2005/345/EC: Commission Decision of 18 February 2004 on restructuring aid implemented by Germany for Bankgesellschaft Berlin AG (notified under document number C(2004) 327) (Text with EEA relevance).
Date: 2004-02-18
Institutions: European Commission
Subjects: Germany, State aid, aid for restructuring, aid to undertakings, application of EU law, bank, control of State aid

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II

(Acts whose publication is not obligatory)

COMMISSION

COMMISSION DECISION

of 18 February 2004

on restructuring aid implemented by Germany for Bankgesellschaft Berlin AG

(notified under document number C(2004) 327)

(Only the German text is authentic)

(Text with EEA relevance)

(2005/345/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Whereas:

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

I.

PROCEDURE

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

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

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

(1)

(2)

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

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

(1) OJ L 83, 27.3.1999, p. 1. Regulation as amended by the 2003

Act of Accession.

(2) OJ C 141, 14.6.2002, p. 2.

(3) OJ C 130, 1.6.2002, p. 5.
(4)

See footnote 2.

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(3)

(4)

(5)

(6)

(7)

(8)

Journal of

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

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

the reasons of

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

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

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

In October 2003 the need for further compensatory
measures was discussed, partly in the presence of
representatives of
the
the bank.
Commission informed Germany of the measures it
was contemplating and gave it and the bank the
opportunity to comment on the financial implications
for the bank, which were discussed in December. On
18 December 2003 it was agreed that Germany would

In November

give the Commission an undertaking to divest Berliner
Bank separately by 1 October 2006, the sale being
effective no later than 1 February 2007, and to
privatise the group by 31 December 2007, together
with other divestment measures.

(9)

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

(10)

(11)

(12)

II.

DESCRIPTION OF THE AID

BGB

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

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

and

(LBB)

The largest subsidiaries or divisions in the BGB group,
which likewise engage in banking, are Landesbank
Berlin‑Hannoversche
Berlin
Hypothekenbank AG (BerlinHyp). LBB is an institu-
tion established under public law in which BGB has an
atypical undisclosed holding (atypisch stille Beteiligung)
of 75,01 %. There
transfer
in economic terms,
agreement which means that,

is a profit‑and‑loss

(5)

See footnote 2.

(*)

Parts of this text have been edited to ensure that confidential
information is not disclosed: those parts are enclosed in square
brackets.

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(13)

(14)

(15)

BGB can be deemed to be LBB’s sole owner. BerlinHyp
engages in real estate financing; BGB owns 89,9 % of
the equity.

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

BGB’s core business is retail banking for private and
corporate customers, where it trades under the two
names Berliner Sparkasse and Berliner Bank. These are
not legally independent subsidiaries, but rather brands
or branches. Since 1 July 2003 Berliner Bank has
belonged to LBB, as Berliner Sparkasse already did (6).
The corporate clients are mainly small and medium‑-
sized enterprises in the region.

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

e.g.

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

information,

(17)

(18)

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

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

(19) When these problems began to emerge in the course
of 2000, BGB considered selling IBG’s main business.
IBG’s
In December 2000,
therefore,
business was transferred to the newly set‑up IBAG,
risks and liabilities
with the exception of

the bulk of

‘old’

(16)

In the Berlin area BGB is the market leader in retail
banking, with shares of individual segments ranging
from about 20 % to over 50 % (7). In terms of first
giro accounts held by private customers, it estimates

(6)

(7)

Berliner Bank previously formed part of BGB, and Berliner
Sparkasse formed part of LBB.
See footnote 2 and speech to the general meeting by Mr Vetter,
chairman of the managing board, on 4 July 2003 (http://www.
bankgesellschaft.de/bankgesellschaft/20_ir/30_hauptver-
sammlung/index.html); see paragraph 298.

(8)

(9)

http://www.bankgesellschaft.de/bankgesellschaft/50_pk/

See
index.html (private customers, first giro accounts).
Answer given by Germany, June 2002; according to ‘Eurohypo’
decision of 19 June 2002 of the German antitrust authority
(Bundeskartellamt), the leaders of the various segments of the
real estate financing business in 2001, by portfolio and by new
business, were the new firm Eurohypo, the Hypovereinsbank
group, the Depfa group, the BHF group, and BayLB. Deutsche
Bank itself, without the business it had contributed to the new
Eurohypo, was likewise still ranked ahead of BGB, which the
decision does not list among the leading competitors.

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(20)

(21)

(22)

to

occasioned by IBG and its subsidiaries, which were
set‑up
transferred
the
LPFV Finanzbeteiligungs‑ und Verwaltungs‑GmbH
(LPFV). But the plans to sell IBAG came to nothing.
Both IBAG and LPFV are now wholly owned
subsidiaries of BGB. The old IBG kept only a few
peripheral lines of business.

newly

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

rather

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

real

estate

especially in the

In the months following, however, further risks were
identified,
services
operated by IBAG/IBG/LPFV. There was a danger that
BGB’s capital might once again fall below the required
minimum solvency ratios. These risks arose once
again out of the guarantee obligations in the real
estate funds business and the sinking value of
property that had been bought with a view to the
setting up of new funds (reserve property). According
to the information supplied by Germany, the inter-
agreements,
locking

profit‑and‑loss

transfer

(10)

Since 1 May 2002, when banking,
insurance and stock
exchange supervision were merged, the Federal Institute for
Financial Services Supervision (BAFin).

(23)

(24)

guarantees and loans within the group made BGB
liable for the bulk of these risks.

IBG and LPFV concluded an agreement

In November 2001 the then Federal Credit Business
Supervisory Office (Bundesaufsichtsamt für das Kredit-
‘BAKred’) (10) threatened BGB with temporary
wesen,
closure if it did not take measures to provision these
risks by the end of 2001. On 20 December 2001,
therefore, the Land of Berlin, BGB, LBB, BerlinHyp,
IBAG,
in
principle to cover these risks by means of compre-
hensive guarantees. The agreement in principle was
replaced by a detailed agreement finally concluded on
16 April 2002. The guarantees assumed in this
agreement were known as the ‘risk shield’
(Risi-
koabschirmung);
they are described in more detail
below.

Restructuring aid

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

(25)

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

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Capital injection

(26)

One component of the restructuring aid notified on
28 January 2002 is the capital
injection of EUR
1,755 million granted by the Land of Berlin as rescue
aid in August 2001, following the authorisation given
by the Commission on 25 July 2001 (11); BGB is now
to retain this amount as restructuring aid.

Risk shield

(27)

The other component of the restructuring aid is the
‘risk shield’ already referred to, which was agreed in
principle in December 2001 by the Land of Berlin,
BGB, LBB, BerlinHyp,
IBG and LPFV, and
IBAG,
subsequently modified, supplemented and superseded
by a detailed agreement concluded on 16 April 2002.
The risk shield comprises the following guarantees,
which are given by the Land of Berlin for 30 years in
order to cover the risks arising out of the real estate
services business carried on by the subsidiaries IBAG,
IBG and LPFV:

(28)

— Loan guarantees: BGB, LBB and BerlinHyp are
guaranteed the contractual
interest and capital
repayments on loans granted by them to IBAG,
IBG and their subsidiaries and certain other
companies up to 31 December 2001. The
listed
companies
exhaustively in the annexes
to the detailed
agreement, which also lays down restrictions in
respect of certain loans and a number of express
exclusion clauses (negative list).

concerned are

and loans

— Book value guarantees: IBAG, IBG and certain other
companies in the group, primarily direct and
IBAG and IBG, are
subsidiaries of
indirect
guaranteed the value of
the individual assets
entered in the relevant audited balance sheet,
with the exception of certain designated items
such as intangible assets, cash, balances at the
Bundesbank and credit institutions, and prepay-
ments and deferred income (Rechnungsabgren-
zungsposten). These book value guarantees are
likewise subject to restrictions and exclusions
(negative list).

