2001/89/EC: Commission Decision of 23 June 1999 conditionally approving aid granted by France to Crédit Foncier de France (Text with EEA relevance) (notified under document number C(1999) 2035)
Date: 1999-06-23
Institutions: European Commission
Subjects: France, State aid, aid system, control of State aid, financial institution, report

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 23 June 1999

conditionally approving aid granted by France to Crédit Foncier de France

(notified under document number C(1999) 2035)

(Only the French text is authentic)

(Text with EEA relevance)

(2001/89/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European
Community, and in particular, Articles 87 and 88 thereof,

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

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

(3)

Whereas:

Economic Affairs and Finance released a statement to
the press announcing support for the ailing bank and
committing the Government to guaranteeing CFF's debts
and restoring its solvency ratio.

Taking the view that some of the planned measures for
supporting CFF were liable to involve State aid within
the meaning of Article 87(1) of the EC Treaty and could
not, at that stage and on the basis of the information
then available, be declared compatible with the common
market, the Commission on 3 July 1996 initiated the
procedure provided for in Article 88(2) of the EC Treaty
and requested the French authorities to provide further
clarifications concerning the planned aid measures.

1. PROCEDURE

(1)

By letter of 2 February 1996 the Commission requested
information from the French authorities concerning the
provision of an overdraft facility of some FRF 20 to 25
billion, via Caisse des Dépôts et Consignations (CDC), to
meet the liquidity requirements of the specialist financial
institution Crédit Foncier de France (CFF). The French
authorities replied by letters of 29 February and 21
March 1996, in which they supplied some of the docu-
mentation requested and informed the Commission that
the new Governor of CFF would shortly be putting
forward a plan for restructuring the bank.

(2)

By letter of 17 April 1996 the Commission asked the
French authorities to provide the information it needed
in order to complete its analysis of the public support
measures for the bank. On 29 April the Minister for

(1) OJ C 275, 20.9.1996, p. 2.

(4)

The solution to CFF's problems initially envisaged by the
French authorities was based on implementation of a
recovery plan, whereby the group was to reorganise and
refocus its activities on medium- and long-term property
lending, and on a link-up with a partner. Thanks to its
credit rating, the new shareholder was to have enabled
the cost of refinancing to be reduced and the bank's own
funds to be restored. After the appointment of a new
Governor, the bank began pursuing a resolute policy of
asset disposals and divestment of non-strategic interests.
An agreement was negotiated and concluded with the
trade unions enabling a plan to be launched which
involved 600 voluntary departures with a view to
reducing CFF's workforce to 2 400 by the end of 1997.

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(5)

(6)

Since the initial efforts to find a buyer were not
successful, the French authorities decided to nationalise
CFF in order to facilitate a link-up. The plan adopted by
the French Government along with its decision to
nationalise CFF, called the ‘Arthuis plan’ and communi-
cated to the Commission on 26 July 1996, provided for
CFF to be subsequently wound up and a public institu-
tion, Caisse Nationale du Crédit Foncier de France
(CNCF), created. Crédit Immobilier de France (CIF) was
to have taken over CFF's branches and management of
its portfolio of outstanding loans as well as some of its
staff. CNCF was to have received a capital grant of
FRF 2,5 to 2,6 billion from the Government in order to
acquire all the mortgage bonds taken over by CDC and
would have been responsible for underwriting CFF's
debts and recovering its property loans with a view to
winding up CFF in the long term (over a period of
around ten years). Following the announcement on 9
September 1996 of a takeover bid by Caisse des Dépôts
et Consignations (CDC) on behalf of the Government,
CDC then controlled 90,6 % of CFF's capital,
the
remainder being held by the savings scheme for CFF staff
(1,3 %), the pension fund for CFF staff (1,2 %) and other
shareholders (6,9 %). Faced with stiff opposition to CIF
among CFF staff, the plan was then abandoned by the
new Government that had been in office since June
1996, which instead planned simply to sell off CFF.

Not having received all the information requested, the
Commission sent the French authorities a reminder by
letter of 9 July 1997. The French Finance Minister
replied on 17 October 1997, informing the Commission
that the task of finding a reference shareholder had been
entrusted by CFF, in agreement with the Government, to
the bank Deutsche Morgan Grenfell, which had prepared
a presentation dossier and sent letters and presentation
memos to potentially interested candidates that had at
least FRF 10 billion in consolidated own funds. Offers
were to involve the shares in CFF held by CDC and were
preferably to cover the whole of the CFF group, but it
was also possible to submit partial offers or joint offers
with third parties where this would still result in privati-
sation. By letter of 21 November 1997 the Commission
asked for information on the procedure for finding a
partner that had been announced, and in particular the
report drawn up by Deutsche Morgan Grenfell. The
Commission received that report on 18 December 1997
and in the light of its analysis asked for further informa-
tion by letter of 26 January 1998 concerning any other
possible government support for CFF as part of the
sell-off.

(7)

According to press reports, several candidates interested
in CFF's commercial network came forward (the names
mentioned are GE Capital, the Azur-GMF group, the
French Post Office, the French savings banks and the US
companies General Electric and General Motors).
In
particular, the solution apparently preferred was to set
up a pool with minority holdings in CFF's capital around
an industrial operator with an excellent credit rating.
The group's financial documents were made available for

(8)

(9)

(10)

(11)

consultation to the most serious candidates from 19
January to 30 April 1998. In September 1998, after
several months of negotiation, the French Government
broke off discussions with the sole candidate for taking
over CFF, the US consortium GMAC-Bass. The reason
for the failure of negotiations was GMAC-Bass' unwill-
ingness to commit itself to taking over the whole of CFF
and the extent of the guarantees it was demanding.
According to the press, GMAC-Bass feared that,
if it
were to take over CFF's entire balance sheet (amounting
at that stage to around FRF 310 billion) without any
government guarantee, its own rating would be down-
graded by the rating agencies. GMAC-Bass therefore
requested the French Government to split CFF's balance
sheet in two and to keep for itself all the outstanding
liabilities covered by a public guarantee.

Following the failure of discussions with GMAC-Bass for
the takeover of CFF, the French Government notified the
Commission by letter of 18 September 1998 that it was
initiating a fresh procedure with a view to finding a
definitive solution for CFF. The new plan under consid-
eration, which was notified to the Commission by letter
of 24 December 1998 and communicated in full with all
the technical annexes on 23 March 1999, was a three-
stage operation: financial restructuring, recapitalisation
by the Government via CDC and initiation of a new
procedure for linking CFF to a partner.

it was

On 24 March 1999 the French Government announced
that
recapitalising CFF by a maximum of
FRF 1,85 billion via a shareholder's advance from CDC,
bearing interest at a short-term market rate. The French
authorities also stated that they intended to link CFF to a
partner before the end of 1999.
the
Director of the Treasury announced by letter of 11 May
1999 that CDC would dispose of its interest in CFF
(90,5 % of the capital and the shareholder's advance of
FRF 1,85 billion)
transparent and
through an open,
non-discriminatory procedure with bidding specifica-
tions.

In particular,

2. DESCRIPTION

2.1. Crédit Foncier de France

Crédit Foncier de France (CFF) is a medium-sized finan-
cial group. At the end of 1994 it had a balance-sheet
total of FRF 377 billion and a staff of 3 400. The group
was made up of 52 companies active in the spheres of
finance, low-cost housing and property development. It
had a national network of 145 permanent or temporary
sales outlets as well as subsidiaries in France and abroad
(United Kingdom, Spain, Italy and the Netherlands).

financial

institution within the
CFF is a specialist
meaning of the 1984 Banking Act. As such it is respon-
sible for carrying out various activities which are
regarded by the French authorities as public-service
tasks, for example the distribution of certain loans for
building low-cost housing (PLA — prêts locatifs aidés),

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the mortgage market and the
the organisation of
payment of premiums under housing savings contracts
to credit institutions. Its main public-service task was the
distribution of subsidised loans for the purchase of a
main residence (PAP — prêts pour l'accession à la
propriété). The Government paid CFF grants enabling it
to offer loans at preferential rates. CFF accounted for
75 % of the distribution and 100 % of the financing of
these loans. This task was discontinued from 1 October
1995 when home-ownership funding was completely
reformed.

