDR at 1 January 1995 had been sold.

very limited picture of these transactions (17). Even if, as
the French authorities claim, the investments have the
effect of cutting the hive-off losses, at this stage they
mean an increase in the risk relating to the State
guarantee. In addition, a number of off-balance sheet risks
were transferred from CL to CDR in the form of guaran-
tees on its subsidiaries or on assets not transferred to CDR
when it was set up. Furthermore, CDR’s consolidation
limits were extended in 1996,
the Commission being
unable at that stage to determine whether the expansion
significantly increased the risk exposure of CDR and
EPFR: the extension of the consolidation limits in 1996
must be examined in the light of the risks to CDR of the
new assets before their incorporation in the form of assets
within the hive-off vehicle. Further
losses have also
emerged and could continue to increase, chiefly as a
result of the rise in the number of legal proceedings initi-
ated. By mid-1997, there were 75 such proceedings, of
which 52 in France and 23 abroad. Several will probably
result in damages being awarded to CDR and a conse-
quent
the hive-off. Others,
however, in the event of an unfavourable outcome for
CDR, will result in major off-balance sheet risks that are
hard to forecast and may alter considerably over time.
Furthermore,
legal proceedings have a negative effect
inasmuch as they make it more difficult to wind up or
sell assets in dispute, by slowing up or indeed interrupting
transactions.

reduction in the cost of

The French authorities were unable, however, to make
any undertaking concerning the maximum losses that
might be incurred by CDR. The French Parliament had
not put a ceiling on the nominal risk borne by EPFR,
which granted a participating loan of FRF 145 billion to
CDR (of which the latter used FRF 123,5 billion, plus
FRF 10 billion taken from the loan facility and trans-
formed into a guarantee), so that it covers all CDR losses,
even if they reach or even exceed the amount of the par-
ticipating loan, i.e. FRF 145 billion.

The risk borne by EPFR in respect of CDR exceeds its
exposure to the assets initially transferred to the hive-off,
for several reasons. Firstly, the ‘backup’ capital
invest-
ments in the hived-off assets, the merits of which are not
questioned by the Commission at
increase
CDR’s exposure in respect of the recapitalized assets and
hence the exposure of EPFR to CDR and the risk of
losses by the hive-off (16). In spite of repeated requests to
the French authorities, the Commission so far has only a

this stage,

Any slippage in the timetable for the sale of CDR’s assets
in relation to the original timetable for their transfer to
the hive-off vehicle (sale of 50 % in three years and 80%
in five years) increases management costs and operating
losses for CDR. In addition, CDR’s repayments to EPFR
were slowed down owing to the fact that certain third-
party liabilities (out of the liabilities of some FRF 60
billion transferred to CDR, in addition to the EPFR parti-
cipating loan) were repaid by CDR more rapidly than the
original five-year period, some of the liabilities having
become due following the withdrawal of licences from its
banking subsidiaries. In addition, there is the growing
complexity of cases (the easiest assets to sell having
already been disposed of), which will slow down foresee-
able hive-off transactions and heighten the risk of capital
losses. Furthermore, the abandonment in December 1997,
when CDR was reformed, of the liquidation rationale may
also have prolonged the hive-off management costs and
hence the losses charged to the State via EPFR. The
delays in selling CDR’s assets do not directly affect its
from the increase in its operating costs
losses (apart

(16) As stated in the CDR management report for 1996, capital
increases in covered subsidiaries constitute a claim on EPFR
which will become due only when the securities of the sub-
sidiaries concerned are liquidated or sold.

two transactions:

(17) The Commission initiated the Article 93(2) procedure in res-
pect of
the recapitalization and sale of
SDBO (OJ C 346, 16. 11. 1996 and OJ C 207, 8. 7. 1997) and
the recapitalization and sale of Stardust Marine (OJ C 111, 9.
4. 1998).

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8. 8. 98

charged as losses) but do, however, have the effect of
prolonging uncertainty and increasing the nominal
carrying costs of the hive-off as regards EPFR. Experience
with this type of hive-off tends to show that, over time,
the assets remaining in portfolio are of less good quality
and become increasingly difficult to realize. Furthermore,
the hived-off companies can incur heavy losses that will
be charged to hive-off losses irrespective of the asset value
of those companies.

Despite two letters sent to the French authorities on the
subject (on 1 December 1997 and 5 February 1998), the
Commission has not received any reply concerning a
possible timetable for recapitalizations of EPFR by the
State which would help to reduce the balance of the loan
from CL to EPFR. It is pointed out that, according to a
timetable based on conservative hypotheses presented by
CL to the Commission’s consultant bank, the balance of
the loan could remain in the region of FRF 100 billion
until the loan matures in 2014.

CDR has carried out only a fraction of the participating
loan repayments to EPFR originally provided for, so that
EPFR has not been able to repay its loan from CL as soon
as expected and current interest rates are higher than
the State’s recapitalizations of EPFR
planned. Second,
have been inadequate, so that the latter has accumulated
interest arrears on its payments to CL which are charged
as higher nominal carrying costs. Thus not only might
EPFR fail to repay the principal of its loan from CL for
several years, but its debts might rise if, as in the last two
years, interest arrears accumulate owing to late or inade-
quate recapitalizations by the State. In its 1997 report (19),
EPFR rings the alarm, pointing out that, if it receives only
the repayments on its participating loan to CDR and
payments from the State solely to cover interest arrears, it
will have to run into debt to pay the interest on the loan
from CL (because the interest is not capitalizable with the
underlying loan). According to EPFR, its borrowing capa-
city for interest payments, capped at FRF 50 billion by
the Law of 28 November 1995, could be used in full by
2002-04. It concludes that, in any event, it would be ad-
visable to avoid financing irrecoverable losses by con-
tracting a debt which would only add to the final bill (20).

to EPFR.

in CDR’s

repayments

The carrying costs are not included in the calculation of
CDR’s losses. They too will be charged to EPFR and
hence ultimately to the national budget. The costs to
EPFR of carrying the hive-off will rise in proportion to
delays
In nominal
terms (18), assuming that the loan-carrying costs cover the
entire period in accordance with the timetable submitted
by CL to the Commission’s consultant bank (and ex-
cluding any further assumptions concerning EPFR’s bor-
rowings), and taking account of the neutralization of the
loan planned by the French authorities, the carrying costs
would, for the entire period of the scheme (1995-2014)
amount altogether to almost FRF 100 billion, of which
FRF 78 billion from 1 January 1997. The nominal costs
would in the end be borne by the national budget and the
taxpayer,
the
nominal value of the carrying costs is also sensitive to
changing rates: a 1 % increase in MMR would also result
in a nominal increase of FRF 13 billion. Such nominal
sensitivity to rate trends would have benefited EPFR since
1995, due to the drop in short-term rates, if the CL loan
had not been neutralized in 1995-96. But it could again
have the opposite effect if rates harden (unless the loan is
neutralized). The uncertainty concerning the amount of
the carrying costs can nonetheless be partly eased by a
discounting calculation which includes the discounted
carrying costs and losses (see below).

losses. Furthermore,

the hive-off

like all

The carrying costs have already risen in relation to the
original estimates of 1995 as a result of two factors: first,

rising carrying costs.

It is clear that it is possible for the hive-off costs to spiral
significantly, not only as regards CDR and its asset losses
and off-balance sheet risks, but also as regards EPFR and
its
In its 1997 report, EPFR
describes it as a ‘snowball’ effect which could result in the
State bearing not only the ‘primary’ interest costs (those of
the CL loan to EPFR) but also the interest on the addi-
tional loans contracted to pay the interest on the principal
loan. If the fears of EPFR come about and it is compelled
to borrow the necessary resources to service the CL loan,
the carrying costs for the entire mechanism could spiral
again. This could continue for as long as the State’s re-
capitalizations of EPFR are insufficient, and especially if
the loans to EPFR have to be concluded at medium- and
long-term rates (about 4,5-5,5 % at
the beginning of
1998) considerably higher than the service rate for the
loan from CL (85 % of MMR, i.e. about 3 % at the begin-
ning of 1998). For example,
in 2003 the amount
outstanding on new loans contracted by EPFR totalled
FRF 50 billion, the annual carrying cost of the hive-off
could surge from FRF 2,9 billion (current estimated ser-
vicing of CL loan, excluding neutralization) to some FRF
4,4-5,5 billion, depending on whether EPFR refinances at
short- or long-term rates.

if

(18) The nominal data given below have not been discounted. For
the discounted value, refer infra. to the calculation of the esti-
mated cost of the operation to the State.

(19) EPFR Report, page 27.
(20) Op. cit., page 29.

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In addition, the State now plans, following the decision to
transfer to EPFR the stake in the holding company
Artemis originally hived off to CDR, to give EPFR an
asset-carrying role not originally provided for in the plan
submitted to the Commission in 1995. The accounting or
transfer losses could be attributed to EPFR. Accordingly,
such capital losses would no longer be borne by CDR so
that its estimated losses would be reduced by the amount
thus the transfer
of provisions in respect of Artemis;
should not affect the hive-off as a whole.

report of 1 July 1997 (21) to the Minister for Economic,
Financial and Industrial Affairs and to Parliament, EPFR
concluded that, at the financial level, the results already
recorded and the trend of forecast future losses ruled out
the possibility of attaining the financial equilibrium origi-
nally forecast for the period in question. However, the
French authorities and the Commission disagree as to the
nature and amount of aid concerned by this Decision.

The French authorities also intimated in the plan
submitted in July 1997 that they might recapitalize CL
afresh, without specifying the amount involved. If neces-
sary, the Commission would have added such a recapital-
ization to its calculation of the total amount of aid in
question. However, no further action was taken.

that obligation. Another factor,

factors were
In Decision 95/547/EC, a number of
deducted from the total aid. The carrying cost of the
zero-coupon bond was deducted and cannot be deducted
from the new assessment of aid to CL, the French auth-
orities having clearly confirmed by letter dated 31 March
1998 from the Minister for Economic, Financial and
Industrial Affairs to Mr Van Miert that they planned to
abolish the obligation to finance a zero-coupon bond.
This accordingly increases by FRF 7,8 billion, compared
with the 1995 plan, the estimated aid to CL, the latter
the
being relieved of
discounted value of the receipts generated by the better
fortunes clause, was deducted, as was the net book value
of CL (after deduction of the clause). By letters dated 31
March and 3 May 1998 to Mr Van Miert, the Minister for
Economic, Financial and Industrial Affairs formally stated
that France undertook to transfer CL to the private sector
before the end of 1999, and that the clause would be
‘terminated’. In view of that undertaking and the ap-
proaching deadline, the Commission considers that the
value of the State’s holding in the bank (some 82 %)
should be deducted from the gross aid rather than, as it
did in 1995, deducting the sum of the clause and the net
book value of the bank.

The French authorities, unlike the Commission which
had calculated in 1995 that possible aid to CL totalled
FRF 45 billion, took the view at the time that the finan-
cial rescue package would be self-financed from the better
fortunes receipts, the privatization of CL and the capital-
ization of the interest on the zero-coupon bond originally
provided for, i.e. the net budget effect for the State would
be zero and the taxpayer would not incur any costs. In its

In particular, the Commission having concluded that all
CDR losses should be regarded as aid to CL, the French
authorities rejected such a comprehensive approach in
contacts with the Commission and in two notes dated 25
November 1997 and 3 April 1998 on the ground that,
since the transfer to the hive-off of the ring-fenced assets,
CL, which is not represented on any of the organs of
CDR had, in accordance with Decision 95/547/EC, shed
all involvement in management decisions concerning the
sale or liquidation of those assets. In addition, the accoun-
ting rules applicable to hived-off assets differ from those
applicable to assets that contribute to the operation of the
bank. The rules applying in the event of continued opera-
tion lapse in part; this accelerates the depreciation of the
goodwill, which inflates the losses of CDR. According to
the French authorities,
the increase of about FRF 40
billion in the losses of the hive-off (up from the FRF 60
billion projected in 1995 to an estimated FRF 100,2
billion at 31 December 1996) could not be charged to CL
for that reason. Thus the aid to CL taken into account in
the total calculation is limited to the losses initially trans-
ferred to the hive-off. By letter dated 3 April 1998,
however,
suggested another
possible method, consisting in taking account of CDR’s
actual losses at 1 January 1997, i.e. FRF 64,3 billion and
discounting them inclusive of carrying costs at a long-
term rate, giving a value of FRF 59 billion, i.e. virtually
the same amount as that obtained by the first method.

the French authorities

The Commission cannot agree with the arguments of the
French authorities. The sole justification for the entire
hive-off in 1995 and thereafter is the CL rescue plan,
without which the bank would have had to be wound up.
If it was possible simply to set up a hive-off vehicle in
order to cut all links between a firm divested of its bad
assets and the ability to charge all or part of the losses of
that structure to the assisted firm, the obligations arising
out of Article 92 of the Treaty could be circumvented by
using such financial vehicles to evade the Treaty. In the
case in point, the cause of the hive-off losses is taken to

(21) Op. cit, page 29.

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is,

in the opinion of

be, save evidence to the contrary in specific cases yet to
be identified, the transfer in 1995 of CL’s doubtful assets
to CDR, a wholly-owned CL subsidiary (although not
consolidated for accounting purposes because its losses
are charged to EPFR and not to its parent). The cost of
creating the hive-off, which includes the goodwill referred
to by the French authorities (shift from a going concern
to a liquidation rationale)
the
Commission, one of the specific costs of the operation to
assist the bank and must be taken into account as a form
of ‘badwill’ attached to the setting-up of the hive-off. The
only way the Commission can conclude that the hive-off
losses are not chargeable to CL, as the recipient, is if it
like a prudent
can be shown that CDR did not act
manager seeking the best price for the hived-off assets or
their liquidation, and with due regard for the financial
consequences of such decisions. As the French authorities
have not put forward any such arguments, the Commis-
sion must conclude, provisionally, that all the losses of
the hive-off constitute aid to CL.