— Performance obligations taken over from LPFV: LPFV
is indemnified in respect of obligations arising
out of the earlier real estate business of IBG and
its previous subsidiaries Bavaria, Arwobau and
Immobilien‑Beteiligungsvertriebsgesellschaft der
Bankgesellschaft Berlin GmbH (‘IBV’): LPFV is
the first EUR 100 million, and
liable for
thereafter such obligations are taken over by

(29)

(11) OJ C 130, 1.6.2002, p. 5.

the Land. This does not apply to obligations in
respect of funds newly set up after 31 December
2000 or
in respect of new IBAG business
described in the detailed agreement.

— BGB indemnified in respect of guarantees: BGB is
indemnified in respect of all obligations arising
out of the guarantees it gave up to 31 December
1998 on transactions entered into by IBG, IBV
and Bavaria. Like the preceding indemnity, this
does not apply to obligations in respect of funds
set up after 31 December 2000 or in respect of
new IBAG business described in the detailed
agreement.

sets

It states that

the detailed agreement

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

this means,

this theoretical ceiling is based on the
However,
assumption that all the risks will, in fact, materialise in
full. For the indemnity given to LPFV in respect of rent
guarantees (ceiling of EUR [...]**),
for
that all rents until 2025 would remain
example,
for the indemnity given to LPFV in
unpaid, and,
respect of renewal guarantees (EUR [...]**), it would
mean that all buildings would have to be replaced in
their entirety. However, even on very pessimistic
assumptions, a 100 % rent default and the demolition
and reconstruction of all buildings concerned is not
realistic. Article 45 accordingly also states that, on the

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information currently available and after careful
examination of the main economic risks, the probable
rate of take‑up can be put substantially lower. The real
risk is estimated at EUR 2,7 billion in the best‑case
scenario, at EUR 3,7 billion in the base‑case scenario
and at EUR 6,1 billion in the worst‑case scenario. The
assumptions on which these estimates are based were
communicated in the course of the procedure (see
paragraph 138).

(30)

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

(31)

The Law empowering the Land Government to issue a
guarantee (12) provides that the shares in BGB held by
the Land of Berlin are to be sold as rapidly as possible
on terms fair to the Land and that, as part of a
reorganisation of BGB’s ownership structure, Investi-
tionsbank Berlin (IBB) is to have its ties with BGB cut,
leaving it as a separate development bank established
under public law (see below).

(33)

(34)

Agreement on the treatment of any claims to repayment
brought by the Land of Berlin arising out of the
investigation procedure initiated by the Commission in
respect of Landesbank Berlin ‑ Girozentrale

(35)

(32)

In its decision to initiate the procedure in the present
case (13), the Commission also drew attention to an
important fact that had not been taken into account in
the initial restructuring plan. At the end of 1992
Wohnungsbau‑Kreditanstalt (WBK) was transferred to
LBB with all its assets; at the same time, all WBK’s

functions were transferred to the newly set‑up IBB.
The transfer increased LBB’s own funds by about
DEM 1,9 billion. From 1995 onwards, LBB paid a
remuneration of 0,25 % of the amount taken up. As
the Commission doubted whether this remuneration
was compatible with the principle of the investor
operating in a market economy,
initiated the
investigation procedure (C 48/2002) in July 2002 (14).
(14). If the Commission were to conclude that the
remuneration paid was not compatible with the
principle of the market‑economy investor and if none
of the tests for compatibility laid down in the Treaty
were met, the difference between the remuneration
paid and the ordinary market return on such an
investment would constitute state aid incompatible
with the common market that would have to be
repaid by LBB to the Land of Berlin.

it

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

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

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

(12)

Published in Gesetz‑ und Verordnungsblatt für Berlin, 58th
year, No 13, 24.4.2002.
(13) OJ C 141, 14.6.2002, p. 11.
(14) OJ C 239, 4.10.2002, p. 12.

(36)

Although this measure had not yet been taken at the
time of the decision to initiate the procedure, the risks
arising from a possible repayment decision by the
Commission were mentioned in the decision as a

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to be taken into account. The repayment
factor
agreement was finally concluded in order to take
account of this misgiving. Given that this measure is
essential to the success of the restructuring plan, the
Commission considers it appropriate to assess this
together with the other aid measures,
agreement
having been able to set the upper limit in this respect.

(40)

future strategies on the market

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

(37)

(38)

Grounds for initiating the procedure

(41)

In its decision initiating the formal
investigation
procedure laid down in Article 88(2) of the EC Treaty,
the Commission provisionally classified the measures
under examination as state aid within the meaning of
Article 87(1) of the EC Treaty and Article 61(1) of the
EEA Agreement because they were granted through
state resources and because, by improving the
recipient’s financial position, they were likely to affect
the economic position of competitors from other
Member States (15) and consequently distorted or
threatened to distort competition and affected trade
between Member States.

(42)

its provisional assessment,

On the basis of
the
Commission concluded that the aid had to be assessed
in the light of the Community guidelines on state aid
for rescuing and restructuring firms in difficulty (‘the
guidelines’) (16) and that there were no other provi-
sions of the Treaty or other Community guidelines
that might render the aid compatible. It agreed with
Germany that BGB was a firm in difficulty within the
meaning of paragraph 2.1 of the guidelines, but it
seriously doubted whether the aid measures were
compatible with the common market.

Restoration of long‑term viability

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

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

the implications of

such as

(39)

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

(43)

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

(15)

Joined Cases C‑278/92, C‑279/92 and C‑280/92 Spain v
Commission [1994]* ECR I‑4103.

(16) OJ C 288, 9. 10. 1999, p. 2.

(44)

The initial notification referred to target profitability
of just 7 %. The Commission doubted whether this
could really be reached, especially given the proble-
matic institutional and management structure of the

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group, the unclear market assumptions on which the
restructuring measures were based, and the continua-
tion of the problematic real estate business. Even if
7 % profitability were to be achieved, the Commission
doubted whether such a return on the capital invested
was enough to be compatible with the principle of the
market‑economy investor.

needed detailed information as to the effect of each
measure on BGB's assets, employment situation and
future market/segment positions.

(45)

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

(48)

Avoidance of undue distortions of competition

(46)

(47)

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

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

situation,

(17)

See, for example, 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. 28).

Even if the above reduction (26 % or EUR 50 billion
of the balance‑sheet total) were achieved in full, the
it would be
Commission questioned whether
sufficient in view of the large amounts of aid and
its practice in previous decisions on restructuring aid
for banks. (17) In this connection, the Commission
suggested that the legal minimum capital require-
ments could serve as a guide for assessing the
appropriateness of the compensatory measures since
a bank that was undercapitalised would have to
reduce its activities accordingly (undercapitalisation
of EUR 1 billion with a legal minimum capital ratio
of 4 % would require a theoretical reduction of
risk‑adjusted assets of up to EUR 25 billion). Such
‘opportunity reductions’ could serve as a rough guide
the degree of market distortion and the
for
required.
corresponding compensatory measures
According to this approach, the EUR 1,755 billion
capital
injection from the Land of Berlin in the
summer of 2001 would alone correspond to a
theoretical asset reduction of up to EUR 44 billion.
However, the Commission pointed out that this guide
should not be applied ‘mechanically’ but should be
subject to discretion in order to take account of
specific circumstances and factors important for the
survival and viability of the bank.

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

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the above rough guide. Moreover,
the light of
experience with restructuring cases had shown that
best‑case scenarios rarely came about.