(12)

Following the French Government's decision in October
1995 that no more new PAP loans were to be granted
and the reform of the PLA loans system in October
1996, total turnover in subsidised loans fell (–85 % over
the period 1994 to 1996). CFF still has to manage the
stock of outstanding subsidised loans, which is shrinking
as loans are reimbursed (scheduled or early repayments).
CFF's competitive activity, which is generally more prof-
itable but riskier, used to be limited but has become
increasingly important in recent years as a means of
counterbalancing the decline in the institution's public-
service tasks.

(13) Up to 1994 the bulk of CFF's capital (59 %) was widely
dispersed among private investors, with the remainder
institutional
being controlled by a group of national
shareholders (such as Caisse des Dépôts et Consigna-
tions, Assurances Générales de France and others, with
approximately 15 % of the capital) and foreign institu-
tions
(UBS Asset Management, Templeton Global
Investors and others, with around 22 % of the capital).
CFF staff held approximately 3 % of the capital. CFF was
nevertheless controlled by the Government, which
appoints its Governor and Deputy Governors. The
Government is also represented at the annual meeting of
shareholders and appoints one of three auditors who
have the task of ensuring that the articles of association
are strictly applied; it is also represented by a deputy
Government commissioner. By virtue of its legal status,
CFF is subject to public supervision in addition to the
usual checks carried out on limited companies that issue
securities and on credit institutions.

2.2. Description of the Government intervention

(14) Unlike the commercial banks, CFF has no traditional
deposit-taking activity and raises funds by issuing bonds
on the domestic and international markets which are
assigned a rating by the major international rating agen-
cies. The recession on the property market in the 1990s,

abolition of the PAP subsidised loans, over which CFF
had a near-monopoly, and, above all, CFF's recorded or
anticipated losses caused its long-term ratings to be
downgraded by Moody's to Baa1 and by Standard &
Poor's (S & P)
its
borrowing to the point where it was impossible for it to
tap the capital markets without compromising its profit-
ability.

increasing the cost of

to A1 (2),

(15)

In early 1996 CFF was refinanced by means of an over-
draft facility of FRF 20 billion, which could be increased
to FRF 25 billion, granted by CDC for a period of 18
months to enable it to overcome its liquidity crisis. The
accounts for 1995 showed a huge loss (FRF 10,8
billion) due to provisions of FRF 13,6 billion linked
largely to a poorly conducted policy towards lending in
the competitive property sector and insufficiently strict
monitoring of the risks involved. The group's own funds
were negative to the tune of FRF 2,4 billion. The extra-
ordinary general meeting of 28 June 1996 reduced the
registered capital
to FRF 943 billion by cutting the
nominal value per share from FRF 200 to FRF 25.

(16)

The statutory solvency ratio having fallen to 0,5 %, the
institution's survival was safeguarded by the Govern-
ment itself, which stepped in and guaranteed CFF's debt
and future solvency. The aid measures contemplated by
the French Government were as follows:

1. an overdraft facility of FRF 20 to 25 billion granted
by Caisse des Dépôts et Consignations (wholly owned
by the Government) for a period of 18 months;

2. a Government guarantee that all CFF debt represented
by securities would be honoured in terms of principal
and interest over the whole maturity range;

3. the Government's undertaking that every necessary
step would be taken to ensure that CFF could
continue to carry out its activities in accordance with
the prudential rules in force.

3. COMMENTS BY INTERESTED PARTIES

(17)

In the course of these proceedings, no comments were
submitted to the Commission by other interested parties
within the prescribed deadline.

4. COMMENTS BY FRANCE

(18) As regards the terms of the loan granted by CDC to CFF,
the French authorities put forward several arguments
aimed at demonstrating that the intervention was of a
temporary and urgent nature and that the terms of the
loan were dissuasive, given its limited duration and the
fact that the interest rates were progressive.

(2) Standard & Poor's rating agency uses the following scale: AAA: the
issuer's capacity to reimburse is extremely strong; AA: capacity is
very strong; A: capacity is still strong but the issuer is susceptible
to changes in economic conditions; BBB: capacity is adequate but
with great sensitivity to changes in economic conditions; BB and B:
speculative characteristics and uncertainty of payment; CCC, CC and
C: doubtful claim; D: already in payment default. Moody's scale for
investment grade risks is as follows: Aaa, Aa1, Aa2, Aa3, A1, A2,
A3, Baa1, Baa2. The
comparable on a
one-to-one basis.

two scales

are not

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(19) On the duration of

the French authorities
the loan,
stressed that it was reimbursed definitively and in full
eight months after it was granted. As regards the loan
guarantees, the selection of loans to local authorities
provided as collateral (3) to CDC was made up of loans
with a maturity of more than two years and of good
quality,
i.e. free from any arrears or risks of dispute,
amounting to FRF 27,8 billion. As far as the interest
rate was concerned, the average effective margin was 31
basis points, rising from 27 basis points in February to
41 basis points in August; it was therefore higher than
those observed on the interbank market.

(20)

(21)

(22)

The French authorities argued that the undertaking given
by the Minister for Economic Affairs and Finance on 29
April 1996 and reiterated in the statement of 26 July
1996, to the effect that all CFF's debt liabilities falling
due would be honoured, did not have the same legal
value as a genuine government guarantee. No details
were given of the technical and legal arrangements and,
even if there had been a formal government guarantee,
such an undertaking would have had to be written into a
finance bill. The Minister's declaration was therefore,
according to the French authorities, rather a political
commitment to monitor CFF's situation and to reassure
the financial markets.

The French authorities also stated that only some of the
bond issues (i.e. foreign-currency loans issued prior to 1
January 1991) were covered by a formal government
guarantee. A Government guarantee was granted during
the 1970s in respect of loans issued by State-owned
enterprises and specialist financial institutions in order
to finance the balance of payments in a context of high
inflation and exchange controls. The guarantee had been
withdrawn by the French Government since 18 January
1991 in view of progress in controlling inflation and the
greater stability of the French franc; loans issued by CFF
after 18 January 1991 were therefore not covered by a
formal guarantee provided by either the Government or
a public institution.

Lastly, with reference to Government guarantees for
CFF's assets, the public guarantee covering its mortgage
loans for housing purchases stems from an Act dated 31
December 1950: the conditions of the guarantee are
determined by agreement between the Government and
CFF under a procedure which ensures that the Govern-
ment guarantee is limited to not more than 50 % of the
value of the mortgaged property (60 % since 1991) and
is exercised only if the net amount collected through
foreclosure on a mortgage is insufficient to cover the
sum normally payable by the debtor. Since 1991 the

(3) By CFF as security for the loan.

(23)

agreement also provides for ‘incentive remuneration’ of
CFF for optimum operation of
the subsidised loans
guarantee fund.

By letter of 16 April 1999 the Commission requested
the French authorities to clarify the reasons that had
prompted the supervisory authority, the Commission
Bancaire,
to refrain from requiring CFF promptly to
restore its own funds to the appropriate level. The
French authorities replied in their letter of 30 April
1999 that they were not aware of the grounds on which
the decision of the Commission Bancaire was based, but
they considered it likely that the supervisory authority
had preferred the approach of looking actively for a
buyer while restoring CFF's viability rather than putting
it into liquidation.

5. ASSESSMENT OF THE AID MEASURES CONCERNED

5.1. Involvement of State aid in the measures

concerned

(24)

financial assistance provided by
In its appraisal of
the Commission applies the ‘market
Member States,
economy investor principle’, as set out in its communi-
cation on public undertakings (4). That communication
states that aid is involved in an operation where a
private
investor, operating under normal market
economy conditions, would not have undertaken it.

5.1.1. The credit line provided by CDC

(25) Under a protocol signed on 23 January 1996, CDC
granted CFF, until 31 March 1997, an overdraft facility
in the form of a renewable credit
line, guaranteed
through the assignment of loans granted to local author-
ities. The credit line of FRF 20 to 25 billion granted by
CDC for a period of 18 months was used for an average
amount of FRF 7,9 billion between 31 January and 30
August 1996, with a maximum drawing of FRF 12,4
billion made on 2 April 1996, the date on which it was
reimbursed. As regards the terms on which this over-
draft facility was granted, the average effective margin
was 31 basis points compared with the reference inter-
bank rate specified in the loan terms, rising from 27
basis points in February to 41 basis points in August
1996.