It is pointed out that the possibility of an increase in the
aid relating to the hive-off costs, in relation to the amount
initially approved, was expressly provided for in Article
2(c) of Decision 95/547/EC which states that, if the costs
of the scheme are exceeded, the Commission will re-ex-
amine the scale of the compensating measures taken into
account in that Decision. The Commission notes that the
French authorities have not challenged that provision of
they therefore have no
Decision 95/547/EC and that
grounds for presenting a different argument at this junc-
ture. It also notes that the ‘scheme’ referred to in Decision
95/547/EC is clearly the entire CL hive-off and cannot be
interpreted narrowly as simply part of it, as suggested by
the French authorities’ proposal to take account of the
higher carrying costs relating to the neutralization of the
loan, and exclude the overall
increase in the other
carrying costs and hive-off losses.

In view of the foregoing, the Commission is justified in
taking account of all the hive-off losses, i.e. those of CDR
and any additional ones which may emerge in regard to
EPFR, principally in the form of higher carrying costs. In
view of the above-mentioned factors, and the great uncer-
tainty still remaining as to the final cost to the State of
the Commission will assess a very wide
rescuing CL,
range of aid, adding to the likely costs at this stage (low
value in the range) those which may emerge as a result of
the hazards of the hive-off scheme.

7.2 Range used to estimate the cost of the measures

to assist CL

The scheme set up by the French authorities consists in
financing the budgetary cost of the operation over a long
period, potentially until 2014, using a system of borrow-
ings (by EPFR from CL) at rates based on the short-term
money market rate, as well as possible large borrowings
by EPFR at market rates if the State recapitalizations do
not cover its immediate cash flow needs and allow it to
honour its interest payments on the CL loan. Without
prejudging future budget choices, the French authorities
have retained considerable flexibility in the scheme as
regards the rate at which the costs of the transaction will
be repaid. In order to simplify the scheme and the calcu-
lation of its cost, it can be assumed that, provided the
hive-off has ended, the State has the choice each year of
to
paying a compensatory amount
EPFR, allowing the latter to repay the balance of the loan
from CL, or of allowing the loan to continue, on the basis
of the short-term financing rates defined in 1995.

in final settlement

To the extent that CDR’s repayments are not sufficient to
reimburse the interest annuities on the loan from CL, the
State should recapitalize EPFR in order to maintain its
cash flow and prevent it from having to pay annuities on
arrears. If, on the other hand, the State fails, as in 1995
and 1996, to provide EPFR with such minimum finan-
cing, EPFR will be compelled to contract massive debts
on the financial market, as the above-mentioned EPFR
report of 1996 warns. Furthermore, the need for future
recapitalizations from the State’s budget has grown appre-
ciably since the abandonment of the zero-coupon bond
that EPFR was to have subscribed, through a drawdown of
FRF 10 billion on the CL loan.

The flows that do take place in the near or distant future
will depend on the State’s decisions regarding the recap-
italization of EPFR: this means that the nominal costs of
carrying the loan to EPFR or the losses incurred by CDR
should be discounted to take account, at the moment
each flow is recorded, of the value of the payment, in
accordance with this Decision, as at 31 December 1997. If
the State had financed the hive-off with a long-term loan,
for instance in the form of 10 or 15-year government
bonds,
future loan
repayment flows and the nominal total loss incurred by
CDR using a long-term rate. As the scheme in question
provides for short-term financing of the hive-off based on
MMR, the discounting rate taken into account by the
Commission for the hive-off losses and their carrying

it would be necessary to discount

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rate trends. Thus

costs is a short-term rate. The fact that the Commission is
using a short-term interest rate to discount future flows
means that the assessment of carrying costs is virtually
independent of
the Commission’s
assessment range does not take account of hypothetical
short-term interest rates and the calculation of the total
cost of the operation produces identical amounts in 1997
and 2014. Nor is a rate-risk sensitivity scenario, used to
evaluate the nominal cost, necessary under the present
hypotheses for an assessment of the discounted cost of
the hive-off (22)
(despite the factors referred to above at
section 6.1 concerning the sensitivity of neutralization
costs to a variation in the calculation rates). Table 15 is
based on a presentation of the cost discounted to 31
December 1997 as it would result from the obligation, at
31 December 1997, to settle the losses of the operation
with a once-and-for-all budgetary payment.

On that basis, the gross aid to CL can, without prejudice
to possible deductions, be calculated (at constant prices at
31 December 1997) on the basis of CDR’s losses, carrying
costs, neutralization of the loan to EPFR and the State
recapitalization in 1994 (already included in the aid of
FRF 45 billion approved in 1995). This method produces
similar
to those that would be obtained by
discounting the sum of the State’s recapitalizations of CL
and EPFR, for which data on the exact amount and future
timetable could not be obtained for the reasons given
above, and from which EPFR income should be deducted
(on the assumption, principally, that the better fortunes
clause is transferred and the proceeds from the privatiza-
tion of CL are allocated to EPFR).

results

The uncertainty as to the losses of CDR which should be
taken into consideration introduces the first unknown
into the assessment of the aid. The losses were estimated
at 31 December 1996 by CDR at FRF 100,2 billion. As
the Commission has no update for that
figure at 31
December 1997, it must use the 1996 figure and include
it at the lower end of the aid range. As stated above,
CDR’s losses are borne by EPFR via the participating loan
it granted to CDR, the latter not repaying any losses it
incurs. The guarantee given by EPFR to CDR, however,
exceeds the amount of the participating loan, FRF 145
billion (including the additional tranche of FRF 10 billion
which was ultimately not drawn down by CDR but was

converted into an EPFR guarantee for CDR’s external
borrowings of FRF 10 billion) and covers in particular all
the off-balance sheet items, notably the court case risks
tied to the many disputes concerning the hived-off assets.
Thus the final estimate of the losses incurred by CDR is
particularly uncertain.

The Commission, in calculating the aid to CL, must take
account of a possible unforeseen increase in CDR’s losses
compared with the FRF 100,2 billion estimated at 31
December 1996. Despite the reduction in residual risk as
the disposal programme advances, and in order to take
account of additional losses which may emerge, as stated
above, it seems prudent at this stage to take the risk re-
lating to the entire participating loan as the basis for cal-
culating the estimated upper range of losses incurred by
CDR. For that reason, in view of the number of errors
made by the French authorities in the past in estimating
the amount concerned, and in order to retain an adequate
margin of error, the Commission considers that a range of
FRF 100,2-145 billion should be used to calculate the
total aid regarding the possible losses of CDR.

The carrying costs set out below are discounted to 31
December 1997. EPFR also plans, in order to facilitate its
cash-flow management, to contract from 1 January 1998
an additional
loan of FRF 10 billion from CL. The
increase in hive-off losses makes fresh capital from the
State more urgent than ever if EPFR is to service its loan
from CL. In the absence of precise details from the
French authorities on future recapitalizations, and in view
of the cash-flow difficulties encountered by EPFR which
have compelled it to delay interest payments (thus incur-
ring penalties) to CL, the Commission would normally
apply the high value in the range, on the assumption that
EPFR will obtain a further loan of FRF 10 billion from
CL, for which a protocol exists between CL and EPFR. In
view of the pessimistic forecast made by EPFR in its 1997
report, its outstanding borrowings on the market could
reach the statutory maximum of FRF 50 billion by 2003
(EPFR indicates a possible horizon of 2002-04) if the State
does not provide the necessary capital. Under the Law of
28 November 1995 setting up EPFR (23),
the latter is
authorized to borrow a maximum of FRF 50 billion to
pay the interest on the loan granted to it by CL.

(22) On the other hand, as stated above, CL is sensitive to the risk
of a fall in rates, which would mean a possible rise in loan-
carrying costs.

(23) See Article 3 of Law 95-1251 of 28 November concerning
State action in connection with the recovery plans for Cr(cid:130)dit
Lyonnais and the Comptoir des Entrepreneurs, Journal Offi-
ciel de la R(cid:130)publique Fran(cid:135)aise, 30 November 1995.

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However, on the basis of the undertaking given by the
French authorities to privatize CL in 1999, the Commis-
sion has not included the risk of excess costs in its assess-
ment of additional aid to CL: if CL is privatized in 1999,
EPFR will immediately receive the value of the State’s
holding, which will inject some oxygen into its cash-flow,
obviate the need for further indebtedness and even help
to reduce the balance of its loan from CL by repaying
some of the principal. If the State sells 72 % of the bank’s
capital and retains 10 % (it currently holds 82 %), EPFR
would receive an injection of some FRF 25 billion fol-
lowing the privatization in 1999 (24). As this would not
suffice to service the loan for a sufficiently long period, it
is essential for the State to continue to recapitalize EPFR
regularly to ensure that the scenario described by EPFR in
its report does not become reality.

In practice, the French authorities will probably allocate
funds to EPFR over time to allow it to pay both its in-
terest annuities on the loan from CL and some of the
principal to avoid a single repayment of principal in 2014
and spread the burden over several years (they could not,

however, give undertakings on this matter without preju-
dicing the authority of the French Parliament in bud-
getary matters). Provided that EPFR is regularly provided
with sufficient capital to satisfy its cash-flow requirements
and obviate the need to borrow, the determination of aid
is not dependent on an exact timetable for recapitaliza-
tion by the State. The present figures are calculated on
that basis.

It must be pointed out that the two assessment scenarios
set out below in Table 15 are based on necessarily simpli-
fying hypotheses: the Commission does not have the data
needed to simulate a forecast of resources and expenditure
for EPFR which alone would provide a relatively accurate
estimate of the total cost of the operation. The Commis-
sion considers, however, that the very broad range used to
assess the cost of the hive-off as set out below provides
the most objective picture possible at this stage of the
range within which the final overall cost to the State will
be situated.

Table 15:

Estimated range of aid to CL

(Total aid provided for in the July 1997 plan, including aid authorized in 1995-96)

Aid
1995

Addit. Aid
Low
95-98

Total aid (1)
Low
95-98

Addit. aid
High
95-98

Total Aid
High
95-98

(FRF billion)

1. Additional CDR losses

Increase from FRF 60 to 100-145 bill.

2. Surplus carrying costs

From 1995 to 1997, in relation to the 1995 plan

3. Neutralization requested

Discounted amount 1997-2014

4. 15 % MMR burden for CL
Discounted amount 1997-2014

5. Receipts from the clause

FRF 1 billion paid in 1995-97

6. Variation in value of CL (2)
Increase of FRF 4 billion

7. Zero coupon

Amount deducted from aid in 1995

40,2

4,6

20,3

–7,2

–1

–4

7,8

85

4,6

20,3

–7,2

–1

–4

7,8

Total, net amount of aid

41

61

102

106

147

(24) On the basis of a valuation of CL at about FRF 35 billion.

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(FRF billion)

Aid
1995

Addit. Aid
Low
95-98

Total aid (1)
Low
95-98

Addit. aid
High
95-98

Total Aid
High
95-98

Gross amount of aid (excluding amount deducted from
the State’s holding in CL)

130

175

Amount authorized in 1995

Amount authorized in 1996 (emergency aid)

Total amount of authorized aid

45

4

49

Amount of supplementary aid in relation to aid au-
thorized in 1995-96

53
low

98
high

Calculation: European Commission.

(1) Under the present calculation of total aid, supplementary aid discounted to 31.12.1997 is added to the aid as evaluated by the Commission in 1995. This
calculation, which is essentially designed to identify supplementary, unauthorized aid to CL, does not take the discounting to 31.12.1997 of aid estimated
in 1995 into account. A comprehensive discounting calculation for aid apparently results in a slightly higher total amount (the difference is between FRF 3
and 4 billion), which does not affect the estimate made of supplementary aid.

(2) figure indicated, — FRF 4 billion, corresponds, by difference deducted, to an increase from 1995 to 1998 in the value of CL deducted from the aid.

On the basis of these two scenarios (high and low), the
amount of aid resulting from the July 1997 plan,
expressed as a gross figure (i.e. before any deduction of
income from the better fortunes clause and from privat-
ization), pertaining to the hiving-off mechanism (added to
the discounted cost of the 1994 recapitalization) can be
estimated at a discounted value of between FRF 130 and
175 billion.

Taking account of the very specific hive-off arrangements,
under which the bank privatization proceeds will be allo-
cated to EPFR, the Commission has deducted the value of
the State interest in CL from the gross amount of the aid.
At end 1997,
the Commission’s consultant bank esti-
mated CL’s value at between FRF 34 and 35 billion on
the basis of the plan submitted in July 1997 and informa-
tion provided by CL at the end of that year. The Commis-
sion has also examined more recent estimates made by
independent sources in April 1998 which put a signifi-
cantly higher figure on the bank’s value (around an
average of FRF 46 billion). However, a number of these
estimates were made on the basis of unchanged consoli-
dation limits and on the assumption that the loan will be
neutralized in full. These estimates were made before the
additional asset sales were decided on to offset the aid
examined under this Decision. According to the revised
business plan submitted by the bank to the Commission
at the beginning of May 1998, these sales will have a
considerable impact on the bank’s business activity and
results, with the probable impact by 1999 of a reduction
in net receipts from banking of between FRF 7 and 10
billion and a reduction in the gross operating result (25) of
between FRF 3,3 and 6 billion, as compared with the
forecasts in the July 1997 plan. In so far as a company’s

(25) Reduction range contingent on the assumptions that the loan

will be ‘neutralized’ in 1999. See section 10.4.

value is primarily the discounted amount of its cash flows,
this results in a significant correction in the bank’s value
which, at this stage and in the light of the latest develop-
ments, has not been properly taken into account, either in
the latest assessments of various sources realized by the
bank or by the market.

On that basis, and notwithstanding a substantial margin
of uncertainty, the Commission must, as a precautionary
measure, restrict itself in this Decision to the assessment
carried out by its consultant bank at the end of 1997.
Assuming that the value of the State’s holding (82 %) in
CL is deducted in full from the gross amount of aid, i.e. a
deduction of approximately FRF 28 billion, the net cost
to the State of the CL aid operation would be reduced to a
range between FRF 102 and 147 billion. In any event,
however substantial the income from privatization, the
amount of
the supplementary aid in question will
continue to be considerable.

The expanded range for the final aid applied by the
Commission is therefore, in view of the uncertainties of
the hiving-off mechanism and the exact amount of the
proceeds from the privatization of CL, located in a very
broad range of between FRF 102 and 147 billion, which
is roughly equivalent to two and three times the amount
of the aid approved in 1995 and 1996 respectively.