(54)

(50)

(51)

(52)

(53)

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

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

Aid limited to the minimum

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

the available information,

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

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

(55)

(56)

(57)

III.

COMMENTS FROM GERMANY

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

Restoration of the firm’s long‑term viability

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

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

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(58)

(59)

firm would mean forgoing an annual positive profit
contribution of EUR [...]** from 2006.

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

Regarding the market assumptions for
the retail
sector, Germany explained that in the Berlin conurba-
tion each bank branch looked after 4 000 inhabitants
on average, which was significantly more than the
average for Germany as a whole (1 400). Although
there was not a surplus of branches in Berlin, it was to
be expected that the number would drop further in
the coming years on account of other channels such as
call centres and the Internet. The plan for sustainable
improvement in the profitability of the retail sector
addressed both cost and yield. Key measures to lower
costs included reducing branches according to current
profitability, regional coverage and the estimated costs
of closure/merger. The aim was to increase principal
customer accounts per branch to [...]* at Berliner
Sparkasse and [...]* at Berliner Bank by the end of
2003, as compared with an average of 2 300
customers in the case of direct competitors in Berlin.
Further savings would result from the replacement of
cost‑intensive traditional cash‑desk facilities by more
modern facilities, thereby saving on 300 staff. Income
could be increased still further by reallocating advice
capacity to bring in the most attractive customer

groups possible. Pure transactions business was to
take place increasingly via online and self‑service
facilities, while branches
should focus more on
customer advice. The forecast of increased demand
in the retail sector was based on information from the
Landeszentralbank Berlin, broker reports and assess-
ments by the Federal Statistical Office in recent years.
As regards BGB’s market position in the individual
segments of
retail sector,
the local and regional
Germany supplied corrected figures showing lower
volume‑based market shares ranging from a little over
20 % to more than 40 % in Berlin (see paragraph 291
et seq.). The growth forecast for Berlin, which, as a
structurally weak region, lagged behind the national
average of 2,5 %, was 2 %. Germany explained that,
despite market shares of around 40 % in the retail
deposit sector, BGB could not be said to be in a
dominant position since the Berlin retail market was
very competitive and customers could move from one
bank to another without significant cost or effort.
Furthermore, savings were overrepresented, whereas
BGB was underrepresented compared with its market
penetration when it came to more sophisticated forms
of investment such as time deposits, savings bonds,
security deposit accounts and other complex pro-
ducts, such as insurance, on account of
its over-
whelmingly low‑income customers.

(60)

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

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lower limits and exhausting all cross‑selling potential,
together with greater division of
labour among
account managers.

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

that countermeasures were not

this audit

forgoing, pursuant

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

(63)

The introduction of efficient risk monitoring and a
new data bank system by the end of 2002, however,
constituted an operational guarantee that
future
problems could be identified and corrected in time.
All activities of the entire group relevant in credit risk
terms were consolidated in a risk register data bank.
These data formed the basis for a limit management
system for assessing credit risks for their risk potential

and subjecting them to various limits. An information
platform was therefore available on a same‑day basis
for all credit risk assessments. On this basis, a new
credit risk report was developed for the executive and
supervisory boards. The rating procedures had been
completely reworked in cooperation with the DSGV
and the German Landesbanken. The extensive exchange
of managerial staff and the reduction in areas from 63
to 34 also helped to improve risk control.

(64)

(65)

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

Target yields before tax of around 6 to 7 % (according
to the original notification) or [...]** % (according to
the revised medium‑term plan of 24 June 2003) for
BGB in 2006 were sufficient. Yield rates before tax in
Germany in the period from 1995 to 2000 ranged
from 12,6 % to 17,6 % for regional banks/savings
bank and from 13 % to 16,5 % for all banks (top 100).
Over time, however, a reduction in equity return
could be observed. In the regional banks/savings bank
sector in particular, it had fallen from 17,6 % in 1995
to 12,6 % in 2000. Given the worsening of
the
economic situation that followed and the faltering
consolidation process in Germany, the figures in the
following years remained lower, ranging from 7 %
(2001) to 8,5 % (2006) for regional banks/savings
banks and from 9,9 % (2001) to 12 % (2006) in the
sector as a whole. For regional banks/savings banks,
the potential for recovery was severely restricted both
liability and guarantor
by the loss of institutional

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liability (Anstaltslast and Gewährträgerhaftung) and by
Basle II. The target yields before tax of around 6 to 7 %
(according to the original notification) or [...]** %
(according to the revised medium‑term plan of 24 June
2003) were not directly comparable with the yields of
competitors since BGB’s core‑capital ratio during the
restructuring phase contained a ‘safety buffer’
to
ensure refinancing on the capital market, partly to
offset the total absence of hidden reserves. Conse-
quently, the future core‑capital ratio of [...]** % had to
be significantly higher than the average core‑capital
ratio of 6,1 % for regional banks/savings banks in the
period from 1995 to 2000. As a result of the safety
buffer of some [...]** %, the equity return — for the
same pre‑tax earnings — also fell by about [...]** %
compared with competitors since the pre‑tax earnings
related to a larger amount of own funds.

(66)

(67)

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

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

(68)

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

(69)

(70)

IBB, finding that the medium‑ to long‑term effects of
these three measures were insignificant.

a negative

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

the

this would have

The Commission asked Germany and the bank to
quantify the consequences of a separate sale of
BerlinHyp by the end of 2006 for the survival of
the rest of the group. According to Germany and the
bank,
following negative
consequences for the rest of the group or would
impose the following requirements, which the buyer
could not necessarily meet: the buyer would have to
take over as far as possible internal
refinancing
(currently some EUR [...]**) on comparable terms, i.e.
have at least as good a rating as Landesbank Berlin,
and BGB’s guarantee for BerlinHyp in order to avoid
applying the methodology for large credits (current
estimated volume: about EUR [...]**). The buyer would
also have to offer at least the book value of BerlinHyp
as the purchase price since otherwise book value
write‑downs of [...]** might result, endangering the
survival of the rest of the group. Even a negative
outcome of the bidding procedure would involve a

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risk of further book value write‑downs. A sale without
serious consequences for the restructuring plan would
be possible only if the marketing cooperation between
BerlinHyp and the group could be maintained. An
obligatory separate sale would require a one‑off
write‑down of the current book value of EUR [...]**
by EUR [...]** to the book value of BerlinHyp’s own
funds of EUR 519 million. The expected earnings
before tax in 2006 for the rest of the group would fall
by a further EUR [...]** or so (difference between the
loss of BerlinHyp’s
about
EUR [...]** and the interest income from the expected
proceeds of the sale of about EUR [...]**). This, together
with the separate sale of Berliner Bank, would result in
a further fall in the target equity return in 2006 for
the rest of the group of some [...]** %, to just over
[...]** % in all, and a core‑capital ratio of just under
[...]** %.

expected income of

Avoidance of undue distortions of competition

(71)

to 2006 (planned situation).

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

(72)

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

(73)

Assets in the other retail banking segment, corporate
customers, i.e. business with small and medium‑sized
enterprises
customers), were
than large
expected to fall from almost EUR [...]* in 2001 to
around EUR [...]* in 2006 (down by just under

(rather

(74)

(75)

[...]* %). At the same time, the number of employees
would be reduced by just over [...]* %. Once again
these figures take no account of the promised sale of
Berliner Bank.