(26)

The credit line was intended to maintain CFF's liquidity
during a transitional phase in which it was unable to
borrow on the financial markets on normal commercial
terms. Since the beginning of 1996 and in the second
week of January 1996, CFF's 10-year bond issues were
quoted on the secondary market with a record yield gap
of almost 200 basis points (i.e. two percentage points of
interest) above the yields on Government issues of the
same duration. Faced with the deterioration in CFF's
financial situation, the Government, without being a
direct shareholder and through CDC (a public credit
institution which at the time had an interest of approxi-
mately 4 % in CFF), was alone in assisting CFF, the
private shareholders refusing to provide any support at
that stage.

(4) Commission communication to the Member States on the applica-
tion of Articles 92 and 93 of the EEC Treaty and of Article 5 of
Commission Directive 80/723/EEC to public undertakings in the
manufacturing sector (OJ C 307, 13.11.1993, p. 2).

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(27)

To determine whether the overdraft facility granted by
CDC should be regarded as state aid,
it has to be
compared with other loans normally granted on the
market by credit institutions. In particular, it has to be
established whether:

April 1996. By contrast, Moody's did not modify CFF's
long-term debt rating, which it gave as Baa1 in early
1996, and confined itself to changing its forecast from
negative to positive after the statements made by the
Government at the end of April.

(a) other private institutions would have granted it; and

(30) As part of the procedure the Commission assessed the
information provided by the French authorities, and in
particular its comments on the duration of the overdraft
facility, the interest rates applied and the guarantees
required.

(b) the terms on which the loan was granted (duration,
interest rate and guarantees) were in line with those
prevailing on the market.

(31)

In assessing these factors, account also has to be taken
of the specific conditions in which the credit line was
granted, and in particular the financial situation in which
CFF found itself in early 1996.

The Commission found that CFF used the credit line for
only eight months in view of the penalising terms on
which it was granted, which deterred use of the credit
the minimum necessary through
over and above
premiums on the basic rates that varied with the timing
of drawings (6). CFF took advantage of this respite in
order rapidly to find solutions to its debt problem on
the market and to improve its asset-liability manage-
ment. The loan therefore supported the ailing institution
at a critical moment in its financial restructuring, for a
limited period and in respect of a limited amount.

(28)

(29)

Looking at CFF's situation at that time, it should first be
stressed that — given its dependence on the capital
markets for financing its activities — CFF was also
dependent, as regards determination of
the rates at
which it could borrow, on the assessments of its finan-
cial soundness made by the rating agencies. The rating
agencies had begun to downgrade CFF's rating in 1993,
but the situation deteriorated in 1995 when Moody's
gave CFF a D rating, which indicates uncertain financial
soundness. That
in
January 1996 (to E +) to indicate very uncertain financial
soundness. By contrast, CFF's long-term rating, which is
the most important since it takes account not only of
financial soundness but also of any form of support or
protection from other parties, in particular the public
authorities, remained at a proportionately higher level
(Baa1), which shows that the market was anticipating
government support for CFF.

revised downwards

rating was

The fact that an institution is under the dominant influ-
ence and protection of the government, as in the case of
CFF, is reflected in the abnormal evolution of its rating.
Although certain institutions may be in serious financial
and economic difficulty, where the government retains
some form of control over them the rating assigned to
their borrowings does not deteriorate. To demonstrate
this process, Moody's has developed a system of bank
financial strength ratings which give an assessment of
the stand-alone financial soundness of an institution, i.e.
without any potential outside support (5). The evolution
of CFF's ratings are highly indicative in this respect. Its
bank financial strength was downgraded by Moody's
between 30 August 1995 and 1 May 1996 from C + to
E (the lowest possible rating) despite the French Govern-
ment's intervention to support it between January and

(32) As regards the collateral for the loan, the Commission
requested additional information in order to enable it to
check more effectively the soundness of
the loans
granted by CFF to local authorities and assigned as a
guarantee to CDC. The Commission found that the total
value of the claims provided as collateral exceeded the
total amount of the loan granted by CDC (7) and that the
claims assigned were exclusively loans to metropolitan
local authorities with a maturity of more than two years
and free from any arrears or risks of dispute.

(33)

The guarantee offered to CDC is in line with usual
banking practice and due diligence in concluding
contracts. It is standard banking practice to require as
collateral claims worth more than the amount loaned:
the extra amount also comprises a further guarantee for
the creditor to cover the statistical risk of incomplete
fulfilment of the debtor's obligations. Furthermore, the
greater the risks involved in the loan, the more the
guarantees provided must be readily and surely realis-
able. Given their high quality, the assets assigned as
collateral by CFF to CDC can be regarded as a propor-
tionate guarantee, despite the particularly high risk
normally attached to a loan to an institution in diffi-
culty, as was CFF at that time.

(34) As far as the rates applied by CDC to the loan are
concerned, the Commission notes that CFF had to pay a
premium over and above the average French interbank
market rate. That rate is reserved for intermediaries with
the best risk rating. The extent of the spread determined
in line with the risk of default by the borrower, the
existence of penalties linked to the amounts drawn, and
the duration of the credit line are factors to be taken
into account in determining whether the contractual
conditions linked to the rates applied to CFF can be
regarded as consistent with banking practice or whether,

(6) On average,

the rates applicable were as

follows: TIOP (Paris
average interbank offered rate) + 0,25 % for drawings before 3 June
1996; TIOP +0,40 % for drawings between 3 June and 1 October
1996; TIOP + 0,675 % for drawings between 1 October 1996 and
31 March 1997.

(5) See the publication Moody's assigns bank financial strength ratings to

540 banks, Moody's, New York, September 1995.

(7) The net excess was FRF 27,8 billion at 31 December 1995, exclu-
ding doubtful claims and arrears, out of total outstanding claims of
FRF 37,6 billion on that date.

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on the contrary, they involve preferential treatment and
could possibly not be accepted as compatible with the
competition rules. In view of the fact that, as a result of
the spread, the total cost to CFF was approximately
FRF 2 billion more than it would have been if the
interbank reference rate had been applied, and that the
contractual
the loan comprised penalties
designed to prevent the overdraft facility being turned de
facto into long-term financing,
the rate conditions
applied to CFF can be regarded as being in line with
banking practice.

terms of

(35)

By way of conclusion, the Commission has found that
the conditions attached to the credit line granted by
CDC to CFF were in line with banking practice for a
loan in a risk category similar to that of CFF in January
1996 and comprised penalties aimed at encouraging the
institution quickly to find other less costly sources of
finance or solutions to its liquidity imbalance at the
earliest opportunity,
in particular through the assign-
ment of claims on its portfolio of loans to local authori-
ties. On that basis, the overdraft facility does not consti-
tute aid.

5.1.2. The government guarantee covering CFF's debts

(36) On 29 April 1996 the French authorities announced
that CFF had recorded a loss of FRF 10,8 billion for
1995, which placed it in an extremely serious situation,
with more than FRF 2 billion of negative own funds. In
a statement issued on the same date, the Minister for
Economic Affairs and Finance announced that
the
Government had given an assurance that all CFF debt
represented by securities would be honoured in terms of
principal and interest over the whole maturity range. At
the time, the guarantee covered approximately FRF 260
billion of CFF borrowings.

(37)

The guarantee was confirmed a few months later. In his
statement of 26 July 1996 the Minister further indicated
that ‘the institution's situation has therefore prompted
in accordance with the
the Government to intervene,
undertakings given on 29 April,
in keeping with the
interests of public finances, the employees of Crédit
the holders of shares and bonds
Foncier de France,
issued by it and the Paris
stock exchange’. Being
addressed to the public, the Minister's statement was
therefore intended to reassure CFF's counterparties, who
were concerned about the serious financial difficulties of

their debtor, as to the quality of its debt; since CFF was
also highly active on international markets, those coun-
terparties were largely foreign investors. Nevertheless,
the statement by the Minister for Economic Affairs and
Finance did not specify the duration of the guarantee,
the amount covered or any remuneration required in
return.

(38) On the grounds

that

the Government guarantee
covering all of CFF's debt could constitute restructuring
aid, the Commission requested further information on
the public guarantees or any other Government protec-
tion enjoyed by CFF.

(39)

(40)

(41)

The Commission has assessed the comments submitted
by the French authorities concerning the guarantee
covering CFF's liabilities, and it takes the view that the
statement by the Minister cannot be regarded — as
suggested by the French authorities — simply as a non-
legally binding political commitment. The arguments
put forward underestimate the considerable impact of a
statement of this kind by a minister responsible for
economic affairs and finance.