In their letter to the Commission dated 3 April 1998, the
French authorities presented a different calculation for
the aid which resulted in a range of FRF 52,4 to 71,2
billion. Applying an error margin of 10 % to the upper
amount of the range, as had the Commission in Decision
95/547/EC, they reached the conclusion that total aid to
CL could be estimated at no more than FRF 80 billion.

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The Commission cannot accept
following reasons:

this estimate for the

(i) First, as indicated above, the French authorities do
not regard all hive-off losses as aid to CL but merely
those losses which were evaluated when hived-off
assets and liabilities were transferred to CDR in 1995.
As a result, the losses are some FRF 40 billion lower
than the value of CDR’s losses calculated by the
Commission as constituting the lower end of
the
range for CDR’s estimated losses. For the reasons set
out above, the Commission cannot accept that only
some of CDR’s losses should be included, this being
the main point of divergence between the French
authorities’ calculation and its own calculation. At the
meetings held with representatives of CL and the
French authorities towards the end of 1997, and in
particular at a meeting held on 28 November 1997,
the Commission clearly stated that, at that stage, the
total increase in CDR’s losses should be regarded as
aid to CL. The Commission representatives reiterated
this position to the authorities at a meeting held in
Brussels early in May 1998.

inherent

the risks

(ii) The second major point of divergence concerns the
calculation of
in the hive-off
the
system. The Commission takes the view that
guarantee given by EPFR to CDR (i.e. FRF 145
billion) could be activated up to an amount conside-
rably in excess of the estimated losses of FRF 100,2
billion, since CDR’s loss spiral noted to date could
continue. As a result, the upper range of the aid esti-
mate should take account of the whole risk associated
with the loan (in theory, it is even higher, since the
State guarantee is unlimited). In that scenario, CDR’s
spiralling losses could go hand in hand with spiral-
ling additional carrying costs for EPFR, which could
force EPFR to make use of the market borrowing
options legally available to it. This second major
point of divergence implies that the top of the range
will be FRF 45 billion higher than the amount put
forward by the authorities. The Commission follows a
more comprehensive method than the French au-
thorities with the aim of
identifying all possible
EPFR losses associated with hiving-off.

(iii) Third,

the French authorities discount

losses and
carrying costs (the loan’s basic carrying costs and the
costs associated with its neutralization) using a long-
term rate, namely that of 10-year government bonds
(fungible treasury bonds),
i.e. about 5,7 %. The
Commission agrees with the French authorities as to
the method, which consists in discounting the total
amount of losses and carrying costs. However, it has
the long-term discounting rate
pointed out

that

results in a discounted figure for losses and carrying
costs in the year 2014 which is lower than the
nominal amount of those losses in 1997 (or, accor-
ding to the method used, in 1995) because carrying
costs are determined by a short-term rate (85 % of
MMR), which is more than two points lower than the
long-term discounting rate applied by the French
authorities. Such a discount calculation using long-
term rates, on which the French authorities’ estimate
is based, applied to a mechanism over such a long
period (1995-2014), in the light of the scale of the
losses and the outstanding loan, has a significant
quantitative impact and results in the discounted
losses associated with hiving-off being reduced by
more than FRF 25 billion, assuming that the loss is
realized in 2014. This calculation implicitly assumes
that the State is able to transform a resource at 85 %
of MMR into a long-term application at 5,7 %, i.e.
bearing, at the current rate, 2,7 % more in interest. If
the State were a lender in structural terms, it would
be able to benefit
from converting borrowings at
short-term rates into loans at long-term rates (but in
that case the present round of hiving-off would not
have been necessary). However, the State is actually a
borrower in structural terms and, as such, is not in a
position to take advantage of the conversion options
that would have been associated with the CL loan,
which has been allocated in full to CDR and has only
produced losses. An attempt
from the
conversion of short-term rates into long-term rates,
the zero coupon, which was initially envisaged in
1995, failed on an amount of only FRF 10 billion,
which is considerably less than the losses in question
(which, moreover, had to be financed by CL and not
by the State);
therefore
conclude that the State can benefit from the possibi-
lity of converting the rates created by the loan to CL
into short-term rates, up to the total amount of losses
(at least FRF 100 billion).

the Commission cannot

to benefit

If that were the case, the State would have been able
to allocate a budget provision to the tune of several
dozen billion francs to EPFR, knowing that the loss
was then estimated at FRF 100 billion. EPFR could
have reinvested this budget provision in the long
term at a rate of 5,7 % until 2014 with a view to
benefiting from the short-term/long-term rate dif-
ferential. Accordingly, the Commission cannot follow
a discounting logic based on a long-term rate which
results in a reduction in hive-off costs which is unre-
lated to the reality of the mechanism in question. It
also notes on a secondary basis that, even if the State
were in a position to take advantage of such rate
conversion options, a rate risk would remain (the risk

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for

of short-term rates rising to the level of long-term
rates,
instance in the event of cyclical over-
heating), which it would have to take into account in
its estimates to ensure that they were comparable.

(iv) Fourth, as indicated above, the Commission did not,
in the previous calculation, take account of the risks
of spiralling carrying costs referred to in the EPFR
1997 report. On the basis of such risks, the upper end
of
the Commission’s valuation range should be
increased by the servicing of the debt which EPFR
could enter into with CL (tranche of an additional
FRF 10 billion) and the market (statutory authoriza-
tion to borrow FRF 50 billion).

In view of these various divergences, the Commission
rejects the estimated amount of aid to CL put forward by
the French authorities.

7.3 Additional aid to CL over and above the amount

authorized by the Commission in 1995

In conclusion,
the additional aid over and above the
amount authorized by the Commission in Decision
95/547/EC comprises:

— CDR’s additional losses borne by the State via the
mechanism of EPFR’s participating loan to CDR;

— EPFR’s supplementary carrying costs, in particular the
neutralization of CL’s loan to EPFR from 1995 to
2014;

— the abandonment of the zero-coupon bond provided
for
in the 1995 business plan and Decision
95/547/EC, of which the discounted receipts had been
deducted from the approved aid.

The Commission points out that, in Article 2(c) of De-
cision 95/547/EC, it stipulated that ‘if the costs of the
scheme, estimated at FRF 45 billion, are exceeded, it will
be necessary to re-examine the scale of the reduction in
the commercial operations of CL’ as accepted by the
French authorities. As a result of the above, if the au-
thorized ceiling of FRF 45 billion is exceeded, a re-ex-
amination must be carried out pursuant to the present de-
cision with a view to determining whether the additional
aid in question is compatible with the common market.

the estimated additional aid is,

Compared with the amount of aid approved in 1995 and
in any event,
1996,
substantial. On the basis of an extended aid range of FRF
102 to 147 billion as per the previous calculation, the
nominal additional aid consists of between FRF 53 and

98 billion over and above the total amount of FRF 49
billion authorized by the Commission in 1995 and 1996.
An increase of that size, which would result in total aid
without precedent in the Community, can be approved
only on the basis of very substantial compensating
measures.

8.

STATE AID CHARATER OF THE PUBLIC

SUPPORT MEASURES FOR CL

In accordance with the market economy investor prin-
ciple, and in so far as the measures in question affect
trade and distort or threaten to distort competition, the
Commission indicated,
in the aforementioned 1993
that capital
communication (26)
injections in public undertakings contain elements of
State aid if, in similar circumstances, a private investor
would not have carried out the capital injection in ques-
tion because this would not have resulted in a sufficient
return.

to the Member States,

it should be noted that the unprecedented total
First,
amount mobilized in this aid operation, which is the
largest ever in the history of the Community concerning
a single undertaking, indicates the State as the sole player
which could have mobilized such amounts in view of its
virtually unlimited ability to raise finance via tax or bor-
rowing on the market. No private group in Europe or
(probably) anywhere else in the world would have had
sufficient
financial capacity to mobilize such a huge
amount of aid.

input. The State’s

Second, the mobilized funds, the discounted gross amount
(minimum) FRF 130 billion, will only
of which is
produce a modest return which is disproportionate to the
financial
return on the invested
amounts will consist solely of the combined value of the
better fortunes clause and the proceeds from the privatiza-
tion of CL. Since the State does not recoup its investment,
the return on the public funds allocated to rescue CL is
strongly negative and can under no circumstances be
compared with the return that a private operator would
expect on a high-risk financial transaction, which was
estimated in 1995 in Decision 95/547/EC to amount to
an annual rate of 12 % of the invested capital. Since the
market economy investor principle is not met, one is
bound to reach the conclusion that
the rescue and
restructuring measures for the bank in question constitute
aid.

(26) OJ C 307, 13. 11. 1993, p. 3.

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After the first recapitalization of CL in 1994 the French
authorities invoked the obligation to comply with the
own funds requirement introduced by Council Directive
89/647/EC of 18 December 1989 on a solvency ratio for
credit institutions (27). Indeed, they informed the Commis-
sion when notifying the emergency aid in 1996 that,
unless such aid was provided, CL might find itself unable
to comply with the minimum solvency ratio required by
the Directive. The Commission, as it indicated in De-
cision 95/547/EC, would emphasize in that connection
that the fact that a bank solvency requirement has been
introduced by a Community Directive does not mean that
injections of public
equivalent measures,
funds or
designed to comply with the Directive, would not be
regarded as aid if,
in similar circumstances, a private
investor would not have deemed the investment to offer
him a normal return. Compliance with the Community
Directive refers solely to operating continuity and the
the recapitalized company’s banking
maintenance of
licence. Under no circumstances does
the Directive
prohibit the liquidation of a credit institution if an injec-
tion of supplementary own funds does not satisfy the
abovementioned market economy investor principle and
thus constitutes State aid mobilizing public funds, the
compatibility of which with the common interest should
be examined in compliance with the Treaty rules in the
same way as any other aid measure. In brief, the author-
ities cannot use the Community Directive on a solvency
ratio for credit
institutions as a justification for non-
compliance with Article 92 of the Treaty.

It should also be noted that the Commission concluded
in Decision 95/547/EC that the measures in question,
which it had evaluated at a net amount of FRF 45 billion
at the time, did constitute aid, and that this applied both
to the first capital increase of May 1994 and to the State’s
underwriting of the first two hive-off operations. Since the
present decision is concerned with the losses and carrying
costs of the hive-off operation (including the neutraliza-
tion of CL’s loan to EPFR) and the abandonment of the
zero-coupon bond deducted from the aid in Decision
95/547/EC, the measures concerned are essentially the
same as the previous ones, reflecting spiralling costs. The
aid measures concerned here are the increase in the value
of aid measures estimated by the Commission in its
previous decision: in other words, they constitute State aid
on the same basis as the aid measures initially estimated
by the Commission in 1995.

In particular, the Commission has examined the provi-
sions of Article 52 of the Banking Law of 24 January
1984 whereby the Governor of the Bank of France was

(27) OJ L 336, 3. 12. 1989, p. 14.

authorized to invite the shareholders and members of
credit institutions to offer him the necessary support if
the situation so merited. The Commission notes that, in
several recent cases,
the private shareholders of credit
institutions in difficulties refused to respond to the invita-
tion of the Governor of the Bank of France to provide
fresh capital contributions, even though the financial
amounts involved were considerably lower than in the
present case (28). It takes the view that this call on share-
holder solidarity is not binding, and that it is legitimate
for shareholders to assess whether new funds should be
provided on the basis of the likely return on any new
capital injection or equivalent measure in the light of the
recovery plan put forward by the credit institution in
question and in accordance with the market investor prin-
ciple referred to above. This was the interpretation of the
Paris Court of Appeal, which handed down a judgment
on 13 January 1998 (29) stipulating that Article 52 could
not be interpreted as coercive. In other words, the State as
shareholder could not, on the basis of Article 52, take the
view that it was required by law to bail out the bank irres-
pective of the Treaty rules.

The possibility of credit institutions which are structurally
non-viable being penalized and, where
appropriate,
expelled from the market by being put into liquidation, is
a fundamental element in ensuring the confidence of
economic operators. Maintaining credit institutions with
insufficient profit margins in business artificially results
in serious distortions of competition, a morally hazardous
enterprise which ultimately may weaken the rest of the
banking system. It also leads to major distortions in the
allocation of funds and consequently to disfunctioning in
the economy as a whole. The Commission shares the view
of the French Commission Bancaire, which notes in its
1995 report that an orderly restructuring of the French
banking system implies that credit institutions, which are
companies like any others and, as such, should not be
protected from market forces, can go out of business (30).
In other words, the disappearance of banking institutions
should not be regarded as indicative of the inadequacy of
existing supervisory mechanisms, but as a sign that
market forces are at work and that banks are no more
protected than any other enterprise. The Commission
notes that the objectives of competition policy and those
of prudential banking policy cannot be mutually incom-
patible, since both are designed to achieve a common
end, namely the development of a competitive, healthy

(28) In other cases, private shareholders intervening at the invita-
tion of the monetary authorities protected themselves from
the legal risks but did not act with a view to obtaining an
adequate return on their capital contributions.

(29) BTP case.
(30) 1995 report of the Commission Bancaire, p. 13.

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banking sector. This implies that the banking supervisory
authorities should make provision for policies to facilitate
the disappearance of uncompetitive banks.