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

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

liabilities would be

(76) With the gradual winding‑up of

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

(77)

(78)

(79)

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

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

Combined with further reductions in asset items, e.g.
in interest rate management or through the divest-
ment of IBB’s government assistance business (around
EUR 20 billion of segment assets), and the effects of
consolidation,
these measures would reduce the
balance‑sheet total by some EUR [...]* — or [...]* %
— from around EUR 189 billion in 2001 to around
EUR [...]* in 2006. Leaving aside the divestment of the
it qualified as a
IBB,
compensatory measure, (18)
total
would fall by about [...]*.

it being doubtful whether

the balance‑sheet

(80)

shares, private and
On the question of market
corporate retail banking were regional businesses,
and so the relevant market shares referred to Berlin.

(18) Commission observation: according to the agreement on
German development banks, government assistance is a task
therefore represent a
for the public sector and does not
commercial activity with implications for competition and so
cannot be recognised as a compensatory measure. Institutional
liability (Anstaltslast) and guarantor liability (Gewährträgerhaf-
tung) can be preserved in the case of government assistance
business only if that business is hived off to an independent
development bank.

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

(81)

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

restructuring plan. The

(82)

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

(83)

(84)

(85)

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

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

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

(86)

(87)

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

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

injection meant

that

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

(89)

(90)

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

In response to the Commission's decision to initiate
proceedings, Germany had already proposed as a
further compensatory measure that the real estate
services businesses (IBAG, IBG, LPFV) be separated
from BGB. The effect of the risk shield was focused on

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Official Journal of the European Union

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that,

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

Land of Berlin’s shares in BGB. The remedies in the
retail sector were sufficient: divestment of Weberbank,
Allbank and the foreign subsidiaries BGB Polska and
Zivnostenska Banka,
the six
German private customer centres and the closure of
around 90 branches, predominantly in Berlin. More-
over, the compensatory measures as a whole were in
line with or went even further than the demands
placed by the Commission on banks in previous
restructuring decisions.

the relinquishing of

(94)

further objections

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

(95)

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

(91)

Accordingly, the market distortion to be taken as a
starting point for assessing the compensatory mea-
sures consisted of:

— a new amount for BGB in the form of the capital

injection: EUR 18,3 billion,

(96)

— a new amount for the real estate services sector
— to be divested — in the form of the risk
shield: EUR [...]* to EUR 6,1 billion.

(92)

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

(93)

Germany also argued that on competition grounds it
was inadvisable to sell Berliner Bank before selling the

Aid limited to the minimum necessary

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

(97)

Furthermore, appropriate control measures had been
introduced to rule out multiple risk coverage in
practice. The risks arising from renewal and the right
of offer were not cumulative but interchangeable. This
factor was taken into account in the description of
LPFV’s risks. However, there was actually multiple risk
coverage in the case of rent guarantees and credit
guarantees for the BGB group. LPFV verified claims on

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4.5.2005

rent guarantees to ensure they were legally and
factually in order and calculated correctly. Since
January 2003 the BCIA Berliner Gesellschaft zum
Controlling der Immobilien‑Altrisiken mbH, wholly
owned by the Land of Berlin and acting on its behalf,
had carried out checks to rule out simultaneous calls
on the loan guarantee. All services performed by LPFV
for which the Land had assumed obligations were
checked by BCIA in detail from a legal, factual and
accounting standpoint, with further checks on the
legality of each claim on the credit guarantee and on
balance‑sheet guarantees. BCIA provided the Land
with a powerful and effective means of minimising
damage, as the Garantiegesetz (Guarantee Law) of
16 April 2002 explicitly stated that no payments may
in connection with
be made
risk‑shielding, except where there is a legal obligation
to do so.

to third parties

(98) More specifically, under the detailed agreement, the
Land or BCIA, on whose activities the Land Parliament
must receive a report every quarter, enjoyed the
following rights with regard to approval, inspection,
the issuing of instructions, etc. vis‑à‑vis companies
protected by the risk shield, the exercise of which was
more closely regulated by a regulation on responsi-
bilities and procedures:

— right to reserve approval of payments on loan
commitments, where certain value limits were
exceeded,

— right to have a say in drawing up the positive list
for balance‑sheet

and the annual accounts
guarantees,

— right of audit by the Berlin Audit Court

(Rechnungshof),

— right to reserve approval of restructuring opera-

tions.

(99)

(100)

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

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

— right

to reserve approval of sales of assets
underlying the book value guarantee, where
certain value limits were exceeded,

(101)

— right to reserve approval of investments which
lead to additional acquisition and production
costs, where certain value limits were exceeded,

— right to reserve approval of certain payments by

LPFV,

— right to issue instructions to IBG and LPFV on

(102)

protection against claims,

— right to reserve approval of assignments and
other measures concerning claims arising from
the detailed agreement,

— comprehensive rights to information and inspec-

tion,

— right to reserve agreement on the appointment

of auditors by IBG, IBAG and LPFV,

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

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

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Official Journal of the European Union

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

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

the effect of

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

II would probably result

improvement

IV.

COMMENTS FROM OTHER INTERESTED PARTIES

(105)

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

Journal of

Comments from Berliner Volksbank

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

covered by the

(Anstaltslast)

liability

(106)

(107)

(109)

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

licence’

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

leader — primarily,

(110)

The market for financial services was characterised by
strong competition on terms, with considerable
pressure on margins. It was therefore to be expected
that BGB would pass on the full advantage conferred
by the aid to the market and thus considerably distort
competition to the detriment of its competitors. This
was a particular cause for concern because the aid was

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4.5.2005

being granted to the market leader in the Berlin/
Brandenburg region, whose market share in that
region relative to the lending business as a whole was,
on BGB’s own estimation, just under 50 % and which
owned just over 50 % of all branches of credit
institutions in Berlin. BGB was a direct competitor of
Berliner Volksbank in the latter’s main fields of
business,
i.e. personal banking and banking for
medium‑sized corporate clients, and already had a
market
than Berliner
Volksbank’s. The aid thus contributed to a further
economic ‘consolidation of power’
in the Berlin
banking market. The bank’s comparatively strong
market presence was also a consequence of
the
multibrand strategy of BGB, which was operating with
several institutions under different brands or business
names. BGB was pursuing a business strategy which
had detached itself from profitability strategies and,
through its
subsidised conditions, had become
predatory.

share many times

larger

(111)

(112)

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

Insufficient attention was paid to the need, identified
in the Commission’s guidelines, to reduce the adverse
effects on competitors by limiting the presence of the
aid recipient on the relevant markets after restructur-
ing since business activities in the relevant markets
would actually expand. The restructuring programme
would make it possible to increase profits in the
private and corporate customer segments and to
compensate for the closure of various sites outside
Berlin, in particular by focusing and expanding those
activities in Berlin. BGB was planning to retreat only
from those geographic markets in which it had not so
far acquired considerable importance. The announced
closure of branches might not lead to a reduction of
BGB’s market presence but it corresponded more to a
general trend in the markets for financial services in
Germany, which was regarded as ‘over‑banked’. The
extent of the remedies to be provided by BGB would
have to be calculated using its current dominant
position in the Berlin banking market, since this was
where the distortive effects were strongest. As a

shares

condition for offsetting the distortions caused by the
aid, the Commission should consider the sale of part
of the BGB group. One possibility would be to sell
Berliner Bank, which in the relevant market segments
had market
to those of Berliner
similar
Volksbank. The advantage of selling Berliner Bank
was that, organisationally, the institution was largely
independent and had its own entrance to the market;
it could therefore be taken over by a competitor with
relative ease. Given the amount of aid, the size of the
business sold off would be appropriate compensation
for the aid’s considerable distortive effects.