Looking not merely at the aims but, as stressed by the
Court of Justice, above all at the effects (8) of Govern-
ment support measures, it can only be concluded that,
by reassuring creditors as to the quality of their claims,
the statement in question had the effect of averting
demand for reimbursement of CFF securities during a
serious liquidity crisis, at a time when the institution was
unable to obtain finance on the market on normal
terms. The Commission considers that it also had the
following effects. Firstly, it avoided the need for CFF to
use the credit line granted by CDC for extraordinary
transactions resulting from possible demand for reim-
bursement of loans from creditors anxious at the bank's
financial situation, which would have diverted funds
away from measures to restore its economic and finan-
cial viability. Secondly,
it enabled the bank's manage-
ment to draw up and subsequently implement a restruc-
turing plan from a long-term perspective given the
security afforded by the Government support. Thirdly, it
enabled CFF to obtain permission from the Commission
Bancaire to continue in business despite having an
inadequate solvency ratio.

It should be stressed that
the Commission Bancaire
allowed CFF to operate for a long period with a solvency
ratio well below that required under the Community
prudential rules. Although the Government undertook
to raise the ratio to the statutory minimum, effective
public involvement was not announced until March
1999. It is highly likely that, in allowing CFF to continue
in business outside the prudential rules, the Commission
Bancaire did not consider the forthcoming recapitalisa-
tion by the Government to be adequate but had ascer-
tained that, if CFF's difficulties were to worsen further,
the Government guarantee announced by the Minister
would be called upon.

(8) According to the Court of Justice, Article 87(1) of the Treaty does
not distinguish between measures of state intervention by reference
to their causes or aims but defines them in relation to their effects
(see in particular its judgment of 26 September 1996 in Case C-
241/94 France v Commission [1996] ECR I-4551).

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(46)

(47)

(42)

that

Indirect confirmation of the awkward position in which
the Commission Bancaire was placed by the uncertainty
surrounding recapitalisation of CFF by the Government
is given by the fact
in 1997 the Commission
Bancaire apparently invited CDC, which since the take-
over bid in late 1996 held more than 90 % of CFF's
capital, to recapitalise CFF so that it would comply with
the prudential ratios. CDC is thought to have replied
that its intervention in favour of CFF was limited to
granting the overdraft facility and that it controlled CFF
only on behalf of the Government, and it therefore
refused to provide it with fresh resources that would
give it the requisite own funds.

(43) Although the Government's pledge did not specify in
formal terms the technical arrangements for its support,
it was nevertheless followed by concrete steps to assist
CFF by the Government, which formally took control of
the bank via CDC. Following the statement issued on 29
April 1996 and confirmed on 26 July 1996, CDC,
which had already granted the emergency loan to CFF in
January 1996, bought on the market in October 1996
on behalf of the Government 90,6 % of CFF's capital for
much more than the market price at the time: until the
takeover bid was announced at a price of FRF 70 per
share, CFF shares were being quoted at between FRF 29
and FRF 40, although it was known that a purchaser
was being sought. The fact that the Treasury bank took
control of CFF, albeit temporarily with a view to sub-
sequently selling it off, therefore confirmed in the eyes
of the public that the Government was determined to
ensure its survival.

(44)

The Commission takes the view that, although the state-
ment issued by the Minister in April 1996 was not
legally formalised, it nevertheless had substantial effects
and should therefore be deemed equivalent to a guar-
antee and assessed in the light of the market economy
investor principle as set out by the Commission in its
communication to the Member States of 13 November
1993 (9).

(45) When the Commission applies the market economy
investor principle to government guarantees, it has to
assess the existence of aid by comparing the terms of the
guarantee with those which the beneficiary would have
obtained on the market at the time when the decision to
support it was taken and which normally depend on the
assessment of the beneficiary company's financial situa-
tion and future prospects. In particular, where Govern-
ment support is provided by means of a guarantee, it
has to be established whether it is not subject to specific
conditions. Aid is involved, for example, where the guar-
antee covers a firm's debts and there are no quantitative
or time limits on its use by the beneficiary and/or if the

(9) See footnote 4.

remuneration is not in line with conditions prevailing on
the market for similar transactions.

In the case in point the Commission notes that the
Government guarantee was unlimited both in time and
in terms of the amount involved, and that it was in no
way remunerated. The Minister's general
statement
related to all the bank's liabilities represented by securi-
ties, without specifying the nature or amount of those
liabilities; it did not make it clear, in particular, whether
this meant only debt represented by a security or also
other debts, for example subordinated debts.

If

the

the guaranteed financing. Otherwise,

The guarantee that all CFF's debt liabilities falling due
would be honoured could have covered different types
of debt.
it related only to ‘debt represented by a
security’ as shown on the 1995 balance sheet, it covered
an amount of nearly FRF 268 billion; otherwise an extra
FRF 9,2 billion in subordinated loans and securities
would have to be included. However, on the basis of the
clarifications provided
French authorities
by
concerning the existence of a system of statutory guar-
antees, in determining the amount of the State aid the
the Government
considered that
Commission has
guarantee does not cover the total nominal amount of
CFF's debt represented by securities. Given the specific
status of building societies (sociétés de crédit foncier), loans
distributed by these institutions enjoy a special privilege
provided for by the Act of 28 February 1852 and
confirmed by the Act of 4 January 1993, which lays
down a link between financing and loans whereby the
amount of outstanding loans granted in accordance with
the articles of association must always be at least equal
to that of
the
building society has to redeem some of its borrowings in
order to fulfil the condition. Claims arising from loans
are affected to some extent by the value of the property
the
on which the creditors have a first mortgage:
amount of property loans is at the outset equal to not
more than 62 % of the value of the property or, alterna-
tively,
is covered by a guarantee granted by a public
authority or a specific statutory procedure. Given the
system described,
the Government guarantee
covering borrowings by building societies would appear
to be additional to the special claim on the property or
the guarantee granted by a public authority, which
improves the liquidity of CFF's claims. CFF's creditors are
thus reassured as to the reimbursement on maturity of
the amounts they have loaned to it, without having to
take legal action to call on the mortgage security. More-
over, if the Government has to honour the guarantee it
will, thanks to the mortgage security, be likely to recover
a substantial proportion of the amount paid. This is not
the case of
the abovementioned subordinated debts
which, by definition, do not have any priority and are
not much more likely to be recovered than shareholders'
equity.

then,

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L 34/43

(48)

(49)

In conclusion, as far as the terms of the guarantee are concerned it should be noted that no limit was
placed on its duration and no remuneration or quid pro quo for the Government was stipulated.
Furthermore, as already pointed out, at the time the guarantee was granted CFF's situation was so
serious that it was unable to obtain a guarantee on comparable terms from a market economy
investor: only the Government was prepared to provide support. The Government guarantee
therefore constitute State aid. It enabled CFF to continue carrying out its activities for nearly three
years in conditions in which it would normally have been impossible to grant any other institution
the same authorisation to carry on banking and financial business.

In order to determine the amount of the aid, an estimate can be made of the price that CFF would
have had to pay if it had had to purchase the guarantee on the market. To that end it is necessary to
estimate the probability of reimbursement of a financial instrument (loan, bond, guarantee) with
characteristics similar to those of the government guarantee granted to CFF, and in particular
indefinite duration, the probability of recovery of mortgage loans and the theoretical probability of
failure of institutions with the same rating as that assigned to CFF at the time the guarantee was
granted (Moody's: Baa1; S & P: A1). That probability, in conjunction with the above factors, makes it
possible to calculate the premium (spread) on the risk-free rate for a banking product with the same
characteristics as the guarantee in question. On this basis, the remuneration that the Government
should have demanded for this support can be calculated at FRF 14,6 billion.

(50)

The government guarantee in respect of CFF's debt also constitutes indirect support for the bank's
creditors. Following the Government's decision to guarantee all of CFF's debt, the value of its
creditors' claims rose as a result of the greater certainty of reimbursement provided by the public
guarantee. Most of CFF's debt is represented by bonds that are held anonymously and can be
transferred without written formality.

5.1.3. The Government's undertaking that CFF would comply with the prudential rules

(51)

The same press statement issued on 29 April 1996 by the Minister for Economic Affairs and Finance
announcing the government guarantee for CFF's debt also contained a pledge on the part of the
French Government that CFF would comply with the prudential rules. As already mentioned in
connection with the debt guarantee, the statement was intended to reassure CFF's counterparties. The
specific objective in this case was to restore confidence among the bank's staff, who were anxious
about its future and had on 22 March 1996 already sounded the alarm as they were entitled to do
under the Act of 1 March 1984 on prevention of company failures.