State budget of the 1994 recapitalization and the anti-
cipated costs of hiving off CL are greater than the costs
that the State would have incurred if another sale or li-
quidation solution had been chosen. In any event, the
cost would have been less if the State had intervened
before the crisis arose.

take. At

the representatives of

When the emergency transitional measures were notified
the French
in September 1996,
authorities reported, in the course of meetings with the
Commission, that, should the bank prove insolvent, there
was a risk of a crisis spreading throughout the financial
system and into the whole economy, depending on the
accompanying measures to any liquidation process that
the French authorities might
the
Commission was not in a position quickly to rule out the
insolvency risk, and it is not able to exclude the risk of
the CL crisis spreading throughout the financial sector.
The Commission does not dispute the possible existence
of such a risk, which it
took into account when it
approved the emergency measures notified to it at the
time, pending an assessment of the whole case, including
a new restructuring plan, as provided for by the Commis-
sion guidelines on aid for
rescue and restructuring.
However, the Commission notes that the State cannot
constantly invoke the risk of a crisis of that type to avoid
the consequences of Article 92 of the Treaty.

the time,

transparency

in management

As it noted in Decision 95/547/EC,
the Commission
takes the view that the unprecedented scale of the losses
incurred by the rescue of CL can largely be explained by
the lack of supervision of the company by the State as
shareholder and by the delay in taking the initial major
restructuring measures. These costs reflect conduct which
is not that of a prudent shareholder and demonstrate a
serious
lack of corporate governance, which led to
numerous errors characterized by the irresponsibility of
the decisions taken by the bank’s previous management, a
lack of
and in the
company’s accounts and a decision-making procedure
which did not incorporate the risk assessment which is
normally at the heart of a bank’s decision-making process.
The lack of internal and external controls, which went
hand in hand with a strategy of forced expansion at the
end of the 1980s and the beginning of the 1990s, explains
the unprecedented scale of CL’s financial problems. The
Commission points out that these management failings
were accentuated by confusion between the roles of the
state as shareholder, the state as entrepreneur, the welfare
state and the state as legislator, a confusion which resulted
in the state as shareholder allowing a situation of unpre-
cedented gravity to degenerate further, contrary to its
asset-related interests.

As the Commission noted in Decision 95/547/EC, it does
not have data establishing that the combined costs to the

the Commission has noted instances of
In particular,
French case-law relating to previous cases in which the
State’s liability for liquidation debts was deemed to extend
beyond its capital contribution to the company in ques-
tion. In similar precedents (31), the Commission and the
Court of Justice have rejected the argument whereby the
liability of the State as shareholder for liquidation debts
extended beyond its capital contribution on the grounds
that extending liability in that way amalgamated the roles
the shareholder State and the welfare state. The
of
case-law of the courts in no way alters the fact that such
operations constitute aid: as a shareholder,
the State,
which was aware of this case-law based on the 1985 Law
on Company Rehabilitation and Liquidation (32), should
long before the measures currently being
have taken,
examined, measures to strengthen risk monitoring during
the bank’s expansionary phase and then restructuring and
liquidation measures when the crisis broke. In other
words,
it did not behave as a prudent shareholder or
market economy investor in compliance with the afore-
mentioned principle. Leaving that matter aside,
the
Commission considers that the French authorities have
failed to provide proof, as required by the 1985 Law, that
the State as shareholder was equivalent to an ipso jure or
de facto manager of the company. In that case, the ipso
jure or de facto managers are liable for the company’s
liquidation debts in the event of management errors up to
the financial amounts which these errors represent. Lastly,
the Commission notes that, even were such proof to be
provided, the provisions would not enable the French
State to claim exemption from implementing Article 92
of the Treaty without flouting the principle of law that
arguments cannot be based on one’s own faults.

Accordingly, even though liquidation of CL would have
had direct or indirect costs far in excess of those for the
measures taken by the French authorities, this situation,
which is the result of the failings over many years of the

(31) See in particular Commission Decision 94/1073/EC (Bull),
OJ L 386, 31. 12. 1994, p. 5 and Joined Cases C-278/92, C-
279/92 and C-280/92 Spain v Commission [1994] ECR I-
4103, paragraph 22.

(32) Law of 25 January 1985 on the relief and liquidation of com-
panies, Articles 179 and 180, Cf. French Official Gazette of
26 January 1985.

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8. 8. 98

State as shareholder, cannot be invoked to argue that the
measures in question do not constitute aid. The upshot of
all these factors is that the aid character of the rescue and
restructuring measures for the bank cannot be disputed by
saying that liquidation would possibly entail far higher
costs, even in a context of financial and systemic crisis.

9. DISTORTION OF TRADE BETWEEN MEMBER
STATES

to distortions of

The liberalization of financial services and the integration
of financial markets have made intra-Community trade
increasingly sensitive
competition.
Economic and monetary union has made this trend more
pronounced (33). With the launch of the single currency,
trade within the Community will be able to develop
without any exchange risk or exchange costs. Although,
in principle, financial institutions are able to operate on a
cross-border basis, there are obstacles preventing them
from expanding abroad. These obstacles are often related
to arrangements protecting domestic institutions from the
effects of competition, which makes it less advantageous
for foreign competitors to enter the market. Aid designed
to enable financial institutions to survive against a back-
ground of lower profits and reduced ability to meet the
challenges posed by competition, such as the aid granted
to CL, may therefore distort competition at Community
level because it makes it harder for foreign financial insti-
tutions to access the domestic market.

Without the aid in question, CL would have to be wound
up or sold, in one or more parts, to one or more stronger
institutions, possibly as part of judicial proceedings. In the
event of that happening, the institution or its activities
might be taken over by a foreign competitor wishing to
set up or boost its business presence in France. This
procedure would make it easier to disperse CL’s assets and
market shares between a high number of potential buyers.
It should be noted that the plan submitted by the French
authorities in July 1997 does not provide for the separate
sell-off of each of CL’s French and foreign subsidiaries,
but merely for the floatation of CL as a whole.

In addition, aid to an institution with an international
dimension like CL which provides a wide range of finan-
cial products to companies competing on international
markets and offers financial services to individual cus-
tomers in competition with other European financial

(33) See section 10.2.

institutions, while also expanding its activities abroad via
its branch network outside France, is likely to have a dis-
torting effect on intra-Community trade. In particular, the
aid in question could enable CL inter alia to restructure
a number of its activities abroad on markets where it is
competing with other
in the
Community.

institutions

financial

It should be noted that, in 1997, CL’s international acti-
vities accounted for FRF 810 billion, or 54 % of the
bank’s total assets. European activities accounted for 32 %
of the bank’s total assets at the end of 1997, representing
an amount of about FRF 474 billion.

Accordingly, the public intervention in question must be
deemed to be covered by Article 92(1) of the Treaty, since
it constitutes State aid which distorts competition to an
extent likely to affect intra-Community trade.

10. ASSESSMENT OF THE COMPATIBILITY OF AID
TO CL

10.1 Legal

framework, criteria and method for

assessing the compatibility of aid to CL

Having established that the measures in question consti-
tute State aid pursuant to Article 92(1) of the Treaty, the
Commission must determine whether such aid can be
deemed compatible with the common market within the
meaning of Article 92(2) and (3).

It should be borne in mind that the aid in question is
neither social aid granted to individual consumers nor aid
likely to facilitate the development of certain French
regions (and granted for that purpose). Nor is it aid
designed to remedy serious economic disruption, since its
purpose is to resolve the problems of a single recipient,
CL, as opposed to the acute problems facing all operators
in the industry. As a result, the aid cannot be considered
as in the common European interest either. Only the
derogation provided for in Article 92(3)(c) may be taken
into account. This article gives the Commission the
power to authorize ‘aid to facilitate the development of
certain economic activities [ . . . ] where such aid does not
adversely affect trading conditions to an extent contrary to
the common interest.’ In assessing whether the aid is
compatible with the common interest, the Commission
takes account of the extent to which competition has
been distorted, the offsetting measures provided for with a
view to limiting such distortions, the restriction of aid to
what is strictly necessary and the viability of the recipient.

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The Commission set out the implementing conditions for
this derogation in the Community guidelines on State aid
for rescuing and restructuring firms in difficulty (34). The
guidelines state that ‘aid for restructuring raises particular
competition concerns as it can shift an unfair share of the
burden of structural adjustment and the attendant social
and industrial problems on to other producers who are
managing without aid and to other Member States.’ The
Commission takes the view that aid for restructuring may
contribute to the development of economic activities
without affecting trade to an extent contrary to the
Community interest where the following conditions are
met:

(1) a restructuring plan based on realistic assumptions
which enables a minimum return on the invested
capital to be generated within a reasonable time-span
and the firm’s long-term viability to be guaranteed;

(2) the provision of sufficient quid pro quos to offset the
distorting effect of aid on competition so that the aid
can be regarded as not contrary to the common in-
terest;

(3) aid should be proportional to the objectives in ques-
tion and the amount of aid should be limited to the
strict minimum needed for restructuring so that the
recipient company itself makes a maximum contribu-
tion to the recovery plan;

(4) the full implementation of the restructuring plan and
observance of any other obligation laid down by the
Commission’s final decision;

(5) setting-up of a monitoring system for the previous

condition.

In accordance with the guidelines on aid for restructuring,
such aid should normally have to be provided only once.
Since in the present instance, the aid in question is to be
provided in addition to that approved in 1995 and 1996,
and given its scale and distorting effect, a particularly
rigorous and detailed assessment should be carried out to
ensure that the aforementioned conditions are complied
with.

10.2 Competitive background to CL’s activities and

the distorting effect of aid

The European banking industry, and the French banking
industry in particular, is currently undergoing a process of
adjustment characterized by very severe competition. This
development is fuelled by the liberalization of capital
markets, rapid technological change and the launch of the
single currency. The definitive opening-up of markets and
the loss of commission on exchange transactions between

(34) OJ C 368, 23. 12. 1994, p. 12.

the currencies of the countries forming the EMU will
increase competitive pressure within the Community.
This will probably result in an accelerated integration of
supply, with banks or, more broadly, financial institutions
merging, largely as a result of existing complementarity
between banking and insurance (in recent years banking
networks have become one of the main retailers of in-
surance products). This integration of supply will inev-
itably give rise to further restructuring to enable the new
groups to derive full benefit from the synergies created
and to shed any dead wood resulting from the merger
operations.

So CL is carrying on its financial business against a back-
ground of acute competition. Like wholesale banks and
investment banks, retail banks are subject to considerable
competitive pressure. The impact of competition on
commercial banking activities in Europe is to squeeze
financial
intermediation margins, which have been
steadily eroded over the last ten years. Banks are attemp-
ting to counteract this loss of added value by developing
commission-generating services, whose share of net
receipts from banking (NRB) is growing, taking French
financial institutions as a whole.

As explained above, State aid to CL became necessary for
several reasons: excessive, uncontrolled exposure to real
estate, an imprudent policy of expansion abroad, but also
an ineffective monitoring system on the part of the share-
holder, which was unable to put an end in time to the
high-risk behaviour of
the bank’s managers. In other
words, the CL’s overall system of corporate governance
proved inadequate.

In view of CL’s delay in responding to the cyclical down-
turn and to the difficulties it faced (rents and purchase
prices have been falling uninterruptedly on the real estate
market since 1990), coupled with the slow pace of the
recovery process, it seems clear that its current substantial
aid requirement is partly a result of the confidence its
managers have placed in the State as shareholder, which
was obliged to cover past errors, as is demonstrated by the
French authorities’ arguments regarding the cost of alter-
native solutions. Obviously, CL is not the only group to
have rushed into a highly speculative policy, but only
public institutions have been able to count on State aid,
whereas private institutions have been forced by the
markets to undergo drastic restructuring or to enter into a
composition with their creditors. The result is an im-
balance in the conditions of competition between public
and private banking institutions which constitutes a
serious distortion of normal market conditions. In the
case in point, there are grounds for believing that, if CL
had not enjoyed the total and permanent
implicit or
explicit backing of the State, it would not have embarked
on its risky policy in the first place, or at the very least it
would have undergone restructuring earlier and with
greater determination.

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Public support, which ultimately means a lifeline for
failing institutions, as was emphasized by the French
Senate’s information report No 52 (35), also has the effect
of protecting their creditors. However, it also removes any
incentive for creditors to monitor their debtors’ behaviour,
with the result that financial institutions are no longer
subject to the supervision and penalties of the markets.
Such protection is not just inappropriate and excessive, it
also has the consequence ‘of encouraging the unsound
management of credit institutions’ — as the European
Parliament and the Council of the European Union stated
in Directive 94/19/EC (36) of 30 May 1994 on deposit-
guarantee schemes. The effect of
the shareholder’s
support, which in turn made market support possible, was
to delay the necessary restructuring and to increase the
final amount of State aid. As a result, and in accordance
with the statements of the Council and the European
Parliament, the Commission fully subscribes to the argu-
ment which has been established in academic circles and
in the wake of banking crises in several countries that this
perverse effect or moral hazard problem played an impor-
tant part in the CL crisis.

It should also be noted that the distorting effect of aid on
competition does not merely concern the previous policy
of CL and nationalized banks which have received aid,
but that it may also create expectations for the future. As
the UK authorities pointed out in the comments they
submitted as part of the present proceedings, if aid is
granted more than once, the bank’s management may
expect further aid to be forthcoming in future, which can
have an additional distorting effect on competition. In
addition, State aid to the weakest institutions plays a nega-
tive role and helps to squeeze margins in the industry as a

whole. State aid is tantamount to rewarding inefficiency
and undermines market discipline, especially where it is
granted repeatedly, as in the case of CL. For that reason,
the guidelines on State aid for rescuing and restructuring
firms in difficulty specify that aid should normally be
necessary only once.

for nationalized institu-
Quasi-systematic state support
tions in difficulty (CL, GAN-CIC, Cr(cid:130)dit Foncier de
France, Marseillaise de Cr(cid:130)dit, Comptoir des Entre-
preneurs), coupled with the fact that most of these rescue
operations were carried out more than once, has had the
effect of exacerbating the conditions of competition faced
by French and European banks in France. It has worsened
the difficulties of the financial industry as a whole and
has had a particularly negative impact on the profit levels
of private banks, which represents a serious distortion of
competition; this also applies to banks from the other
Member States operating in France or which face
obstacles to the development of their activities in France
as a result of this situation. As was pointed out in a report
(‘Commissariat
from the French planning authorities
G(cid:130)n(cid:130)ral au Plan’) (37),
the resulting imbalance in the
conditions governing entry to, and exit from, the banking
industry is such as to create an artificial blockage of the
French banking system, whereas the normal counterpart
of unfettered entry to the industry should be unfettered
exit. This imbalance is one of the main causes, if not the
main cause, of the difficulties of the French banking
industry (38). According to the aforementioned report of
the Senate Finance Committee, by systematically rejecting
the liquidation and sale option, governments have merely
made their remaining options more costly, once relief has
been shown to be inefficient. Unfortunately, CL illustrates
this fact: the cost of procrastination is high (39).