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

for BGB. This

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

(115)

(116)

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

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

Comments from a third party that asked for its identity
to be kept secret

(117)

The bank’s future strategy seemed in particular to be
to reduce its activities, capacities and infrastructure
and to concentrate on regional personal and corporate
banking. This plan could be based only on the
assumption that these regional markets and the bank’s
share of them would grow. There were some doubts
and contradictions, however, about the bank’s shares
of these markets. It was also unclear whether the bank
could build on a sound customer basis at all. The
Berliner Bank brand had weaknesses in this respect.
Because of the problems of the property financing

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Official Journal of the European Union

L 116/19

business in the past, there were doubts about its future
success. Maintaining a large share of
the capital
market business was not typical of a regional bank.

in accordance with the guidelines and the Commis-
sion’s practice as
restructuring aid. The
transfer of WBK to LBB was being investigated by
the Commission in a separate proceeding but was not
described by Germany as aid.

regards

(118)

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

(119)

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

for this.

(120) With continuing public ownership, there were con-
siderable doubts as to whether the bank’s viability
could be restored and guaranteed. The Land of Berlin
would be exposed to considerable political pressure
In
when terminating employment
general,
the
restructuring plan. The bank’s bodies would still have
political appointees on them, which would give rise to
conflicts of interest. Even if it were taken over by
another German regional bank, these problems would
continue.

relationships.
it would not be able to implement

V.

GERMANY’S REACTION TO THE COMMENTS OF

OTHER INTERESTED PARTIES

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

since Berliner

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

(124)

The steps necessary for implementing the restructur-
ing programme were being planned by BGB in two
stages:

— at conceptual level, it had first of all worked out a
subdraft
current business
segments, irrespective of whether it was to be
kept, liquidated, reduced or sold,

each of

the

for

— at a practical level, it had then allocated to each
its

specific measures necessary for

subdraft
implementation and costed them in turn.

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

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

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

‘avoidable consequences’ requirement whereby the
beneficiary companies were obliged to do their
utmost to keep the Land’s involvement as small as
possible, to utilise the assets covered by the book‑-
value guarantee as favourably as possible and to lease
or otherwise use property items on optimum terms.
Infringement rendered the company concerned liable
for damages.

(127)

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

individual

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

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

from transactions

(131)

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

(132)

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

(133)

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

VI.

ASSESSMENT OF THE AID MEASURES

State aid under Article 87(1) of the EC Treaty

(130) Nor was the risk shield an ‘unconditional licence to
submit offers on whatever terms it wanted, e.g. when
selling or leasing property’. In Articles 17(2), 35(2)
and 42(5) of the detailed agreement there were several
conditions that were dependent on the Land’s consent.
Moreover, Article 46 laid down a comprehensive

(134)

capital

injection,

The
risk shield and the
the
contribution promised in the refund agreement were
provided by the Land of Berlin and therefore comprise
state resources. The resources were granted on
conditions which would not be acceptable to a
market‑economy investor. The total amount involved

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Official Journal of the European Union

L 116/21

is several billion euros, which are being made available
to an undertaking in serious financial difficulties.

companies (which, if the nominal theoretical extreme
risks are not covered from rent, renewal and book
value guarantees, would have to be attributed to the
risk assets at a value of EUR [...]*); and EUR [...]* to
[...]* by a security premium.

(135)

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

(136)

the

(EUR [...]*),

rental guarantees

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

(137)

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

than forecast

(138) Germany also explained that,

from a commercial
standpoint, the total take‑up expected corresponded
to the worst‑case scenario, with an estimated value of
EUR 6,1 billion (EUR [...]*
in rent guarantees,
EUR [...]* in maximum price guarantees, EUR [...]*
in renewal guarantees, EUR [...]* in book value
guarantees and EUR [...]* in residual amounts), and
hence to the economic value of the aid. This economic
value was underpinned by an alternative calculation
submitted by Germany: without the guarantees in the
risk shield, liability for all the risks would have had to
be ‘discharged’ with a capital injection of some EUR
[...]*‑ [...]*. About EUR [...]* of this capital would be
accounted for by the cash value of the guarantees
described above (nominal economic value: EUR
6,1 billion); EUR [...]*‑ [...]* by the capital injection
for supporting the group banks' loans, committed for
the same purpose and utilised, to property service

the group banks’

(139) Germany also explained in this connection that it was
nevertheless not possible for supervisory reasons to
limit the maximum liability under the risk shield to
the economic value of just over EUR 6 billion. Only if
the amount were EUR 21,6 billion would all
conceivable risks mentioned above be covered, so
loans to property service
that
companies, which on account of the risks were being
committed and drawn down from rent, renewal and
the other above‑mentioned guarantees, play no role in
the subsidiary banks’ and the
the calculation of
group’s own‑funds ratios because they have a 0 %
weighting in the calculation and are therefore not
included and also not set off against the large‑scale
lending limits. Limiting the maximum amount of
liability to the economically realistic risk would, on
the contrary, mean in supervisory terms that the
credits would have to count as risk assets to the tune
of EUR [...]*, the large‑scale lending ceiling would be
exceeded and the falling own‑funds ratios would make
a further significant capital injection necessary. The
need, from a supervisory standpoint, to start with all
the theoretically occurring risks, despite a lower
economic value, was confirmed by the BAF in its
letter of 7 March 2003.

(140)

The Commission recognises the need, from a super-
visory standpoint, to start with all the theoretically
occurring risks and an amount of EUR 21,6 billion.
Further, for the state aid assessment of the measure, it
assumes, on the basis of the justification presented by
Germany, that the aid contained in the risk shield has
an economic value of EUR 6,1 billion. This amount
to the realistic worst‑case scenario
corresponds
supported by Germany with assumptions and is thus
necessary for the assessment if only for prudential
reasons. In addition, a value of roughly this amount
in the alternative, the liability
would also result if,
from risks is discharged by capital injection.

(141) With regard to the contribution promised by the Land
of Berlin in the refund agreement, it should be noted
first of all that this will apply only if the Commission
concludes the LBB/IBB proceeding (19) with a recovery
decision and if, in this case too, only the necessary
amount of the reorganisation grant is paid, in order to
avoid undershooting the capital ratios mentioned in
the agreement in the case of LBB and/or the BGB
group. Since the examination in the LBB proceeding
has not yet been completed, it is not possible at the

(19) OJ C 239, 4.10.2002, p. 12.

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Official Journal of the European Union

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(142)

(143)

moment to determine the exact economic value of
this aid. For
the competition
assessment, though, the theoretical upper limit can
be given as EUR 1,8 billion. (20)

the purposes of

The measures make it possible to improve BGB’s
financial position considerably. They have so far
prevented supervisory intervention, e.g.
temporary
closure, and the probable insolvency of substantial
subsidiaries in the group and are thus likely to distort
competition. With its subsidiaries, the undertaking is
one of the largest German banks. In 2002 it had a
group balance sheet of approximately EUR 175 billion
and was ranked twelfth. In its largest segments, BGB is
active at regional, national and international level. The
financial services sector as a whole is characterised by
increasing integration, and in substantial subsectors
the internal market is a reality. Competition between
institutions in different Member States is
financial
strong and has been getting stronger
since the
introduction of the single currency. The measures
and their effects on actual and potential competitors
distort — or threaten to distort — competition. The
distortions of competition thus also affect
trade
between Member States. The measures
therefore
constitute state aid under Article 87(1) of the EC
Treaty. Germany has not questioned this view.

the procedure,

In the decision to initiate
the
Commission noted that not only the Land of Berlin
but also NordLB contributed capital, although the
amount was proportionately less than its shareholding
prior to the capital
injection (EUR 166 million, or
8,3 % of the capital increase, compared with a 20 %
injection). The
shareholding prior
Commission could not evaluate this measure at the
information and
time because it
lacked sufficient
could not
capital
that
contributed by NordLB was also state aid within the
meaning of Article 87(1) of the EC Treaty. It requested
Germany to send the necessary information.