(52) However, since an adequate level of own funds is a basic and necessary condition for carrying on
banking business, the Minister's statement implied that the Government was prepared to provide the
financial resources necessary for ensuring the institution's survival and viability. At the time of the
Minister's statement CFF's own funds requirements were considerable: substantial losses had caused
the solvency ratio to fall to 0,5 %. When proceedings were initiated under Article 88(2) of the Treaty
the Commission did not have sufficient information to quantify the extent of such possible public
assistance; press reports referred at the time to a minimum tier-one own funds requirement of FRF 8
billion in order to achieve a solvency ratio of 8 %.

(53)

In accordance with Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for
credit institutions (10), as last amended by Directive 92/30/EEC (11), the banking supervisory authori-
ties must ensure that a bank whose solvency ratio drops below 8 % takes the necessary steps to
restore the ratio to the appropriate level as quickly as possible, through recapitalisation or by
reducing its liabilities, failing which its banking licence is to be withdrawn and it is to cease its
activity. As already stated in other Commission Decisions concerning banks, such recapitalisation
operations constitute aid if they are not carried out by the Government under normal market
conditions, even if the amount incurred in recapitalising the assisted institution is less than it would
have cost to wind it up. The minimum solvency requirement is one of the criteria for determining
the viability of a bank and at the same time ensures that there is a level playing-field since, in theory,
banks can always reduce their liabilities in order to meet the solvency requirement rather than
increasing their capital.

(10) OJ L 336, 30.12.1989, p. 14.
(11) OJ L 110, 28.4.1992, p. 52.

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(54)

(55)

(56)

Since the liquidation option is always open, a recapitalisation operation of this nature constitutes aid
if it is not performed under normal conditions that are acceptable in terms of remuneration to a
private investor. When comparing the action by the Government with the behaviour of a market
economy investor, the assessment of the amount of the aid must be based on a comparison between
the cost of the operation and its correctly discounted value.

Since 1996, despite creative accounting and the sale of property assets, CFF was unable to comply
with the prudential requirements without recapitalisation measures. By letter of 24 March 1999 the
Minister for Economic Affairs and Finance informed the Commission that on the basis of the
accounts for 1998 the amount of the recapitalisation had been fixed at FRF 1,85 billion. The
operation was to be carried out by means of a shareholder's advance by CDC, remunerated at a
short-term market rate. When CFF was sold, the advance would be repaid and then consolidated into
CFF's capital by the buyer. Nevertheless, a recapitalisation limited to FRF 1,85 billion anticipates and
presupposes deconsolidation of the subsidiary Crédit Logement (CLog), which has not so far been
effected, and compliance with the objective set by the Commission Bancaire of a tier-one own funds
ratio for CFF of at least 6 %.

Expansion of CLog's business due to recovery of the housing market, combined with rapid develop-
ment of the secured loans sector, caused a steep increase in the weighted total of CLog's outstanding
loans which CFF, given the size of its stake in CLog (71 %), consolidates in its accounts. CLog's loans
are economically more risky and therefore carry a higher prudential weighting, resulting in a greater
own funds requirement for CFF. In their letter of 24 December 1998 the French authorities informed
the Commission that discussions had begun with the other CLog shareholders on reducing CFF's
interest in CLog from 71 % to less than 20 % in order to alleviate over the ensuing months the own
funds burden carried by CFF (12). On the basis of the information provided by the French authorities
the Commission estimates CFF's own funds requirements at between FRF 1,357 billion and
FRF 5,914 billion according to various assumptions regarding the tier-one own funds ratio required
by the Commission Bancaire and the extent of CFF's interest in CLog ultimately decided on.

Table 1 — Capital requirements of Crédit Foncier de France

Stake in Crédit Logement

(in FRF million)

Tier-one own funds solvency
ratio

71 %

51 %

20 %

10 %

0 %

(unchanged)

1 849

1 321

1 646

1 357

1 357

3 857

3 329

1 646

1 357

1 357

5 914

5 385

1 801

1 801

1 801

4 %

5 %

6 %

Source:

French authorities

(57) On the basis of the information available, the Commission concludes that the Government's pledge
that CFF would comply with the prudential rules constitutes aid whose compatibility must be
assessed in the light of the measures to restructure CFF. The Commission bases its assessment of the
aid on the scenario of a capital increase limited to FRF 1,85 billion (FRF 1,4 billion discounted to
1996), as notified by the French authorities, assuming that the reduction of CFF's interest in CLog
will be sufficient for that purpose (see Table 1).

(12) The denominator of the solvency ratio comprises risk-adjusted assets.

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L 34/45

(58)

In conclusion, the total aid granted to CFF amounts to FRF 16 billion as set out in the following
summary table.

Table 2 — Summary of aid measures (discounted to 31 December 1996)

Measures concerned

Amount of aid

(in FRF billion)

Restructuring aid

— Government guarantee

— own funds

14,6

1,4

Total

16,0

5.2. Effect on trade between Member States

(59)

The liberalisation of financial services and the integration of financial markets are making intra-
Community trade increasingly sensitive to distortions of competition.

5.2.1. Distortion of competition

(60) When aid is granted to a banking group such as CFF, which supplies loans and other financial
services to businesses and collects resources from a wide range of customers, it is liable to distort
competition with other credit institutions. Aid to the weakest institutions has a harmful effect and
contributes to downward pressures on banking margins. Aid encourages inefficiency and defeats
market discipline. Protection by a government which is ready to intervene should credit institutions
run into difficulties removes the incentive for creditors to monitor the behaviour of their debtors.
Institutions are no longer subject to the supervision and verdict of the markets. Not only is
protection of this nature unjustified and excessive, it also acts as an incentive to poor management
on the part of credit institutions.

(61)

In terms of the collection of resources, an area where the degree of competition is also high, the
distortion of competition caused by the aid was considerable since CFF was a fairly major borrower
on international financial markets. The Government guarantee conferred on CFF a substantial
competitive advantage in that area.

5.2.2. Effect on trade between Member States

(62) Although banks can in principle offer their services freely and without restriction across frontiers,
principally by taking deposits and granting loans, they encounter obstacles to their expansion
abroad.

(63)

These obstacles are frequently linked to the firm local rooting of domestic banks, which makes
market entry more expensive for foreign competitors. Since completion of the single market has
given banks the opportunity of offering their services in other Member States, any aid granted to a
is liable to restrict these opportunities.
bank, whether it operates nationally or internationally,

(64) Aid designed to secure the survival of banks, even operating only at local

level, which would
otherwise have been forced out of the market as a result of their lower profitability and their lack of
competitiveness, may therefore distort competition at Community level since it makes it more
difficult for foreign banks to enter the French market.

(65) Without the aid in question, CFF would probably have had to be wound up. Under such circum-
stances, CFF's assets could have been purchased by foreign competitors wishing to acquire a
significant commercial presence in France. CFF's customers would have had to turn to another bank,
possibly from another Member State.

(66)

The aid to CFF must consequently be deemed to be caught by Article 87(1) of the EC Treaty since it
distorts competition to an extent likely to affect intra-Community trade.

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5.3. Examination of the compatibility with the Treaty of the aid to CFF

(67) Having established that the financial support measures granted to CFF involve State aid, the
Commission has to examine whether that aid can be declared compatible with the common market
in accordance with Article 87(2) and (3) of the EC Treaty.

(68)

(69)

It should first be noted that the aid under examination is not aid of a social character granted to
individual consumers, or aid to promote the development of certain areas of France. Neither is it aid
designed to remedy a serious economic disturbance since it is intended to remedy the difficulties of a
single recipient, CFF, and not those of all operators in the sector.

The Commission considers that CFF's problems do not stem from a systemic banking crisis in
France. CFF is not the only French credit institution in difficulty, and a number of other banks,
particularly State-owned ones, are also encountering difficulties; however, the causes of CFF's losses
are specific to itself and seem to be linked largely to a poorly conducted policy towards lending in
the competitive property sector by its subsidiaries and insufficiently strict monitoring of the risks
involved. Neither can the aid therefore be justified in the Community interest on the grounds of the
development of a generalised banking crisis.