Table 16:

Aid to nationalized French banking groups

Recipient

Number of aid schemes
since 1992

Total aid, not discounted
(1992-1998)
(FRF billion)

Cr(cid:130)dit Lyonnais
Soci(cid:130)t(cid:130) Marseillaise de Cr(cid:130)dit (1)
Comptoir des entrepreneurs
GAN-CIC

Cr(cid:130)dit Foncier de France (2)

Total

4
4
4
2

1

102 (minimum)
2,1
15,2
23,76

25

168

(1) A further contribution, of an unquantified amount, is planned for 1998.
(2) FRF 25 billion corresponds to the amount of the short-term facility granted by the State; other, unquantifiable com-
ponents are planned (unlimited State guarantee and State undertaking to take all necessary measures to ensure that CFF
can continue to operate after 31 July 1996).

(35) See French Senate, Banques: votre sant(cid:130) nous int(cid:130)resse; report
by Mr Alain Lambert on behalf of the Finance, Budgetary
Control and Accounts Committee on the situation and pros-
pects of the French banking system, (Report No 52, 1996-97).

(36) OJ L 135, 31. 5. 1994, p. 5.

(37)

‘Le syst(cid:138)me bancaire fran(cid:135)ais’, October 1996, contribution by
the planning authorities to the Senate Finance Committee’s
finance working party, see p. 86 of Report No 52 of the Sen-
ate Finance Committee.

(38) See the Lambert Report, op. cit., p. 56.
(39) See the Lambert Report, op. cit., p. 60.

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Accordingly, any lasting solution for CL and the national-
ized banking system in France must entail a reform of the
corporate governance of the group and its institutions and
a solution to the moral hazard problem engendered by
the State’s ultimate willingness to provide support. In the
case in point, the Commission takes the view that the
undertakings entered into by the French Government to
privatize and radically trim the group will provide a
lasting solution to the corporate governance failings noted
in the past.

shareholders

should be noted that

It
the interpretation given in
numerous cases to Article 52 of the 1984 Banking Law by
the French authorities (see section 9 above) results in an
additional distorting element to the conditions of com-
petition obtaining in the French banking industry. Ac-
cording to the French authorities,
are
obliged to lend support to a failing institution if the
monetary authorities call on them to do so. It should be
noted that this creates an uneven playing field between
private and nationalized banks, whose shareholder has
access to unlimited resources, and that, as a result of this
interpretation, funds are allocated in an economically irra-
tional way and the normal functioning of the market and
of the conditions of competition obtaining in the French
banking industry is distorted. There is no doubt that this
coercive interpretation of the Banking Law, which was
recently rejected by a judgment of the Paris Court of
Appeal, has made a lasting contribution to the imprudent
conduct of the managers of French nationalized banks,
which have relied on their shareholder for virtually auto-
it
matic support. By giving rise to such expectations,
aggravated existing distortions of competition. The fact
that the French authorities are still invoking what they
regard as the coercive nature of Article 52 in numerous
cases of banks in difficulty, shows that the shareholder
state has still not fully learned the lessons of the series of
crises in the nationalized banking sector and that it is still
capable of repeating certain past errors.

(as

enterprises

institutions will normally be subject to market forces and
that banks are no more protected from liquidation than
any other
the French Commission
Bancaire stated in its aforementioned 1995 report), but
also that the State as shareholder will act accordingly
when dealing with banking crises and will do so without
discriminating between nationalized banks and private
banks. This policy should be accompanied by protection
measures for small investors in the form of instruments
such as deposit-guarantee funds (40). It also needs accom-
panying strategies for the ordered liquidation of failing
banks with a view to avoiding crises and preventing them
from spreading to the rest of the financial industry and
the economy as a whole. The Commission takes the view
that the Member States have instruments, such as tem-
porary liability guarantees, enabling them to provide a
framework for the ordered liquidation of companies and
to prevent a systemic crisis developing. The Commission
‘wise men’ consisting of
has consulted a group of
ex-governors of the Member States’ central banks which
concurs with this approach.

10.3 Assessment of the viability of CL on the basis
the assumptions contained in the plan

of
submitted to the Commission in July 1997

It should be noted that the general principle of the guide-
lines on restructuring aid should be that aid is to be
authorized only where it is in the interest of the Com-
munity to do so. The Commission began by analysing,
with the assistance of
the plan
submitted by the French authorities to determine the
internal cohesion of the assumptions on which it was
based. This preliminary examination is without prejudice
to any changes which may be made to it with reference to
Community policy on State aid, with the result that these
intangible by the
assumptions are not
Commission.

its consulting bank,

regarded as

Instead of virtually unconditional support, particularly
when the French authorities themselves make use of the
argument that there is a risk of a systemic crisis spreading
to the rest of the financial sector in the case of major
banks like CL (the ‘too big to fail’ argument),
the
Commission believes that the French authorities should,
in the common interest, follow a different strategy for
resolving crises in the banking sector so as to minimize
their distorting effect on competition. The policy it advo-
cates is designed to encourage responsible behaviour on
the part of the managers of both nationalized and private
banks. To that end, it is important not just for the com-
petent authorities to state clearly and publicly that credit

According to the French authorities’ plan, if the CL loan
were ‘totally neutralized’, the bank’s profits would register
continuous growth, rising from FRF 0,2 billion in 1996 to
FRF 3,2 billion in the year 2000 (net result, group share,
after distribution of the clause). After the year 2000, ac-
cording to the Commission’s consulting bank, in the light
of the high outturn, they would stabilize and grow at a
more modest rate.

(40) Directive 94/14/EC of the European Parliament and of the
Council on deposit-guarantee schemes provides for the Mem-
ber States to establish such instruments, OJ L 135, 31. 5.
1994, p. 5.

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Table 17:

Trend of CL’s results according to the July 1997 plan

1996

1997

1998

1999

2000

(FRF billion)

Financial impact of neutralization

With neutralization
Net result (group share) (after better fortunes clause)

3,0

0,2

3,3

1,0

3,0

1,7

2,7

2,2

2,4

3,2

NB: 1996 and 1997 refer to actual results. The rediscounted figures for 1998-2000 were submitted by the French authorities

in March 1998. These figures were subsequently rediscounted in May 1998 (see Table 19).

Following the restructuring of the French network, the
main source of CL’s post-plan margins are expected to be
in France itself, which should account for about 57 % of
CL’s net result (41) from the year 2000 onwards.

The work carried out by the Commission’s consulting
bank, which is based on the objectives set by CL (gradual
floating of
the company’s capital by the year 2000,
universal bank strategy in France and corporate bank
strategy in the rest of the world), gives rise to several con-
clusions.

the

success of

As regards France (DCAF), CL’s projections seem reason-
able to the Commission’s consulting bank. These projec-
tions are based on an explicit strategy designed to defend
existing market shares and to cut operating costs. The
plan is based on the
cost-cutting
programme and improvements to the quality of assets. In
so far as CL does not aim to win back market shares
(except as regards the consumer credit facilities offered in
partnership with Cetelem), these objectives would seem to
be within its grasp. The Commission’s consulting bank
has carried out a sensitivity analysis showing that, even if
CL reduced its overheads and operating ratio at a far
slower rate than anticipated, its profitability would not be
undermined. However, growth in own funds would be far
slower and the tier one solvency ratio would not rise
above the 5 % mark until the year 2000. A 20 % increase
in the level of provisioning in the plan would have a
lesser impact on the result and the own funds ratio. The
Commission’s consulting bank took the view that, since
the business plan’s assumptions regarding turnover and
net receipts from banking were on the conservative side,
an analysis of sensitivity to a fall in NRB was not neces-
sary.

(41) DCAF and DCAF subsidiaries.

The Commission’s consulting bank examined the other
transactions effected by CL. It emphasized that CL’s
performance in Europe during the time-span of the plan,
depended to a large extent on that of BfG (which, accord-
ing to the plan, is not due to be sold off until the year
2000). BfG’s results should stabilize following restructur-
ing and the introduction of new strategic guidelines.
Given that the plan provides for major sales in Europe,
the bank’s performance in Europe will be affected by
extraordinary elements depending on whether the sell-
offs result in capital losses or gains. The Commission’s
consulting bank noted that, following CL’s withdrawal
from its retail banking activities in the rest of the world,
and the current integration of its market and corporate
banking activities, major synergies made it possible to
improve the overall cover of the bank’s large-scale cus-
the bank was well-placed to
tomers and meant
achieve its objectives.
In particular, Cr(cid:130)dit Lyonnais
Americas, which is one of the few banks in the United
States to enjoy the status of a commercial bank and a
corporate bank, and Cr(cid:130)dit Lyonnais Asia, which is highly
specialized in brokerage activities,
the
group’s pivotal points. These two solid pillars underwrote
the bank’s international strategy and financial projections.

formed two of

that

the assumptions made, which forecast

On the basis of the work carried out by its consulting
bank, the Commission concluded that the business plan
submitted to it in July 1997 was broadly realistic in terms
of
reasonable
growth and eschewed excessively ambitious objectives
which could have led CL to adopt an aggressive pricing
policy. This plan, which is structurally consistent, points
to the emergence of adequate profit levels by the year
2000, so that CL is viable in the long-term according to
the aid and quid pro quo assumptions presented by the
French authorities in July 1997. CL’s 1997 results would
appear broadly to support this analysis. CL’s NRB in 1997
was greater than the 1996 figure, even though the plan
forecast a significant downturn in NRB.

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These conclusions must be qualified by various considera-
tions. CL’s performance should be set against that of the
institutions which are most directly comparable to it. In
view of the variety of CL’s functions, such comparisons
are complex and require a substantial number of institu-
tions and markets to be assessed using multiple criteria
concerning the size, structure, organization, profitability,
distribution and presence on the domestic and interna-
tional market, etc. This examination was carried out by
the Commission’s consulting bank with reference not just
to the French banks closest
to CL, such as Soci(cid:130)t(cid:130)
G(cid:130)n(cid:130)rale and BNP, but also in the light of current trends
on the other banking markets in Europe and in the rest
of the world.

The analysis shows that the restructuring work begun by
CL is substantial but not yet complete. CL still has a large
staff and a high number of branches, reflected in substan-
tial overheads. The hiving-off of assets to the tune of FRF
190 billion improved the portfolio’s
return
(measured by the ratios of interest margins to average
assets and gross operating result to average assets), but
CL’s net return ratios (return on assets and on own funds)
are still considerably below those of comparable competi-
tors. CL’s operating ratio (76 % in 1997) is still too high
in relation to that of its French competitors (approxim-
ately 70 %), not
foreign competitors
(approximately 60 %).

to mention its

gross

In the lead-up to the final stage of economic and mon-
etary union, it seems very likely that further reductions in
this ratio will be necessary for most European banks and
all the more so for CL. In terms of asset quality, the hive-
off has certainly enabled a considerable improvement to
be made, and today cover for doubtful debts has been
brought back to a more appropriate level. However, given
that risk monitoring was the critical factor underlying
most of CL’s problems, it remains to be seen whether, in
the medium term, the new risk management systems will
enable the bank to anticipate, prevent and manage major
risks in the medium term and also to face unforeseen
circumstances with its own resources.

Lastly, it should be noted that, compared with the strategy
of geographical expansion and expansion into new fields,
the size of CL and, in particular, the size of its weighted
commitments, involve a lower level of capitalization than
those of its competitors, which entails inter alia higher
financing costs on markets because of its low rating and
restricts its potential growth margin. Without
the aid
made available to CL, it would have been obliged substan-
tially to reduce its market shares in France, which are still

close to those of its main competitors. CL will not be able
to resume a growth strategy in absolute terms and in
terms of market shares until
it has accumulated own
funds which are substantially in excess of the funds avail-
able to it at present. Unless recapitalization takes place,
this would entail a series of positive results over several
years.

In its conclusions as

The above brings us to the conclusion, on the basis of the
notified plan, that CL is viable, but that it still has to
make considerable efforts to consolidate the current re-
the
covery.
Commission should also take account of the very substan-
tial changes to the plan needed in view of the require-
ment to minimize aid and the measures to offset distor-
tions of competition as provided for in the Community
competition rules (see sections 10.4 and 10.5 below).

to CL’s viability,

10.4 Aid in proportion to the costs and benefits of
restructuring; changes to the forecasts in the
notified plan

The Community guidelines on State aid for rescuing and
restructuring firms in difficulty state that ‘to limit the
distortive effect, the form in which the aid is granted
must be such as to avoid providing the company with
surplus cash which could be used for aggressive, market-
distorting activities not
linked to the restructuring
process’. In order to assess whether the aid is in propor-
tion to the objective, and whether CL is contributing, to
the maximum extent possible, from its own resources to
the restructuring plan submitted to the Commission, as
the guidelines require, the Commission draws a distinc-
tion between aid arising out of the increase in CDR’s
losses and aid arising out of a change in the terms of the
loan from CL to EPFR.

The aid to CL in respect of CDR’s and EPFR’s losses is a
product essentially of the same cause that motivated the
hive-off in 1995; it would be difficult for the authorities to
vary the amount of aid without calling into question the
principles that underlay the hive-off in the first place and
in particular the arrangement by which CDR’s losses were
to be borne by EPFR. In origin these losses are CL’s, as
CDR took over CL’s poor-quality assets and liabilities;
any losses due to bad management on CDR’s part would
have to be substantiated case by case. Because CDR is a
subsidiary of CL which is outside CL’s consolidated
accounts, and over which CL no longer has any control,
as required by Commission Decision 95/547/EEC, these
losses do not affect CL’s financial position: the State takes
up the cost by recapitalizing EPFR.

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But the rate of interest charged on the loan from CL to EPFR has a direct impact on CL’s profit-
ability. It will be seen from Table 13 that the neutralization of the net cost of carrying this loan
has a very significant effect on CL’s results. This is a variable which is open to state action;
indeed the State has already acted upon it, by granting emergency aid in 1995 and 1996 with a
view to improving CL’s financial situation. For this reason the Commission has examined the
proportionality between the objectives being pursued and the additional aid represented by the
neutralization of the EPFR loan and the cancellation of the zero-coupon bond, which together
constitute a major increase in the carrying cost of the transaction to EPFR, an increase which has
to be borne by the State.