to the capital

conclude

therefore

the

(144) Germany explained that NordLB’s capital

increase
contained no aid since it had been made in accordance
with the market‑economy investor principle. Like the
private shareholder Parion and the miscellaneous
small shareholders, NordLB had participated in the
capital increase to a less than proportionate degree,
although the Land of Berlin and BGB had expected
each to take part in accordance with their respective

shareholdings. NordLB’s 20 % stake prior to the
capital injection would have corresponded to a capital
contribution of just over DEM 400 million. Such an
exposure, however, did not seem good business to
NordLB. On the other hand,
to have refused to
participate in the capital increase at all would have
reduced NordLB’s stake to 4 %. NordLB would thus
have lost the participatory rights associated with a
holding of at least 10 %, such as asking a court to
appoint special auditors or asserting the company’s
the management and
claims against members of
supervisory boards. Further, in August 2001 NordLB
had submitted an offer that ‘promoted its interests’
with regard to unfinished discussions on deepening
cooperation and a possible merger. Without any
participation in the capital increase, this would have
hardly been credible. Altogether, this was a decision
that carefully weighed up NordLB’s business interests.

(145) Given that the relative weight of this measure in the
restructuring plan is marginal and that the classifica-
tion of the measure as state aid or normal market
behaviour would not alter the Commission’s assess-
ment
the
is not necessary for
Commission to take a definite view on this issue.

in this case,

it

(146)

the procedure,

the
In the decision to initiate
Commission pointed out that the capital
injection
and the risk shield together should be treated as
non‑notified aid, with the legal consequences of
Article 13(2) of Regulation (EC) No 659/1999, since,
in the detailed agreement, despite notification and the
suspensory condition of aid authorisation, neither of
the two measures can be suspended without attracting
such as a
supervisory measures by the BAFin,
temporary closure of BGB. As Germany too has
explained, both measures — the risk shield and the
capital injection, which itself has been provisionally
authorised as rescue aid — are part of a single
restructuring plan. The Commission must, however,
assess this as a whole and, consequently, the two
measures cannot be given different legal classifica-
tions.

(20) This theoretical, rounded maximum is arrived at by applying
the methodology used in the Commission WestLB decision
2000/392/EC (OJ L 150, 23.6.2000, p. 1) to work out a normal
market compensation, taking into consideration the judgment
by the Court of First Instance of the European Communities of
6 March 2003 in Joined Cases T‑228/99 and T‑233/99,
Westdeutsche Landesbank Girozentrale and Land Nordrhein-
Westfalen v Commission, Rec. 2003, p. II-435, and the relevant
data for LBB, plus compound interest.

(147)

the

In this respect, Germany explained in its comments
that
legal
suspensory condition leaves
effectiveness of the adopted schemes open, but it
conceded that the capital injection and the risk shield
have together produced effects because only through

the

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L 116/23

these measures could BGB continue in business. It also
attached importance to the observation that the ban
on implementing aid for firms in difficulty before the
adoption of a final decision by the Commission
constitutes a procedural problem in view of
the
duration of the authorisation procedure.

(148) As also acknowledged by Germany, the aid in its
totality has produced actual effects before a final
decision since only through these measures has BGB
been able to continue in business. This applies not
only to the capital injection and the risk shield, but
also to the Land’s obligation to contribute under the
refund agreement. Admittedly, this obligation applies
only in the event of a recovery decision by the
Commission in the LBB/IBB case, and only then if the
amount to be recovered leads to the capital ratios
mentioned in the agreement not being met. However,
the success of the restructuring, including the other
two measures, would be jeopardised without such a
precaution,
this measure too, despite a
suspensory condition relating to authorisation by
the Commission, has produced economic effects on
its conclusion and hence before the authorisation. The
Commission notes, however, that through the sus-
pensory conditions making the validity of
the
repayment agreement dependent on state aid approval
by the Commission and the prompt transmission of
comprehensive information Germany has expressed
its readiness to cooperate.

so that

Compatibility of the aid measures
with the common market

(150)

Since the aid measures were not granted under an
approved aid scheme, the Commission must assess
their compatibility with the common market in the
light of Article 87 of the EC Treaty.

(151)

In accordance with Article 87(1), save as otherwise
provided for in the EC Treaty, state aid or aid granted
through state resources in any form whatsoever which
distorts or
to distort competition by
favouring certain undertakings or the production of
certain goods is, in so far as it affects trade between
incompatible with the common
Member States,
market.

threatens

the

(152) However, Article 87 does allow exemptions from the
principle of the incompatibility of state aid with the
common market. Provided that
conditions
governing exemption under Article 87(2) were met,
aid could be deemed compatible with the common
market. However, the aid measures under examination
cannot be regarded as aid having a social character
that
consumers
(subparagraph (a)), as aid to make good the damage
caused by natural disasters or exceptional occurrences
(subparagraph (b)) or as aid granted to the economy of
certain areas of the Federal Republic of Germany
affected
Germany
(subparagraph (c)). These exemptions are not, there-
fore, applicable in the present case.

individual

division

granted

the

by

to

of

is

(149)

The financial burden imposed by the BGB restructur-
ing plan on the Land of Berlin is — as will be shown
below — lower than in the scenario involving use of
only the existing state guarantees (institutional liability
for Land banks. This fact,
and guarantor liability)
however, does not imply that the measures taken in
favour of BGB are in line with the market‑economy
investor principle
and would consequently not
constitute state aid. Firstly, the existing state guaran-
tees themselves, even if only until 2005, constitute
state aid compatible with the common market (21).
Secondly, the Commission notes that the aid measures
in question keep BGB in operation for restructuring
purposes and thus benefit the entire group, including
the various private‑law companies. They are thus
radically different in nature and scope from the pure
implementation of the state guarantees, which exist
only for the Land bank LBB, part of the group. For
these reasons, all the measures under examination
here constitute new state aid.

(153) As regards the exemptions under Article 87(3)(b) and
(d), it is to be noted that the aid does not serve to
promote the execution of
important projects of
common European interest or to remedy a serious
disturbance in the economy of the Member State and
cannot be regarded as aid to promote culture and
heritage conservation.

(154) Accordingly,

the Commission is vetting the aid
measures in the light of the exemption in Article 87
(3)(c). It is basing its assessment of 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, on the
relevant Community guidelines. In the Commission's
the only guidelines applicable are those on
view,
rescuing and restructuring firms in
state aid for

(21)

See OJ C 146, 19.6.2002, p. 6, and OJ C 150, 22.6.2002, p. 7.

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difficulty (22) (hereinafter the guidelines). The Com-
mission also takes
the measures
described make a contribution to financing the
restructuring of the firm and are, therefore, to be
regarded as restructuring aid.

the view that

where the firm’s disappearance would result
monopoly or tight oligopolistic situation.

in a

(155) According to the guidelines,

restructuring aid is
permissible only if it does not run counter to the
Community interest. Under the guidelines, aid may be
approved by the Commission only if certain condi-
tions that are examined below are met.

(160)

(156)

(157)

Eligibility of the firm receiving the aid

In the Commission's view,
it has been sufficiently
demonstrated that BGB is to be regarded as a firm in
difficulty within the meaning of Section 2.1. (point 30,
read in conjunction with points 4 to 8) of
the
guidelines.