(70) Only the derogation provided for in the second part of Article 87(3)(c) can possibly be taken into
consideration. The compatibility of the aid measures must be assessed on the basis of the specific
rules governing rescue and restructuring aid (13). The general principle is that State aid to firms in
difficulty is compatible if a number of conditions are met, and in particular in the case of
restructuring aid:

1. full implementation of a restructuring plan based on realistic assumptions and making it possible
to restore within a reasonable timescale the required minimum return on capital invested and
thus to secure the firm's long-term viability;

2. provision of sufficient quid pro quos to offset the distortion of competition and therefore make it

possible to conclude that the aid is not contrary to the common interest;

3. proportionality of the aid to the aims pursued and limitation of the amount of the aid to the
minimum necessary for restructuring, to ensure that the recovery effort receives maximum
support from the firm itself;

4. full implementation of the restructuring plan and compliance with any other obligation laid down

by the Commission in its final decision;

5. establishment of arrangements for monitoring fulfilment of the preceding condition.

In accordance with the guidelines on restructuring aid, the Commission considers that such aid
should normally be necessary once only.

5.3.1.1. V i a b i l i t y o f

t h e e n t e r p r i s e

(71)

In a letter dated 21 March 1996 the French authorities informed the Commission that CFF's new
Governor was preparing a restructuring and strategic redeployment plan for the bank. The plan was
to place CFF on a sound footing and restore its viability with a view to linking it to a partner. The
plan did not initially provide for an increase in the bank's capital by the Government, which hoped
that the measures included in the plan would be sufficient to generate the necessary resources for
recapitalising CFF.

(72) While it was looking for a reference shareholder, and especially from 1996 onwards, CFF embarked
on an internal restructuring process based on realignment on its core business, namely loans for
owner-occupied or rented housing, granted chiefly to private individuals. The business strategy
hinged on five activities around which the new organisational structure was devised. The internal
restructuring rationalised the organisation chart by grouping together activities of the same type with
a view to clarifying responsibilities and achieving economies of scale.

(13) Community guidelines on State aid for rescuing and restructuring firms in difficulty (OJ C 368, 23.12.1994, p. 12).

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(73) Marketing was the priority of CFF staff and management, with significant results in terms of turnover
in loans in the competitive sector, which grew from FRF 6,1 billion in 1995 to FRF 11,5 billion in
1998. Thanks to the efforts of its commercial network, CFF gained market shares in its traditional
area of activity, regulated loans. It improved its commercial methods with the introduction of sales
training in early 1998.

(74)

(75)

The policy of restructuring and divestment in the context of refocusing on the core business helped
at the same time to improve the group's liquidity and restore its own funds. In 1996 CFF sold
non-strategic assets and holdings worth FRF 23 billion and finalised transactions involving the
securitisation and direct sale of claims on local authorities amounting to FRF 22 billion, of which
FRF 11 billion by securitisation. These transactions enabled CFF first to reimburse the advance
provided by CDC and, by introducing asset-liability management tools, to refrain after the January
1996 crisis from raising funds on the capital market.

CFF's cash position is now positive by a substantial margin, not only owing to the disposal of
considerable amounts of local-authority loans and the sale of other assets, but above all thanks to
early repayments by its customers in response to the fall in market rates. In 1996 early repayments
were made in respect of nearly all outstanding loans, generating FRF 26 billion in addition to the
FRF 9 billion in contractual amortisations and the FRF 21 billion from disposals of local-authority
loans. This made it possible to cope with the production and redemption of maturing securities and
other debts and to add FRF 10 billion to the securities portfolio. Since high levels of early repayment
continued in 1997 and 1998, CFF fulfilled all its commitments until 1999 while maintaining the
turnover envisaged in the business plan; if necessary the bank can carry out securitisation trans-
actions or realise assets in its bond portfolio in order to raise funds.

(76) As regards the evolution of bad debts and provisions, the total amount of doubtful outstanding
claims was lowered in parallel with the fall in total loans outstanding. Provisions for doubtful claims
fell from FRF 9,7 billion in 1995 to FRF 5,2 billion in 1998, a significant improvement achieved
through the strict risk selection policy pursued in connection with the grant of loans (risk manage-
ment) as a direct consequence of the refocusing of the bank's activities on low-risk sectors (housing
credit). As regards the system for monitoring the risks and liabilities entered into by its subsidiaries,
CFF recognised that risk monitoring tools existed generally within the group, but that they had
previously not been upgraded quantitatively and qualitatively in line with the needs of modern
management, especially in the context of the diversification which CFF had undertaken. Since 1996,
therefore, CFF has endeavoured to improve the control of the parent company over its subsidiaries: a
group committee is responsible for constantly checking that the strategy pursued by subsidiaries is
consistent with that of the parent company and provides a forum for discussing common problems.
The monitoring of subsidiaries comprises quarterly reporting of results and of the main financial
indicators of the cash position, as well as updating of the annual results forecasts. The reporting is
supplemented by monitoring of the business results. As far as risk control is concerned there are two
committees, one responsible for authorising commitments totalling more than FRF 5 billion by CFF
subsidiaries in respect of entities outside the group, and the other for dealing with large risks of
which the aggregate amount per client amounts within the group to at least FRF 5 billion.

(77)

The following table gives the balance-sheet data for the CFF group from 1995 to 1998.

Table 3 — Consolidated balance sheet of the CFF Group

1998

1997

1996

1995

(in FRF billion)

Assets (net)

Government paper

Claims on banks

Claims on customers

Securities portfolio

Other assets

Prepayments
income

and

accrued

14,4

21,1

193,8

33,6

13,0

10,6

12,4

36,8

228,2

16,6

4,8

10,7

3,1

45,5

257,4

15,6

5,0

14,0

3,7

51,4

299,3

9,9

6,3

11,4

Total

286,5

309,5

340,6

382,0

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1998

1997

1996

1995

(in FRF billion)

Liabilities

Banks

Customers

Securities

Other liabilities

Accruals and deferred income

Provisions for risks

EGBR

Subordinated debt

Minority interests

Consolidated own funds

Consolidated result

39,4

5,4

194,4

14,0

12,6

5,2

1,3

11,7

0,8

0,5

1,2

44,1

5,3

215,9

15,3

11,2

5,5

0,9

11,2

0,7

– 1,5

0,9

47,3

4,9

241,4

16,5

13,1

7,1

0,7

10,3

0,7

– 2,3

0,9

Total

286,5

309,5

340,6

Off-balance-sheet items

Commitments given

Commitments received

Forward
transactions

foreign-exchange

Transactions involving forward
instruments
financial

142,0

0,9

69,7

107,7

122,3

1,4

78,8

102,6

114,4

20,5

67,2

73,9

60,9

5,2

266,0

19,5

13,0

9,7

0,7

9,2

0,3

8,3

– 10,8

382,0

112,8

1,0

75,1

75,4

(78)

Since 1996 margins have been increased in line with the objectives of the business plan. The greatest
efforts have focused on structural costs, with a view to adjusting resources to the fall in the level of
activity. Between 1995 and 1998 the workforce was reduced by approximately 30 % (from 3 287 to
2 371), enabling staff costs to be cut by 25 %. Total operating charges were reduced by 22 % over
the same period. Since the exceptional loss sustained in 1995 the group has accumulated profits
which, albeit still on a modest scale, have led to an improvement in consolidated own funds. The
contraction in net receipts from banking resulting from the reduction in the overall interest margin
(foreseen in the business plan) has been neutralised not only by the reduction in general operating
charges but also by the capital gains realised on disposals of local-authority loans and by the
reduction in value adjustments in respect of claims and financial assets (thanks to improved risk
management) and in depreciation and provisions.

(79)

The following table shows the evolution of the CFF group's consolidated results.

Table 4 — Profit and loss account of the CFF Group

(in FRF billion)

Banking operating income

Banking operating charges

Other income and charges

Net receipts from banking

Operating
and
charges including staff costs

administrative

Gross operating result

Risk charges

Exceptional

income/charges

Other accounts

Consolidated net result

1998

25,2

– 22,2

0,5

3,5

– 2,0

– 1,2

1,5

– 0,6

– 0,1

0,4

1,2

1997

28,3

– 24,5

0,3

4,1

– 2,3

– 1,5

1,8

– 0,9

– 0,1

0,1

0,9

1996

31,2

– 26,8

0,1

4,5

– 2,3

– 1,5

2,2

– 1,7

0,2

0,2

0,9

1995

34,2

– 29,4

0,1

4,9

– 2,8

1,7

2,1

– 13,6

1,2

– 0,4

– 10,7

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(80)

The validity of the restructuring plan implemented by CFF, which by virtue of the consolidation
measures carried out generated the liquid resources the bank needed during the period of difficulty it
underwent, and the resulting return to profitability, did not however suffice to restore its solvency
ratio to the appropriate level. Although the French authorities initially stated that, despite the
Government's pledge, they did not intend to carry out any prior recapitalisation of CFF or to give it
any other support, the size of the profits made did not enable the bank's own funds to be restored to
the level required by the Community prudential rules. That was to be done by the bank's buyer as
part of the sell-off of CFF.