The neutralization of the loan to EPFR can be considered necessary only if CL would be unable
by itself to finance the charges it has to bear in respect of the loan to EPFR, over and above its
return, which is 85 % of MMR. It should be borne in mind that this arrangement is a form of
contribution by CL to the recovery plan, and helps to limit the volume of aid. It should also be
pointed out that the neutralization operation is not the equivalent of a State-aided investment
that would figure in CL’s balance sheet, but rather an item that would show in its profit-and-loss
account. The necessity for it has therefore to be assessed in the light of CL’s financial position.

At the beginning of May 1998 CL drew up new profit-and-loss forecasts on the basis of the asset
sales required as a quid pro quo in this Decision. The revised figures show that the underlying
assumptions in the plan change drastically, and that from 1997 to 1999 CL will be unable to
show positive results unless the loan is neutralized: for each of these years the effect of neutral-
izing the loan is greater than CL’s profit before application of the better fortunes clause. The
adjustment is particularly big in 1999, when CL expects a net profit that falls short of the July
1997 forecast by FRF 2 billion. Given CL’s poor rating, and the fact that it has been placed
under surveillance by Moody’s rating agency since the beginning of 1998, the Commission can
accept that if the loan to EPFR is not neutralized from 1997 to 1999 there could be losses
serious enough to compromise the restructuring operation in progress. The Commission
acknowledges that the costs of restructuring provided for in the closure and sell-off plan to
which the French Government has committed itself bear heavily on the years 1998 and 1999,
which are two strategic years in the life of the group, as its privatization is to be completed in
October 1999.

Table 18:

Revised assumptions 1996-2000

1997

1998

1999

2000

(FRF billion)

Financial impact of neutralization

Net profit, group share (before clause), with
neutralization:

— New estimates

— July 1997 plan

3,3

1,9

2,3

Shortfall by comparison with July ’97 plan

–0,4

3,0

2,7

[ . . . ]

2,7

[ . . . ]

[ . . . ]

4,5

[ . . . ]

2,4

3,6

6,6

–3,0

NB: This table was drawn up on the basis of data which CL submitted to the Commission in May 1998. They are based on
the outturn for 1996 and 1997 and on CL’s forecasts, updated in May to reflect the impact of the asset sales on CL’s
turnover and profits.

At a meeting on 7 May 1998 representatives of CL indicated that from the year 2000 onward,
when the restructuring linked to the asset sales had been completed, CL expected to be able to
finance its own development without the total neutralization of the loan which had initially been
proposed by the French authorities in July 1997. It should be pointed out that the many factors
linked to the restructuring operations which are to follow this Decision will not recur beyond
the year 2000, as the asset sales are all to be complete by 31 December 2000. This means that
when CL is privatized, in 1999, its medium-term prospects should be very much better, provided
it continues the internal restructuring effort it has undertaken especially in order to bring its
operating ratio (the ratio of its overheads to its net receipts from banking) down to about 70 %.

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then,

The Commission is of the opinion that the privatization
of CL and the end of the uncertainty surrounding the aid
plan will profoundly modify the conditions in which CL
has to work. The bank will find it easier to go to the
market for fresh capital. It should see a gradual fall in the
cost of its borrowing, which because of its poor credit
rating is currently more expensive than that of its com-
petitors. This should bring its rate margins back to the
same level as those of its main competitors. An improve-
ment in these would strengthen the recovery which has
already got under way with the reduction in its operating
ratio. Following privatization,
there should be a
basis for a lasting improvement. The Commission would
note here that CL’s difficulties became particularly acute
during an economic downturn in 1992 and 1993. A bank
is especially vulnerable to cyclical
swings, not only
because its growth reflects them directly (though CL’s
growth should remain weak in the medium term, as a
result of the continuing restraining mechanism), but also
because the risks run by its customers and therefore the
rate of default on its claims are a great deal lower when
the macroeconomic situation is good. As the medium-
term outlook for the European economy is encouraging,
owing to the context of growth and stability created by
economic and monetary union, the Commission is of the
opinion that CL should be able to pursue its recovery in a
favourable environment, which will allow it to complete
the restructuring already begun and drastically to reduce
its balance sheet in accordance with this Decision, even
taking account of
the Decision
the limitations
imposes on its growth. On the basis of the initial plan in
1997 the Commission came to the conclusion that CL
was viable, and in the light of the new estimates put
forward by CL, therefore, the Commission considers that
that conclusion continues to hold good.

that

Commission in 1995 and 1997, can be estimated at
between FRF 53 billion and FRF 98 billion.

The Commission and the French Government have also
agreed that a financial mechanism may be established
which produces the same restraining effect as the obliga-
tion on CL to finance the loan to EPFR at 85 % of MMR,
i. e. at less than its refinancing rate, which is MMR. The
alternative mechanism,
in accordance with the private
investor principle already referred to, would not comprise
any fresh State aid to CL (see section 10.6 below), and
would increase the rate for servicing the loan to EPFR to
100 % of MMR.

The loan of FRF 10 billion from CL to EPFR which was
intended to finance the subscription by EPFR of a zero-
coupon bond will not now be granted; this constitutes a
loss of revenue to the State, which the Commission has
taken into account in its calculation of the aid and the
quid pro quo it necessitates, as EPFR is deprived of the
possibility of transforming a resource bearing a short-term
rate of interest into an application bearing a long-term
rate; but it has no direct effect on CL, which is simply
relieved of an obligation to borrow and lend a sum of
FRF 10 billion at MMR, without any effect on its profit-
and-loss account or its solvency ratio (43).

The Commission concludes that the complete neutraliza-
tion of the loan may be allowed for the years 1997, 1998
and 1999, and that thereafter CL will be in a position to
refinancing the long-term liabilities
bear
backing the EPFR loan without endangering its own
viability.

the cost of

This limitation does not affect the amount of State aid to
CL calculated on the basis of the complete neutralization
of the loan. As a result of the variation in the value of CL,
the State will lose as much as it gains from the reduction
in the volume of aid, so that in terms of the State’s port-
folio the impact on the net amount of aid will be negli-
gible (see Table 15) (42).

On this basis, the value of the additional aid examined in
this Decision, over and above that approved by the

(42) On conventional assumptions supposing that the fiscal im-
pact of a variation in operating revenues is offset by a margi-
nal multiplier between the value of the bank and the value of
its own funds.

10.5 Aquidproquo in proportion to the distortion

of competition caused by the aid

When the Commission is examining a measure to assist
the restructuring of a firm in difficulty, its overall assess-
ment has to consider whether the common interest is
served by the maintenance of the firm in business, given
the competition that exists in the industry and the way
competition will be affected by the aid. The distortion of
competition can be reduced by limiting the aid to what is
strictly necessary, but also by requiring a quid pro quo on
the part of the firm. If the Commission can secure a
substantial reduction in the distortion of competition the
aid may be declared compatible with the common
market, provided the other tests laid down in the guide-
lines on restructuring aid are satisfied.

(43) Loans to the State bear zero risk and are not included in CL’s
solvency ratio: the effect on the weighted assets is nil.

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8. 8. 98

(a) Factors in the assessment of the distortion of competi-

tion

Commission has also taken account of the undertakings
given by the Government regarding a mechanism to
restrain CL’s growth, which likewise helps to offset the
distortive effect of the aid (see section 10.6).

It should be borne in mind, first of all, that without the
State aid it has received CL would have had to be put into
liquidation. Under the Community guidelines on State
aid for rescuing and restructuring firms in difficulty (44),
the purpose of requiring the recipient firm to give up
capacity as a quid pro quo for the aid is to reduce the
distortion of competition caused by the aid on the main
markets where the recipient is competing with similar
firms. The capacities or market shares left free provide a
form of compensation for competitors, serving to offset as
far as possible the distortion of competition caused by the
aid.

If the quid pro quo takes the form of asset sales to reduce
the size of CL’s balance sheet, along the lines followed by
the French authorities in connection with the earlier
Decision 95/547/EC, CL will be able to use the proceeds
of the sale to finance the restructuring, so that the re-
cipient will be made to contribute,
to the maximum
extent possible, to the restructuring process. In this case,
then, a substantial quid pro quo on the part of the re-
cipient can also help to keep the State aid to a strict
minimum. The Commission is nevertheless aware that in
some cases market constraints may make it difficult to
secure full value for the assets sold off by CL.

European banking legislation has introduced a solvency
constraint: the nucleus of tier-one own funds must be at
least 4 % of weighted assets, and own funds in the
broader sense must amount to at least 8 %; this limits
credit institutions’ capacity for growth. In reality there is a
capitalization constraint of this kind which applies to any
form of enterprise in the medium and long term; but in
the banking sector the constraint is permanent, imme-
diate and directly quantifiable, and cannot be set aside
temporarily if a credit
institution wishes to pursue a
growth strategy. A credit institution that barely satisfies
the solvency requirement has no margin for growth
unless it can attract
fresh capital or increase its own
capital and reserves by achieving a high rate of profit. An
inefficient bank will see its growth restrained by the
solvency requirement, while a bank making large profits
will have a margin of growth that reflects its profitability.
The restraint which the solvency requirement places on
the growth of less effective institutions illustrates very
clearly the way in which prudential policy and competi-
tion policy complement one another. In considering the
quid pro quo suggested by the French authorities, the

(44) OJ C 368, 23. 12. 1994, p. 12.

One result of the solvency requirement is that in the case
of credit establishments it is possible to arrive at a very
rough theoretical estimate of the distortion of competition
caused by State aid. If the aid can be equated with a
capital
injection, the distortion of competition can be
assessed in terms of weighted assets. A capital injection of
FRF 1 billion, or any measure whose effect is equivalent,
allows a bank to increase the weighted assets in its
balance sheet above what is required by the compulsory
solvency ratio of 4 % to 8 %, and thus to expand its acti-
vities. The operation under consideration here brings with
it a potential distortion of competition equivalent
to
between FRF 12,5 and 25 billion: CL has been able to
increase its weighted assets by between FRF 12,5 and 25
billion, and would not have been able to do so without
the aid. This relationship also means that if State aid to a
credit institution exceeds its own funds, the distortion of
competition caused would be greater than the whole of
the weighted assets. In such a situation the role of the
quid pro quo is to limit the distortion very roughly es-
timated here.

CL has received State aid equal to at least twice and
possibly even three times its current own funds, which
amounted to FRF 44 billion in 1997, so that the theore-
tical distortion of competition measured in terms of
balance-sheet assets by the rough method outlined above
is equal to its entire weighted assets (it cannot exceed that
amount). Thus the aid has not only enabled CL to avoid
liquidation and survive, but also to maintain a level of
activity which the solvency requirement would have
forced it to cut back substantially, going far beyond the
reductions made so far, if the aid had been less generous;
it certainly would not have been able to stabilize its
market shares in France as it has done in the last two
years (see Table 5 in section 3). The curb on growth
imposed by the solvency requirement has not had
anything like the constraining effect it would have had if
no aid or only a part of the aid had been granted.

Given the volume of aid, then, CL’s French and European
competitors have suffered an exceptionally high level of
distortion of competition. If the aid is to be approved, it is
important for the common interest that a very substantial
quid pro quo be put forward by the French authorities
which provides sufficient compensation to competitors
for the distortion they have suffered as a result of those
authorities’ refusal to allow market mechanisms to take
their course.

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(b) Compensating measures in Europe and in the world

As a quid pro quo for the 1995 aid plan, with an
approved net volume of State aid of FRF 45 billion, the
French authorities undertook to take substantial compen-
sating measures. It has already been indicated (section 4)
that in a letter sent to the Commission on 18 July 1995
Mr Madelin, the Minister for Economic and Financial
Affairs,
said that CL would reduce its commercial
presence outside France by 35 % in balance-sheet terms,
equivalent to about 50 % of CL’s assets in Europe outside
France. CL’s international assets were valued at a total of
FRF 959 billion at 31 December 1994, so that that reduc-
tion amounted to about FRF 335 billion, including FRF
310 billion in Europe. CL was to have until 31 December
1998 to dispose of assets so as to comply with the obliga-
tion. By the end of October 1997 CL had sold off interna-
tional assets worth about FRF 171 billion, including FRF
136 billion in Europe; this was about half the reduction it
had undertaken to carry out, being equal to 17,9 % of the
group’s international assets at 31 December 1994. To
comply with Decision 95/547/EC it still had to dispose of
assets of FRF 174 billion in Europe by 31 December
1998.

In the plan presented by the French authorities in July
1997 the compensating measures which were to be taken
to offset the aid additional to what the Commission had
approved in 1995 fell far short of what was needed. The
French authorities proposed to sell off ‘those subsidiaries
of CL the bulk of whose business is in retail banking
outside France’. They also asked for a less stringent time-
table than the one imposed by Decision 95/547/EC,
according to which all the sales of international assets
required to offset the effects of the aid had to be carried
out by 31 December 1998. They proposed that this dead-
line be put back to the year 2000, so that strategic disin-
vestment could take place over the entire duration of the
plan. By letter dated 2 April 1998, Mr Van Miert informed
Mr Strauss-Kahn that the Commission took the view that
the conditions laid down in Decision 95/547/EC had to
be complied with, and that all the compensating measures
provided for in 1995 would have to be taken by the
planned date in accordance with the Decision.

According to information supplied by CL, retail banking
business in Europe outside France accounted for assets of
FRF 438 billion, or about 45 % of CL’s international
assets and 70 % of its business in Europe outside France,
the balance sheet at 31
as measured in terms of
December 1994, which was
taken by the
Commission for evaluating the compensating measures in
the 1995 plan. In 1995 the French authorities undertook
to ensure that 35 % of CL’s international assets were
disposed of, worth about FRF 335 billion; this was to

the basis

consist essentially of sell-offs in retail banking in Europe.
The new compensating measures which the French
authorities proposed in July 1997 consequently amounted
to at best 30 % more than those of 1995, being the
percentage corresponding to the difference of about FRF
100 billion between the previous level of asset sales (FRF
335 billion) and the new one as estimated on the basis of
the July 1997 plan (total sales of FRF 438 billion),
whereas the total amount of aid to CL, on the higher
assumptions outlined above, was over three times greater
than the volume approved in 1995. In addition,
the
French authorities left some doubt as to what was meant
by the expression ‘those subsidiaries of CL the bulk of
whose business is in retail banking outside France’: in
particular, it was not clear whether they intended this
undertaking to include CL Belgium, which with total
assets of FRF 70 billion at the end of 1997 was CL’s main
subsidiary in Europe apart from BfG. If CL Belgium was
not included, the new quid pro quo to offset the increase
in aid was practically non-existent, and would amount
only to a few tens of billions in retail banking in Europe.