Point 4 of the guidelines assumes that a firm is in
difficulty ‘where it is unable, whether through its own
resources or with the funds it is able to obtain from its
owner/shareholders or creditors, to stem losses which,
without outside intervention by the public authorities,
will almost certainly condemn it to go out of business
in the short or medium term’. In the case of BGB,
these circumstances clearly obtain. Although the
measures in question, which benefited BGB before
its business activities were terminated, were taken by
the Land of Berlin, i.e. by BGB's majority shareholder,
it had already been noted that a market‑economy
investor would not have provided those resources on
the same terms.

(158) Without the Land aid measures, the capital ratios
would have fallen below the thresholds prescribed by
the Banking Law, with the result that BAFin (known at
the time as BAKred) would have had to take the
necessary measures under Sections 45 to 46a of the
Banking Law,
temporary
closure. Moreover, at the time the aid was granted,
BGB satisfied other criteria governing the definition of
a firm in difficulty under point 6 of the guidelines;
these include increasing losses, mounting debt, rising
interest charges and falling net asset value.

for example,

including,

Basic principle

(159) According to point 28 of

it

the guidelines, aid for
restructuring can be granted only if strict criteria are
met and if
is certain that any distortions of
competition will be offset by the benefits flowing
from the firm’s survival, particularly where the net
effect of redundancies resulting from the firm going
out of business would exacerbate local, regional or
national employment problems or, exceptionally,

(22) OJ C 288, 9.10.1999, p. 2.

The latter can be ruled out as regards Berlin given the
number of banks doing business there and the
structure of the market for private and corporate
business, on which BGB in the shape of Berliner Bank
and Berliner Sparkasse is still the market leader. In the
event of any bankruptcy on the part of the leading
regional bank and the sale of its component parts that
would presumably follow, no deterioration of
the
economic structure is, therefore, to be anticipated.
This is conceivable only in an extremely improbable
and hence theoretical scenario in which, following the
insolvency of one of the larger regional competitors,
all the subsidiaries/assets of BGB that account for its
strong regional position were acquired. Even then,
however, the emergence of a monopoly or a tight
oligopolistic situation is to be ruled out in view of the
merger control procedure that would follow. The
position of BGB on national and international markets
is not sufficiently strong to result in a monopoly or
oligopolistic situation following any bankruptcy and
any ensuing disposals. Germany has not disputed this
assessment by the Commission, which was set out in
the decision initiating the procedure.

(161) As regards the economic and social repercussions in
Berlin, Germany has already provided an estimate in
which the impact of BGB’s restructuring is compared
its going out of business/
with the impact of
bankruptcy, especially in connection with employ-
ment and tax revenue for the Land of Berlin. It was
claimed that an insolvency would lead to the loss of
7 200 jobs in Berlin (a decline of 59 %) by 2006,
instead of the 3 200 jobs (a decline of 26 %) that
would be lost in the restructuring scenario. The Land’s
tax receipts in 2006 would fall by EUR 70 million in
the event of a restructuring and by EUR 150 million if
no restructuring took place. In the decision initiating
the procedure, the Commission noted that it could
not verify these estimates as no further explanations
had been provided.

(162) Germany has provided additional information, includ-
ing a calculation by the German Institute for
Economic Research (DIW) according to which,
if
BGB had become insolvent, this would have resulted
in the loss of between just over 7 000 and just under
10 000 jobs in Berlin (of the 12 200 jobs that existed
in Berlin in 2001), whereas, according to the updated
plan, the restructuring would lead to a loss of some
3 500 jobs in Berlin by 2006. The Commission
regards as excessive the job losses assumed in the case
of insolvency since in this eventuality too the business
areas deemed to be fundamentally viable could have
been retained by acquirers in a likewise restructured

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form. Moreover, the job losses — currently estimated
at some 5 000 — that would result in Berlin as a
result of the restructuring are significantly higher than
originally assumed.
In any event, the Commission
agrees with the assessment by Germany that a sudden
insolvency would basically have resulted in signifi-
cantly more job losses than an orderly and long-
er‑term restructuring because a sudden insolvency
would have led to ‘fire sales’ and the closure of areas of
business that could be restructured. Account also has
to be taken of the indirect job losses resulting from
domino effects. Accordingly, direct and indirect tax
effects would lead to annual revenue shortfalls which,
at some EUR 300 million a year, can be seen as
significant, especially since they continue for many
years. To that extent, the Commission agrees with the
Federal Government that the firm’s survival will have
economic and social advantages.

insolvency

In its notification, Germany had,
in the case of a
also identified
scenario,
hypothetical
factors that would result in losses for LBB as well as
the Land’s obligations to provide support. However,
without any clear identification and quantification of
these liability risks, the Commission could not make a
proper assessment of these economic effects. In the
course of the proceedings, Germany thus presented a
legal opinion and calculations
relating to the
repercussions — over and above the revenue shortfalls
mentioned — of a hypothetical insolvency of BGB for
the Land of Berlin. These repercussions would
materialise as a result of
the very complex risk
interlinkage within the firm (including internal loans,
comfort letters, and profit‑and‑loss pooling arrange-
in conjunction with the institutional and
ments),
guarantor liability for LBB that will continue until
2005.

(163)

(164) According to Germany, the insolvency of BGB would
lead for LBB, which is linked to it by virtue of an
atypical undisclosed holding, loans and guarantees, to
losses amounting to between some EUR 18,5 billion
and EUR 25 billion consisting essentially of:
the
declining value of LBB’s claims on BGB (in the case of
a balance‑sheet total of EUR [...]* and depending on
the default rate, some EUR [...]*‑ EUR [...]*) and of
claims on customers (in the case of a balance‑sheet
total of some EUR [...]* and depending on the failure
rate,
recourse to
guarantees granted to BGB Finance in Dublin (some
EUR [...]*‑ EUR [...]*); and insolvency costs (some EUR
[...]*).

some EUR [...]* ‑ EUR [...]*);

(165) According to Germany, this scenario would impose
charges of some EUR 31 billion to EUR 40 billion on
the Land. It was assumed here that the Land decides to
terminate LBB’s business
therefore,
exercise not the institutional liability but the guarantor
liability of the Land, i.e. liability for the total amount
of LBB’s liabilities not covered by assets
(23). The

and would,

liability was
amount covered by the guarantor
estimated at between some EUR [...]* (base case) and
EUR [...]* (worst case). Other charges on the Land
amounting to between some EUR [...]* (base case) and
EUR [...]* (worst case) would result under this scenario
from the claims of the Deposit Guarantee Fund of
German private banks. (24) It was also assumed that
the Land’s capital injection of just under EUR 2 billion
would be lost and that the provision of
liquidity
during the winding‑up would have interest‑rate costs
of some EUR 5 billion.

(166)

The Commission has checked these figures and
It
calculations and asked for further explanations.
has come to the conclusion that, in a hypothetical
insolvency scenario, the existing state guarantees for
LBB would impose on the Land substantial charges for
which only a rough estimate could be made, with a
distinction having to be drawn in any event between
the subscenarios with or without
the continued
existence of LBB and assuming institutional liability.

the effects of

(167) According to its own estimates, which are based on
the figures supplied by Germany, the Commission
assumes that, if LBB were to continue in business, the
charges on the Land would be of the order of some
EUR 13 billion to EUR 20 billion or more. This would
comprise first the loss of the Land’s share in BGB's
capital
(just under EUR 2 billion). In addition, by
virtue of its institutional liability for LBB, the Land
the claim
would have to offset
represented by the guarantees granted by LBB to
BGB Finance in Dublin (estimated by the Commission
at some EUR [...]*) and the decline in value of LBB’s
claims on BGB (estimated at around EUR [...]*) to the
extent that, subject to compliance with the solvency
criteria,
its continuing operation could be properly
safeguarded. In view of the possible claims ‑ indicated
by Germany ‑ of the Deposit Guarantee Fund of
German private banks, a number of uncertainties exist
— [...]*. Substantial legal doubts also exist regarding
the
certain
third‑party claims stemming from the fund business
in the real estate services area (e.g. prospectus liability,
exemption declarations for shareholders of investment

legal validity of LBB’s

liability for

(23) On the basis of the institutional liability, which is applicable
until July 2005, the Land of Berlin is, as regards its internal
relationship with LBB, required to provide LBB, as a public‑law
body, with resources in such a way that it is able to perform its
tasks. However, if the Land decides to terminate the business,
the guarantor liability is triggered.