Table 5 — Own funds of the CFF Group

Tier-one own funds

Additional own funds

Deduction

(in FRF million)

1998

1997

1996

1995

6 424,0

6 424,0

– 96,0

3 304,0

3 304,0

– 126,0

1 990,0

1 990,0

– 183,0

557,0

557,0

– 194,0

Consolidated own funds

12 752,0

6 482,0

3 797,0

920,0

Weighted risks

Solvency ratio

Solvency ratio (tier-one) (1)

205 600,0

188 000,0

185 550,0

183 600,0

6,20 %

3,12 %

3,45 %

1,76 %

2,05 %

1,07 %

0,50 %

0,30 %

(1) The tier-one ratio should normally,

in accordance with the prudential rules, be at least 4 %.

(81)

In September 1998, however, the discussions being held with the candidate for taking over CFF, the
US consortium GMAC-Bass, were broken off as a result of the latter's unwillingness to take over the
whole of CFF. According to the press, GMAC-Bass feared that, if it were to take over CFF's entire
balance sheet (amounting at that stage to around FRF 310 billion) without any Government
guarantee,
its own rating would be downgraded by the rating agencies. GMAC-Bass therefore
requested the French Government to split CFF's balance sheet in two and to keep for itself all the
outstanding liabilities covered by a public guarantee.

(82)

The new plan presented by the French authorities on 24 December 1998 is a three-stage operation:
financial restructuring, recapitalisation and initiation of a new procedure for linking CFF to a partner.

(83)

(84)

The financial restructuring is intended to solve the difficulties identified during the previous search
for a partner,
in particular the guaranteeing of CFF's debt, problems of corporate governance,
transparency of the accounts and the increasing need for own funds. These problems were addressed,
respectively, by setting up a building society as a subsidiary, giving CFF ordinary bank status,
clarifying its balance sheet and reducing its holding in CLog.

The mortgage bonds and corresponding assets will be transferred to a specialised subsidiary with the
status of a building society (société de crédit foncier — SCF). Given the standing of these societies,
this will provide CFF with a new, secure source of finance enabling the government guarantee to be
withdrawn. Implementation of this plan is subject to approval by the French Parliament of the
savings and financial security act, scheduled for the end of this year. The Commission is favourably
disposed towards those legislative provisions and creation of the SCF by CFF, since such an
the government
organisational structure will provide a definitive solution to the problem of
guarantee.

(85)

The Commission attaches great importance to the reduction of CFF's interest in Clog, in view of the
effects of consolidating CLog's accounts on the solvency ratio of the group, as shown by Table 1.

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(86)

(87)

(88)

Following a letter of 24 March 1999 from the Minister for Finance and Industry communicating the
amount which the Government
the Commission
requested information with a view to ascertaining that there was an industrial plan that could carry
the bank's recovery to completion and establishing that the planned aid measure corresponded to the
strict minimum necessary. The information requested was also to confirm the planned dates for
giving CFF ordinary bank status and creating the SCF subsidiary. The Commission received the full
information requested on 12 May 1999.

intended to provide for recapitalising CFF,

The new plan takes the results posted for 1998 as a basis for developing future strategy and
forecasting the group's future results, and forms part of the effort to find a buyer. It aims to restore
the bank's profitability in the areas of highest risk and to avoid contraction of the net receipts from
banking by finding other sources of income to offset the fall in traditional receipts. The plan tackles
the bank's underlying problems and all aspects of its day-to-day management (staff, organisation,
marketing), strategic development and financial structure (own funds, quality of claims, profitability,
liquidity) with a view to enabling it to confirm its viability.

The aims of the strategic plan are twofold: to complete the refocusing on mortgage lending and to
develop turnover in housing credit, the sale of services and the distribution of savings products. As
far as the first objective is concerned, the chief measures are concentration on loans for low-cost
housing, reorganisation of the network and strengthening of the marketing function. CFF intends to
continue its redeployment in three directions: loans for owner-occupied or rented housing, granted
chiefly to private individuals, coupled with a strategy for marketing a corresponding range of savings
products; increasing lending activity in sectors under control, such as loans to property firms and
specialised loans; and developing the marketing of services with high value added, such as property
valuations, administration of estates, low-cost housing and the management of property, areas in
which it already has considerable professional experience.

(89) On the basis of the documents submitted, the strategic plan appears adequate on the whole; albeit
optimistic in some respects. The fall in income from the assisted sector has not yet been sufficiently
counterbalanced by growth of the competitive sector, in which CFF still has only a small market
share. Projections regarding the growth of market share in that area appear optimistic, given that no
growth of the market as a whole is forecast in the business plan. Switching to a new product line in
this way is not easy for CFF, which is emerging from a deep crisis, and will demand great efforts
from its staff, whose commercial skills had not been greatly developed in the past.

(90)

(91)

Furthermore, although the increase in loan renegotiations and early repayments prompted by the fall
in interest rates and the development of a policy of loan repurchases by banking networks has
initially had a favourable impact on CFF's cash position, it can lead to a drop in banking operating
income, particularly in the assisted sector, which remains at the heart of CFF's lending activities.

Lastly, analysis of the evolution of these costs beyond 1999 reveals the absence of any further
adjustment to take account of the fall in outstanding PAP loans and the continuing slow growth of
net receipts from banking. The evolution of operating charges does not reflect a continuation of the
trend observed over the last three years and the forecasts for the banking sector as a whole.

5.3.1.2. C o m p e n s a t o r y m e a s u r e s

(92)

It should be borne in mind first of all that, without the aid it received, CFF would have had to be put
into liquidation. As stated in the guidelines on State aid for rescuing and restructuring firms in
difficulty (14), it has to be seen whether the solution causing the least distortion of competition for
competitors has been sought. If major distortion of competition is unavoidable, substantial compens-
atory measures, or quid pro quos, must be required that benefit other operators in the sector in order
to mitigate the harmful effects of the aid.

(14) See footnote 13.

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(93)

(94)

It should be added that, in accordance with Community policy, the quid pro quos should represent an
additional effort on the part of
the firm receiving aid in comparison with the restructuring
operations strictly necessary for restoring its viability. In particular, they should first and foremost
consist of measures that are not directly or indirectly financed by State aid. Where there is no closure
of capacity, quid pro quos can take the form of divestments, provided that the activities concerned are
profitable, or a reduction in the commercial presence of the company concerned.

In the banking sector, the solvency constraint introduced by the banking legislation (the nucleus of
tier-one own funds and own funds in the broad sense must represent 4 % and 8 % respectively of
risk-adjusted assets) limits credit institutions' capacity for growth. In reality there is a capitalisation
requirement 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 and immediate. It can be quantified according to
the rules laid down and cannot be temporarily relaxed as part of a growth strategy pursued by a
credit institution. A credit institution that only narrowly satisfies the solvency requirement does not
have any room for growth until it can attract fresh capital or increase its own capital and reserves by
achieving a high rate of profit. The growth of an inefficient institution is consequently held back,
while a bank that is generating sizeable profits has potential for growth linked to its profitability.
This restraint which the solvency requirement places on the growth of less efficient institutions
illustrates very clearly the way in which prudential policy and competition policy complement one
another.

(95) One result of the solvency requirement is that in the case of credit institutions it is possible to arrive
at a hypothetical estimate of the distortion of competition caused by State aid (15). 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 EUR 1 million, or any measure with equivalent effect, would allow a
bank to increase the weighted assets in its balance sheet (given the compulsory solvency ratio of 8 %)
and thus to expand its activities. Such an operation would create a potential distortion of
competition equivalent in terms of activity to around EUR 12,5 million (since, without the aid, the
bank would not have been able to increase its weighted assets by EUR 12,5 million). This relation-
ship also means that State aid to a credit institution exceeds the latter's 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 compensatory measures is to limit the distortion estimated very roughly in this manner.