In the July 1997 plan the French authorities indicated
that the deadline for the main compensating measure
offered, namely the sale of BfG, which alone accounted
for
almost FRF 220 billion (45), might possibly be
changed. CL has a stake of 50 % plus one share in BfG.
The other shareholders are Aachener & M(cid:129)nchener, the
second-largest insurance group in Germany, which holds
25 % plus one share, and a trade-union-owned financial
services company, which holds 25 % minus two shares.
When CL acquired its majority holding in BfG it gave the
other shareholders an option to sell their holding at a
price set in advance, an option they could exercise up to
the end of 1999, and it guaranteed payment of a
minimum level of dividends. BfG’s profitability has been
poor; following the replacement of its managers, restruc-
turing measures were taken at the end of 1997, the main
objective of which was to preserve its margins despite an
expected fall
in its net receipts from banking. These
measures seem already to have borne fruit, as its profits
improved in 1997. BfG represents about 35 % of CL’s
assets in Europe outside France (as defined at the end of
1994), so that its sale would be a compensating measure
which made a very important contribution to reducing
the size of the group. But in view of these uncertainties it
was not clear that when the plan expired at the end of the
year 2000 the compensating measures to offset the aid
granted under the 1995 and 1997 plans would have been
taken.

(45) As in the case of the other compensating measures this figure
is expressed on the basis of CL’s balance sheet at 31. 12.
1994.

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In view of the considerable increase in the volume of aid,
the Commission could not approve the plan submitted in
July 1997 on the basis of so loose a timetable and so
small an increase in the quid pro quo.

The Commission has examined other possible criteria for
assessing and defining the quid pro quo required of CL
under this Decision, but has concluded that now as in
1995 the most reliable criterion for determining the
nature and scale of the main steps required is a sale of
assets such as subsidiaries or branches, or equivalent
closures; this would mean a reduction in the balance
sheet and in CL’s effective commercial operations.

The Commission considers that in the common interest
the main compensating measures offsetting the planned
aid to CL should be taken in Europe, whether in whole-
sale or retail banking, because it is in these lines of busi-
ness that CL competes most directly with other banks in
the Community, including other French banks who wish
to expand their activities in Europe. A large proportion of
CL’s capital dealings inside the Community is with its
subsidiaries and branches. It will be remembered that
during CL’s rapid expansion at the end of the 1980s and
into the early 1990s its growth strategy hinged on its
international network, and especially the network it was
building up in Europe. Thus
its European banking
network plays a central role in the distortion of trade
caused by the granting of State aid.

95/547/EC already required compensating measures to be
taken in Europe worth FRF 310 billion, equal to 50 % of
CL’s European assets, so that CL would now have to
dispose of further assets worth another FRF 310 billion
(like the compensating measures required by Decision
95/547/95, these would be identified on the basis of CL’s
balance sheet at 31 December 1994). In his letter to Mr
Strauss-Kahn on 2 April, Mr Van Miert accepted that out
of this FRF 310 billion figure assets of about FRF 80
billion could be disposed of outside Europe, for example
in North America or Asia, but said that a quid pro quo on
this scale was indispensable if the aid to CL was to be
declared compatible with the Treaty.

In this valuation of the sales of international assets to be
required as a quid pro quo to offset the aid, the Commis-
sion has arrived at a figure lower than that which would
have been produced by:

— observing strict proportion to the quid pro quo
required in 1995; assuming the high value for the esti-
mated aid,
this would have called for more far-
reaching compensating measures;

— the rough estimate of

the theoretical distortion of
competition, based on the bank’s
solvency ratio
constraint, which, if the amount of aid exceeded CL’s
own funds, would mean the distortion of competition
would exceed CL’s balance sheet total.

Given the unparalleled scale of
the
Commission takes the view that all of CL’s activities in
Europe outside France should be sold off: this would
amount to FRF 620 billion on the basis of CL’s balance
sheet at 31 December 1994, the reference date. Decision

the aid involved,

The Commission takes the view that the level of compen-
sating measures described above is an incompressible
minimum if the aid is to be declared compatible with the
common market. The quid pro quo thus defined is never-
theless a substantial one, and will reduce the distortion of
competition very significantly.

Compensating measures: sale or closure of international assets

Table 19:

Compensating measures

Value on balance sheet at 31. 12. 1997
(FRF billion)

1. Compensating measures Europe 1995

Already carried out (end 1997):

Woodchester
Credito Bergamasco (+CLIAM Italy)
Cr(cid:130)dit Lyonnais Greece
CL Bank Sverige
BPI
Iberagentes
CL Bank Netherlands
Bankhaus W(cid:148)lbern

Still to be carried out in Europe under 1995 Decision

2. New compensating measures called for (1)

310

136,1
15,9
41,0
n.s.
0,5
0,6
0,1
76,6
1,5

173,9

310

(1) Including FRF 12,4 billion in Latin America; other sales in Latin America are required by the 1995 Decision.

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Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale (see section 5.1) has submitted that the
Commission ought to require the sale of all CL’s foreign
assets and part of its business and network in France; the
Commission cannot accept this. If that course were to be
the
followed, CL would not be viable at
restructuring process. The Commission is of the opinion
that the distortion of competition observed can be very
significantly reduced by compensating measures on the
scale specified here, without the need to resort to so
extreme a solution.

the end of

Meetings between the Commission and the French
authorities took place at the beginning of May 1998, and
on 3 and 13 May Mr Strauss-Kahn sent Mr Van Miert
letters setting out the new compensating measures that
France was prepared to propose with a view to this De-
cision. The measures related to Europe and to the rest of
the world, and took the form of sales or closures of subsi-
diaries or branches:

— closures and sales in Europe amounting to FRF 556
billion, made up of FRF 529 billion outside France
and FRF 27 billion in sales inside France (not inclu-
ding the branch network), and

— closures and sales in the rest of the world comprising

assets worth FRF 64 billion.

The French authorities provided a confidential
list of
these undertakings by letter to Mr Van Miert dated 13
May.

The bulk of the sales linked to the additional aid is to be
completed by the time CL is privatized, that is to say by 1
October 1999. Sales which have not taken place by then,
as a result of market
factors duly substantiated and
acknowledged by the Commission, will in any event be
completed before October 2000.

Closures of branches or subsidiaries, like sales of assets,
have the effect of reducing CL’s commercial presence,
and can be accepted as compensating measures. In total,
CL would be complying with the figure of FRF 620
billion in sales or closures called for by the Commission
(FRF 645 billion including an additional FRF 25 billion
in the rest of the world provided for in 1995). Together
with the compensating measures to be taken under De-
cision 95/547/EC, this quid pro quo would reduce CL’s
balance sheet as it stood at 31 December 1994 by more
than one third. The closures and sales would free market
shares which could be taken up by CL’s competitors. Of
the total compensating measures in this form proposed in
1995 and 1998, 86 % of the Government’s undertakings
relate to Europe, including 82 % outside France, which is
in line with the common interest.

Subject to the other factors that have to be considered in
this Decision, then, the Commission is of the opinion
that the quid pro quo proposed by the French authorities
will allow the distortion caused by the aid to be reduced
very significantly.

(c) Additional compensating measures relating to the

network of branches in France

This aid comes in addition to what was approved before,
and the amount of aid involved this time is potentially
very much greater than the amount approved in 1995; so
that CL must be asked to make a further effort in respect
of its network in France, in order to free market share for
its competitors in France, which are affected particularly
badly by the distortion of competition caused by the aid.
information supplied by CL to the
On the basis of
Commission’s consulting bank, the plan presented in July
1997 called for a reduction in the number of outlets in
France to 2 146 in the year 2000 (all branches included;
personal, business and corporate functions alike); this was
a reduction of 6,6 % by comparison with the number of
outlets in 1996. In his letter to Mr Strauss-Kahn of 2
April, Mr Van Miert asked for a further effort on CL’s
part, to reduce the number of outlets in France to 1 850
by the year 2000, which the Commission’s consulting
bank judged compatible with the requirement that CL be
viable. This further reduction of about 300 outlets is a
substantial quid pro quo to compensate CL’s competitors,
and would mean that CL’s French network would have
been reduced by about 20 % by comparison with 1996.

The Commission has taken note of comments submitted
by Soci(cid:130)t(cid:130) G(cid:130)n(cid:130)rale in the course of these proceedings
(see section 5.1) according to which some measures that
would increase CL’s profitability and improve its competi-
tiveness cannot be considered to offset
the distorting
effect of the aid. The Commission would point out that
the additional compensating measures now being asked of
CL, especially with respect to its network in France but
also with respect
to its international business, go far
beyond the restructuring measures which CL projected in
the July 1997 plan.

In his letter of 3 May to Mr Van Miert, Mr Strauss-Kahn
undertook to reduce the number of branches in France to
1 850, as the Commission had asked.

On this basis the Commission is of the opinion that the
compensating measures to be taken in France, in addition
to the planned FRF 27 billion in the form of asset sales,
should encompass all
the group’s branches in France
(personal, business and corporate banking alike). By re-

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8. 8. 98

ducing CL’s commercial presence they will provide a very
significant quid pro quo to compensate CL’s competitors,
both French and European, by allowing them to develop
their business on the French market. The closures are to
take place by 31 December 2000.

would be equal to the discounted value of the extra 15 %
of MMR to be paid by EPFR on the outstanding portion
of the loan from CL; this discounted value would be
about FRF 5,5 billion for the period 2000-2014, according
to the Commission’s figures.

10.6 The restraining mechanism

The better fortunes clause which the French authorities
introduced in 1995 tends to restrain CL’s growth by
acting as a drain on its profits, and hence its own funds,
given the solvency requirement already discussed. In the
plan submitted in July 1997 the French authorities indi-
cated that they proposed to reconsider the clause, and
envisaged replacing it with an alternative that they did
not specify at that time. In their letter of 31 March 1998
they proposed that CL be allowed to redeem the clause in
exchange for a share issue reserved to the State.

the new private shareholders. But

The Commission acknowledges that maintaining a better
fortunes clause which apportions up to 60 % of CL’s
profits to the State until the year 2014, at a time when CL
is due to be privatized, is difficult to reconcile with the
requirements of
in
order to minimize the cost to the State and the amount of
aid, CL should buy back the clause at a market price, on
the basis of an independent valuation, so that the State
receives the discounted value of the proceeds of the clause
up to 2014, and the transaction does not comprise any
further State aid to CL. The valuation is to be submitted
to the Commission for its approval.

In May 1998 the French authorities also told the
Commission that they wanted to change the mechanism
of the loan from CL to EPFR, while maintaining the
restraining effect at present exercised on CL by the in-
terest rate carried by the loan (85 % of MMR). The
French authorities proposed that, for the period 2000-
2014, CL should convert into another form the current
value of the disadvantage it suffers as a result of the low
rate it collects on the EPFR loan, a value which the
Commission has put at FRF 7,2 billion over the period
1997-2000 and has deducted from the total aid granted
(see Table 15). This would be done by redrafting the
better fortunes clause: the proportion of profits withdrawn
would be increased in such a way that, given the increase
in the value of the clause (46) and of the residual value of
the State’s holding in CL, the effect on the State’s assets

(46) The value of the clause would increase as a result of two fac-
tors: the improvement of CL’s profits by 15 % of MMR on
the outstanding portion of the loan, and the change in the
volume of profits withdrawn under the clause.

The better fortunes clause, whose value would now have
increased, would then be redeemed by CL by means of a
share issue reserved to the State, to be subscribed by
EPFR. EPFR would sell these shares in the course of the
privatization process, so that
the effect on the State’s
assets of the two transactions — the change in the value
of the clause and the sale of the clause — would at worst
be neutral, given that the State would have foregone the
15 % of MMR interest concession on the loan to EPFR
and would have lost its revenues under the better fortunes
clause. On this basis the State aid to CL, after deduction
of the proceeds of privatization, would not be affected by
the changes to the hive-off mechanism.

Alongside this transaction,
restraining effect on CL,
given the following undertakings:

in order

to maintain the
the French authorities have

(i) 58 % of CL’s net profits up to and including 2003 will

be distributed as dividends;

(ii) the carryover of losses for tax purposes will come to
fortunes clause is

an end as soon as the better
redeemed;

(iii) the growth in CL’s consolidated balance sheet, as-
suming constant consolidation limits and exchange
rates, will be subject to a ceiling of 3,2 % per annum
between the end of 1998 and the end of 2001, and
until 2014 its solvency ratios will be maintained at no
less than their level at the end of 2001 (47), save in
exceptional circumstances duly substantiated to the
Commission and acknowledged by it.

The Commission can accept the overall mechanism for
increasing the rate of servicing of the loan from 85 % of
MMR to 100 % from 2000 to 2014, the change in the
drafting of the clause, the sale of the clause, and the alter-
native mechanism for restraining CL’s growth, provided
that the following conditions are satisfied:

— the estimate of the discounted value of the refinancing
burden on CL as a result of its loan to EPFR at 15 %
below the money market rate from 2000 to 2014, the
redrafting of the clause, and the value put on the
clause are to be based on a valuation by an indepen-
dent valuer;

(47) The Commission interprets this undertaking as referring to
the ratio of tier-one own funds and the Cooke solvency ratio.

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— the valuer’s report is to be forwarded to the Commis-
sion, which must approve its conclusions before any
change in the value of
the clause and before the
planned issue of shares in CL reserved for the State;

— the Commission may oppose the operation if it takes
the view that the better fortunes clause and the re-
financing burden on CL are not being given their full
values, so that new aid components may be appearing.

Provided it can satisfy itself fully on these points, the
Commission can conclude that
the restraining mech-
anism does not comprise any additional aid component,
and that it will continue to act as an appreciable restraint
on CL beyond the end of the restructuring plan.

10.7 Privatization undertakings given by the French

authorities

In conjunction with its examination of the compatibility
of the aid at issue, the Commission takes note of the
undertakings given by the Government with respect to
the privatization of CL, following on from the objectives
set when Decision 95/547/EC was adopted. In a letter
dated 13 May 1998, the Minister for Economic, Financial
and Industrial Affairs undertook to privatize CL by the
end of October 1999 in accordance with an open, transpa-
rent and non-discriminatory procedure. The State would
lose any role as lead shareholder, and its holding would
fall to less than 10 % of the capital. A privatization order
would be made by the end of 1998, and the sell-off would
begin on 1 March 1999.

to determine whether

The Commission takes note of these undertakings, and
recalls the general principles it applies in cases of privat-
there is any
ization in order
element of State aid, principles it set out in its Twenty-
third Report on Competition Policy (1993) (48). It considers
that the privatization ought to put an end to the problem
of corporate governance pointed out earlier, and ensure
that, in future, CL turns to its private shareholders and to
the market for any additional resources it may need.

10.8 Other conditions to be complied with if the aid

is to be compatible

(i) The Commission emphasizes that the sales of subsid-
iaries and branches must be such as to reduce the

(48) Twenty-third Report on Competition Policy, point 403. The
principles to which the Commission refers in order to deter-
mine whether a privatization comprises State aid had earlier
been indicated to the French authorities in a letter from the
Commission’s Director-General
for Competition dated 14
July 1993.

scope of CL’s consolidated accounts net of previous
sell-offs, and must be irrevocable. They must be
carried out in accordance with transparent procedures
which are open to any potential buyer, French or
foreign. The conditions must not include any clause
which might impose unacceptable limitations on the
number of potential candidates or which is tailored to
one or other potential candidate. The choice of buyer
must be made with a view to maximizing revenue
from the sale. The proceeds of the sale must be used
entirely for the financing of CL’s restructuring plan.

(ii) Compliance with this Decision

(a) The French authorities are to submit a progress
report every three months until 31 December
2000. The report is to give a detailed account of
the sales and closures agreed in connection with
this Decision, showing the date of the sale, the
book value of the assets at 1994, the price paid,
and any capital gain or loss. The first such report
is to be submitted on 1 October 1998. Subsequent
reports will be due on 1 January 1999, 1 April
1999, 1 July 1999, and so on. The three-monthly
progress reports for the year 1999 are to provide a
precise account of the progress of privatization.

(b) CL’s six-monthly and annual reports are to be
supplied to the Commission immediately they are
approved by the board of directors of the bank,
together with a review of progress with the bank’s
business plan.

(c) The Commission is to have unlimited access to
information. It may with the consent of
the
French authorities seek explanations and clarifica-
tion from CL direct. The French authorities and
CL are to lend their full cooperation in any
enquiries that may be requested by the Commis-
sion or by a consultant acting for it.

(d) The Commission is

to be kept

constantly
informed of the steps taken to privatize CL. The
authorities are to send it in advance any informa-
tion which might help to establish that the pri-
vatization is being carried out in accordance with
open,
transparent and non-discriminatory pro-
cedures. The Commission will examine the pro-
cedures in the light of the privatization principles
already referred to.

(iii) Decision 95/547/EC

The French authorities are to comply with the under-
takings set out in Article 4 of Decision 95/547/EC until
the end of the hive-off operation.

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11. CONCLUSIONS

condition that the change does not comprise any
further aid to CL.

11.1 Compatibility of the aid additional to the aid

already approved

The Commission concludes that the measures considered
in these proceedings in respect of the increase in CDR’s
losses and EPFR’s carrying costs, and the abandonment of
the requirement that CL finance the subscription of a
zero-coupon issue by EPFR, comprise aid additional to
the aid authorized by Commission Decision 95/547/EC,
which amounted to FRF 45 billion, and the Commission
Decision of 25 September 1996, which amounted to FRF
4 billion. The Commission estimates the additional aid at
FRF 53-98 billion, discounted (49).

The Commission accordingly concludes as follows:

(i) The restructuring plan submitted by the French auth-
orities has shown that CL can be viable. This is
confirmed by the conclusions of the Commission’s
consulting bank and by the new business plan
submitted by the French authorities in May 1998.

(ii) Despite its unparalleled volume, the aid is confined
to what is strictly necessary for the viability of CL,
provided that the neutralization of the EPFR loan is
confined to the period 1997-99.

sales

(iii) The very far-reaching programme of

and
closures
to which the French authorities have
committed themselves and the fact that the aid is
confined to what is strictly necessary mean that CL
will be financing a substantial proportion of
the
restructuring plan to the maximum extent allowed by
the resources available to it.

This set of undertakings was confirmed in three letters
dated 13 May 1998.

The Commission can conclude, then, in accordance with
the Community guidelines on State aid for rescuing and
restructuring firms in difficulty, that provided the French
authorities comply with the undertakings set out
in
Article 1(2) below, and with the conditions the Commis-
sion imposes in Article 1(3), the additional aid qualifies
for exemption under the beginning of the first sentence
in Article 92(3)(c) of the Treaty, and is compatible with
the common market.

11.2 Aid authorized by Commission Decision

95/547/EC

The aid which the Commission authorized in Decision
95/547/EC continues to be compatible with the Treaty,
always provided the French authorities and CL comply
fully with the obligations imposed by that Decision,
except where a change is authorized in this Decision.

The Commission would point out in particular that De-
cision 95/547/EC requires the French authorities and CL
to ensure that the quid pro quo provided for in the Deci-
sion is fully implemented,
is to say that CL’s
commercial presence outside France is reduced by 35 %
in balance sheet terms, equal to 50% of its assets in
Europe outside France. The reduction is to be assessed in
assets
proportion to the proportion of CL’s
accounted for by the asset on 31 December 1994, and is
to be complete by 31 December 1998,

total

that

(iv) The French authorities have put forward compensa-
ting measures concerning which it can be concluded,
first of all, that CL will be reducing its commercial
presence considerably,
in the common interest, so
that its balance sheet at the end of the restructuring
plan will have been reduced by one third by compa-
rison with 31 December 1994; and second, that the
compensating measures linked to the additional aid,
consisting of further closures and sales of assets worth
FRF 310 billion and the reduction of CL’s network of
branches in France to 1 850 in the year 2000, will
prevent excessive distortion of competition.

(v) An equivalent restraining mechanism may be substi-
tuted for the burden of 15 % of the money market
rate on the EPFR loan, and the drain on profits and
own funds caused by the better fortunes clause, on

(49) See Table 15.

HAS ADOPTED THIS DECISION:

Article 1

The measures submitted to the Commission in
(1)
September 1996 and the measures in the Cr(cid:130)dit Lyonnais
restructuring plan which was laid before the Commission
in July 1997, taking the form of a neutralization of the
loan to EPFR, a decision not to proceed with the zero-
coupon bond, and the coverage by the State of additional
losses made by CDR and EPFR, as amended by the
French authorities in accordance with this Decision,
constitute State aid caught by Article 92(1) of the EC
Treaty and Article 61(1) of the EEA Agreement. The aid,
which is additional to the aid authorized by the Commis-
sion in Decision 95/547/EC and the Commission de-
cision of 25 September 1996, has a value between FRF 53
and 98 billion. This additional aid may be declared

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compatible with the common market under Article
92(3)(c) of the EC Treaty and with the EEA Agreement
under Article 61(3)(c) of the Agreement, provided that
France complies with the undertakings set out in para-
graph 2 and the conditions set out in paragraph 3.

(2)

France gives the following undertakings:

(a) France undertakes to transfer Cr(cid:130)dit Lyonnais to the
in ac-
private sector no later than October 1999,
cordance with an open, transparent and non-discrim-
inatory procedure. The process can begin in 1998,
when a privatization order will be made, and will take
place in several stages. It will in any event be launched
before 1 March 1999. The State’s holding in the
capital of Cr(cid:130)dit Lyonnais will be reduced to no more
than 10 %, and the State will no longer be Cr(cid:130)dit
Lyonnais’s lead shareholder.

(b) As a quid pro quo to offset the aid, Cr(cid:130)dit Lyonnais
will sell off or liquidate assets worth FRF 620 billion
on its balance sheet at 31 December 1994. The reduc-
tion will be spread over the whole of its assets in
Europe outside France, with the exception in par-
ticular of its business in London, Luxembourg, Frank-
furt and Switzerland. Cr(cid:130)dit Lyonnais will be entitled
to manage accounts for the purpose of supplying
payment and disbursement services in the euro zone.
The preservation of these strategic businesses will be
offset by other assets in France and in the world. This
undertaking supplements the undertaking given on 18
July 1995, which called for a worldwide reduction of
35 %, equivalent to 50 % in Europe; that undertaking
is confirmed. The balance of
those sales is to be
completed by 31 December 1998. The worldwide
reduction of FRF 620 billion must have taken place by
the time of privatization. Either or both of these dates
may be postponed by a year as a result of market
factors duly substantiated to the Commission.

(c) Cr(cid:130)dit Lyonnais will reduce its network in France,
which will not exceed 1 850 commercial outlets in the
year 2000 for
the parent company and its retail
banking subsidiaries. This number includes outlets for
personal, business and corporate customers.

(d) To ensure successful privatization within the time
allowed, the better fortunes clause and the effect of the
partial neutralization of the loan after 1999 will be
valued by an independent valuer, and sold to the
market
indirectly via an issue of Cr(cid:130)dit Lyonnais
shares to be subscribed by EPFR, which will then sell
them in the course of the privatization process. Before
the share issue the valuation will be forwarded to the
Commission.

(e) In order to maintain the restraining effects on Cr(cid:130)dit
Lyonnais’s growth potential of
the better fortunes
clause and of the difference in rates of interest on the
loan to EPFR, and to ensure that Cr(cid:130)dit Lyonnais’s
development is controlled by comparison with those
of its competitors, (i) 58 % of its net profits up to and
including the financial year 2003 will be distributed as
dividends; (ii) the carryover of losses for tax purposes
will come to an end as soon as the better fortunes
clause is redeemed; (iii) the growth in its consolidated
balance sheet, at constant consolidation limits and
constant exchange rates, will be subject to a ceiling of
3,2 % per annum between the end of 1998 and the
end of 2001, and until 2014 its solvency ratios will be
maintained at no less than their level at the end of
2001, save in exceptional circumstances duly substan-
tiated to the Commission and acknowledged by it.

(f) The performance of all the undertakings set out in
points (a) to (e) may be verified by an independent
expert each year until the completion of the asset
sales. The French authorities will send the Commis-
sion a quarterly progress report and a detailed six-
monthly report on the application of the plan.

France has sent the Commission a confidential list of the
sales and closures referred to in point (b), by letter dated
13 May 1998.

To ensure that

(3)
the aid is compatible with the
common market the French Government shall ensure
that the following conditions are complied with:

(a) Implementation

All the undertakings and other measures provided for
in this Decision and the measures provided for in
Decision 95/547/EC which have not been changed in
this Decision must be implemented; they may not be
changed without the Commission’s prior consent.

(b) Procedure for the sale of assets

Sales of Cr(cid:130)dit Lyonnais subsidiaries and branches
shall be such as to reduce the scope of Cr(cid:130)dit Lyon-
nais’s consolidated accounts net of previous sell-offs,
and shall be irrevocable. They shall be carried out in
accordance with transparent procedures which are
open to any potential buyer, French or foreign. The
conditions may not include any clause which might
impose unacceptable limitations on the number of
potential candidates or which is tailored to one or
other potential candidate. The choice of buyers shall
be made with a view to maximizing revenue from the
sale. The proceeds of the sale shall be used entirely to
finance Cr(cid:130)dit Lyonnais’s restructuring plan.

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(c) Redefinition and operation of

the mechanism to

restrain Cr(cid:130)dit Lyonnais

The valuation of the discounted value of the burden of
refinancing on Cr(cid:130)dit Lyonnais from 2000 to 2014 in
respect of the loan it has given EPFR at 15 % below
the money market rate, the redrafting of the better
fortunes clause, and the valuation of the clause shall
be carried out by an independent valuer; the valuer’s
report shall be forwarded to the Commission, and the
Commission must approve its conclusions before any
change in the value of the clause and before Cr(cid:130)dit
Lyonnais issues the shares reserved for the State.

(d) Monitoring of this Decision

(i) The French authorities shall submit a progress
report every three months until 31 December
2000. The report shall give a detailed account of
the sales and closures agreed in connection with
this Decision, showing the date of the sale, the
book value of the assets at 31 December 1994, the
price paid, and any capital gain or loss. The first
report shall be due on 1 October 1998. The subse-
quent deadlines shall be 1 January 1999, 1 April
1999 and 1 July 1999.

(ii) Cr(cid:130)dit Lyonnais’s six-monthly and annual reports
shall be sent to the Commission immediately they
are approved by the board of directors of
the
bank, along with a review of progress with the
bank’s business plan.

(iii) The Commission shall have unrestricted access to
information throughout the duration of the plan.
It may with the consent of the French authorities
seek explanations and clarification from Cr(cid:130)dit
Lyonnais direct. The French authorities
and
Cr(cid:130)dit Lyonnais shall lend their full cooperation
in any enquiries that may be requested by the
Commission or by a consultant acting for it.

(iv) The Commission shall be kept

constantly
informed of the steps taken to privatize Cr(cid:130)dit
Lyonnais. The authorities shall send it in advance

any information which might help to establish
that the privatization is being carried out in accor-
dance with open, transparent and non-discrimina-
tory procedures.

(v) Any postponement of

the dates of sales and
closures to be carried out in accordance with the
mechanisms set out above in the undertakings of
the French authorities at point 2(b) in this Article
must have been approved in advance by the
Commission. These undertakings refer exclusively
to the dates of sales and closures of assets, and
leave unchanged the undertaking to privatize
Cr(cid:130)dit
been
completed in any event by October 1999 at the
latest.

Lyonnais, which must

have

(e) Decision 95/547/EC

The French authorities shall comply with the under-
takings in Article 4 of Decision 95/547/EC until the
end of the hive-off operation.

Article 2

Within two months of the date of notification of this
Decision, France shall
inform the Commission of the
measures taken to comply with it.

Article 3

This Decision is addressed to the French Republic.

Done at Brussels, 20 May 1998.

For the Commission

Karel VAN MIERT

Member of the Commission