(96)

(97)

In the case under examination, as regards the information on the compensatory measures offered by
CFF to competitors which the Commission requested when it initiated the Article 88(2) procedure,
the French authorities submitted data on the efforts made. The Commission does not regard the
reduction in net receipts from banking envisaged by the business plan as a compensatory measure
since it is rather a result of the reduction of lending activity in the assisted sector which has not yet
been counterbalanced by an increase in activity in the competitive sector.

The Commission nevertheless takes the view that the substantial reduction in the balance sheet (from
FRF 392 billion at 31 December 1995 to FRF 296 billion at 31 December 1998,
i.e. a 25 %
reduction) cannot be regarded merely as necessary for restoring viability and as an effect of the
voluntary refocusing of the bank's activities, but that it involved substantial efforts which have
mitigated the distortion of competition resulting from the Government's intervention. These efforts
represent in particular a very significant contribution in relation to the distortion of competition that
can be hypothetically evaluated in the case in point.

(98)

In this connection the Commission regards as a positive development CFF's decision to dispose of its
network abroad, particularly in view of the fact that its foreign business, albeit small, was expanding
before the Government intervened (a branch had been opened in Italy).

(99) Given the amount of the aid in relation to the compensatory measures carried out, the Commission
takes the view that CFF has made a significant contribution to its restructuring costs and has
provided substantial quid pro quos enabling the distortive effect of the aid on competition to be
mitigated.

(15) See Commission Decision 98/490/EC of 20 May 1998 concerning aid granted by France to the Crédit Lyonnais

group (OJ L 221, 8.8.1998, p. 72).

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5.3.1.3. P r o p o r t i o n a l i t y o f

t h e a i d a n d c o n t r i b u t i o n o f

t h e b a n k t o i t s r e c o v e r y

(100)

In view of the foregoing and with regard to compliance with the other conditions laid down in the
guidelines on restructuring aid, the Commission considers that CFF is making a significant contribu-
tion to the restructuring costs from its own resources.

(101) Nevertheless, although CFF's recovery has already been largely achieved, the level of its own funds
remains well below the statutory minimum required by the prudential rules. This problem should be
solved by means of the recapitalisation notified by the French Government (limited to FRF 1,85
billion, in view of the reduction of CFF's interest in CLog (16), the timing and details of which are still
uncertain). The Commission considers that the remaining uncertainties regarding the bank's long-
term viability should be dispelled once it is linked to a partner.

(102) The return on own funds achieved by CFF in 1998, determined on the basis of the ratio of the
consolidated result to consolidated own funds (including the shareholder's advance) amounts to
approximately 8,4 %. This figure is not yet in line with the average profitability of the banking sector
or the expectations of a private shareholder and justifies linking the bank with a strong partner as
envisaged in the plan for privatising the bank in the near future in order to secure its viability.

(103) The fact that the task of restoring the bank's own funds to an appropriate level and completing its
recovery is entrusted to a major partner, which should enable it to implement its business plan,
raises problems regarding its sale.

(104)

In conjunction with its examination of the compatibility of the aid measures concerned, the
Commission has taken privatisation of the bank into account. In their letter of 12 May 1999 the
French authorities undertook to privatise CFF by December 1999 in accordance with an open,
transparent and non-discriminatory procedure. The Commission takes note of these undertakings
and recalls the general principles it applies in cases of privatisation in order to determine whether
there is any element of State aid, principles it set out in its Twenty-third Report on Competition Policy
(1993) (17). It considers that the privatisation ought to provide a definitive solution to the problem of
corporate governance pointed out earlier and ensure that,
in future, CFF turns to its private
shareholders and to the market for any additional resources it may need.

(105) At this stage and on the basis of the information available on the privatisation of CFF, since the
choice of the buyer is to be determined by reference to market criteria as far as the price and the
buyer's business plan are concerned, the Commission takes the view that the privatisation procedure
does not give rise to any presumption of further State aid.

(106)

In evaluating the aid the Commission has not taken account of how much privatisation of the bank
could bring in for the Government: at this stage, a selling price has not yet been determined for CFF
and it does not have a valuation.

6. CONCLUSIONS

(107)

In view of the foregoing and on the basis of the information available, the Commission concludes
that CFF's recovery plan involves substantial State aid,

in particular in the form of:

— a Government guarantee covering all CFF's debt liabilities falling due, in terms of both principal

and interest,

— the Government's undertaking to take every step necessary to ensure that CFF can continue to
carry out its activities in accordance with the prudential rules in force, and a capital advance to
CFF.

(108) These measures have been examined in the light of Article 87(3)(c) of the EC Treaty to determine
whether they can be regarded as compatible with the common market. For the reasons set out in
recitals 62 to 100, the Commission takes the view that the aid granted to CFF complies with the
conditions laid down in the guidelines on State aid for rescuing and restructuring firms in difficulty,
provided that the conditions specified in the latest plan notified are fulfilled.

(16) See Table 1.
(17) Twenty-third Report on Competition Policy, point 403. The principles to which the Commission refers in order to
determine whether a privatisation involves 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.

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(109)

It is also necessary, in view of the large amount of aid involved, for the proper implementation of
the plan to be monitored, with special reference to the restructuring efforts, to ensure that the
recovery plan submitted to the Commission is carried out effectively and in full. The French
authorities should therefore inform the Commission, every six months following the date of
approval of this Decision and until the objectives of the restructuring plan have been achieved, of
progress in implementing the plan and any deviation of actual results from the forecasts. No change
that could result in an increase in State aid to CFF may be made to the plan without the
Commission's prior approval.

(110) The French authorities have stated that the shareholder's advance of FRF 1,85 billion is the strict
minimum needed to enable CFF to comply with the prudential requirements and that the buyer will
be responsible for increasing the bank's own funds to a level that secures CFF's long-term viability. In
the absence of privatisation and therefore of an increase in CFF's own funds by a buyer, the French
Government would probably have to carry out a further recapitalisation. If so, the Commission could
consider that such an operation constituted additional aid.

(111) Under these conditions, the aid in question can be exempted from the prohibition laid down in
Article 87(1) of the EC Treaty and Article 61(1) of the EEA Agreement since it can be regarded as
compatible with the common market in pursuance of Article 87(3)(c) of the EC Treaty and Article
61(3)(c) of the EEA Agreement,

HAS ADOPTED THIS DECISION:

Article 1

The measures intended to consolidate, restructure and privatise Crédit Foncier de France, in particular the
government guarantee covering its debts announced by the Minister for Economic Affairs and Finance on
29 April 1996 and the FRF 1,85 billion increase in its capital carried out by Caisse des Dépôts et
Consignations, constitute State aid within the meaning of Article 88(1) of the EC Treaty. These operations,
the value of which is estimated at FRF 16 billion, are hereby declared compatible with the common market
and with the EEA Agreement pursuant to Article 87(3)(c) of the EC Treaty and Article 61(3)(c) of the EEA
Agreement.

Article 2

Authorisation of the measures referred to in Article 1 is subject to France complying with the following
conditions:

(a) The implementation of all the recovery measures and all aspects of the restructuring plan submitted to

the Commission must be guaranteed;

(b) The conditions laid down in the restructuring plan may not be modified, after the conditions imposed

by this Decision have been taken into account, without the Commission's prior agreement;

(c) Crédit Foncier de France must not be allowed to carry over tax losses in respect of the losses covered by

the notified capital

increase.

Article 3

France shall cooperate fully in monitoring the implementation of this Decision and shall transmit the
following documents to the Commission:

(a) A detailed report by the French authorities on application of the Commission Decision, implementation

of the restructuring plan and privatisation of the bank. The report shall

in particular:

— examine the viability of Crédit Foncier de France by presenting detailed results in relation to the

estimates contained in the plan,

— give details of any government assistance to Crédit Foncier de France (by way of recapitalisation,

finance, guarantees, etc.),

— analyse in detail developments in the process of selling Crédit Foncier de France.

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This report shall be submitted to the Commission every six months following the date of notification of
this Decision and for the last time after Crédit Foncier de France has been privatised;

(b) The balance sheets, profit and loss accounts and reports (annual and half-yearly) adopted by the Board

of Directors of Crédit Foncier de France.

The Commission may request that these documents and implementation of the plan be evaluated by means
of specialised audits. If so, the French authorities and Crédit Foncier de France shall cooperate in the
performance of those audits.

This Decision is addressed to the French Republic.

Article 4

Done at Brussels, 23 June 1999.

For the Commission

Karel VAN MIERT

Member of the Commission