(24)

In 1993 the Land of Berlin issued a statement to the Deposit
Guarantee Fund of private German banks regarding Berliner
Bank AG, which had in the meantime merged with BGB, to the
effect that, according to the German authorities, the risk of
liability on the part of the Land of Berlin towards the Deposit
Guarantee Fund was not, however, ruled out. It is to this case
that the estimates refer.

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4.5.2005

and ad hoc companies acting in a personal capacity).
Any risks cannot, therefore, be quantified.

Restoration of long-term viability

(168)

(169)

for

charges

additional

In the event of termination of LBB’s business, there
would be
the Land of
approximately EUR 8 billion (some EUR 6 billion as
a result of the loss in value for LBB of claims on
customers as a result of liquidity problems triggered
by the insolvency — virtually as a domino effect ‑ for
customers (in particular investment companies, shelf
companies and residential property companies) and
around EUR 2 billion by way of depreciation on
participating interests).

in the event of

In the course of the proceedings, Germany has also
the hypothetical
claimed that,
insolvency of the real estate service business (divest-
ment and liquidation without the risk shield), these
scenarios would not be significantly affected because
of
the risk interlinkage within the company. Of
decisive importance here are the large amount of
lending to subsidiaries in the growing and, at the same
time, increasingly difficult real estate service business
(IBAG/IBG/LPFV, including the IBAG subsidiaries IBV
and Bavaria) by the group’s subbanks (BGB, LBB and
BerlinHyp), as well as the profit‑and‑loss pooling
arrangements between IBG and its subsidiaries Bavaria
and IBV, on the one hand, and BGB and IBAG, on the
other. In addition, BGB gave guarantees in respect of
all the liabilities of IBG, Bavaria and IBV that were
justified at the end of 1998. The Commission has no
reason to doubt these observations by Germany. To
this extent, it agrees with Germany that divestment
and liquidation of
the real estate service business
IBAG/IBG/LPFV would, without the risk shield, also
lead to the insolvency of BGB, together with the
consequences described above, because of the risk
interlinkage.

(170)

Lastly, it should be pointed out that the repercussions
insolvency of BGB — with or
of a hypothetical
without the survival of LBB — are difficult to calculate
and that the estimations are subject to considerable
uncertainty. The charges for the Land can, therefore,
be estimated only roughly and range from some EUR
13 billion to over EUR 30 billion. However, taking a
it can be
probable value between these extremes,
concluded that, with the help of the aid measures in
question, a restructuring will
impose less onerous
charges on the Land of Berlin.

(171) During the proceedings Germany has not claimed that
BGB or other firms in the group provide services of
general economic interest within the meaning of
Article 86(2) of the EC Treaty. Accordingly, as stated
in the decision initiating the procedure, the Commis-
sion has assumed that this aspect is of no relevance to
the assessment of the measure in question and has
concluded that aid cannot be approved on the basis of
Article 86(2).

(172) According to point 3.2.2(b) of the guidelines, the
grant of aid is conditional on implementation of the
restructuring plan, which must be endorsed by the
Commission in the case of all individual aid measures
and examined to determine whether it is likely to
restore the firm’s long-term viability within a reason-
able timescale. The restructuring plan must be of
limited duration and be based on realistic assump-
tions. It must describe the circumstances that led to
the firm's difficulties, thereby providing a basis for
assessing whether the proposed measures are appro-
priate. It should enable the firm to progress towards a
new structure that offers it prospects for long-term
viability and enables it to stand on its own feet, i.e. it
should enable the firm to cover all its costs including
depreciation and financial charges and to achieve a
sufficient return on its capital for it to compete in the
marketplace.

(173)

(174)

for

the individual

The Commission has based its
assessment on
information furnished by Germany, including detailed
restructuring measures,
plans
forecast profit and loss accounts for the restructuring
period 2001 to 2006 on the basis of a best-case, a
worst-case and a base-case scenario, an analysis of the
structural deficits responsible for the difficulties and
the costs of the planned restructuring measures. In
making its assessment, the Commission also relied on
information supplied by Germany on the current
implementation of
the restructuring plan and on
modifications to individual measures including the
scheduling of the sale of specific assets.

the failure of

In view of
the initial attempt at
privatisation and BGB’s large annual loss of approxi-
mately EUR 700 million for 2002, the Commission
considered it necessary,
following notification by
Germany at the end of March 2003, to investigate
by its own means the bank’s viability once more in
depth and, if no clear conclusions could be drawn, to
have it examined by independent outside experts. The
Commission’s aim was to establish with a sufficient
degree of certainty that BGB can continue to compete
in the marketplace on its own merits without any
further state support. Without such a sufficient degree
of certainty or if doubts subsist, the Commission
would have to take a negative decision on all the
measures at issue on the basis of the restructuring
plan submitted. The failure of the privatisation process
raised in particular doubts about the soundness of the
remaining real estate financing business. Admittedly,
the annual loss of approximately EUR 700 million
(after tax) was due predominantly to exceptional items
(minus EUR 593 million),
in particular substantial
write-downs on Euro-Stoxx holdings of EUR 399
million, while the operating result less the provision
for contingencies was only slightly negative (minus
indeed around EUR
EUR 23 million) and was

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L 116/27

(175)

(176)

30 million better than that anticipated in the plan for
2002 (minus EUR 53 million). However, this heavy
loss had a considerable negative impact on the
core‑capital
ratio intended as a cushion against
possible further losses and hence essential to viability,
which dropped as a result to 5,6 % and thus by a
considerable margin of almost [...]* % fell short of the
[...]* % figure originally planned for 2002.

It should be pointed out in this connection that in
early 2003 the Commission had held talks with
Germany about whether further compensation mea-
sures were possible in the retail
field. Germany
quantified the effects of a separate sale of Berliner
Bank under the conditions then prevailing in such a
way that the Commission could not be sufficiently
certain that the remaining group could continue to
compete in the marketplace on its own merits.

together with its attendant

The Commission’s investigation focused in particular
on the credit risks and risk provision in the real estate
financing field and, to a lesser extent, in the capital
market field. In the Commission’s opinion, the doubts
about viability could have been allayed if the real
estate financing business or at least the major part of
risks, had been
it,
effectively insulated from the remainder of the group,
e.g. by an early separate sale of the business. Up until
June 2003, however, Germany presented figures
which made it appear to the Commission that the
scenario of such an outflanking, effective insulation of
this business was not feasible. The main reason given
was that the sale would have led to an immediate
transfer of
the real estate financing
business (especially BGB’s stake in BerlinHyp with a
book value of EUR [...]*) from capital assets to current
assets. This would have necessitated a valuation of
those assets at the current market value, [...]*. The
resulting exceptional losses would, so Germany stated,
have placed such a heavy burden on BGB’s capital
its
resources
viability would no longer have been assured.

state support

the assets of

that without

further

20 November. In the light of the report by Mazars, the
Commission, on the basis of the restructuring plan as
it stood in the summer of 2003 (which did not yet
include the divestment of Berliner Bank as this was
offered by Germany only after completion of the
study), came to the conclusions regarding the bank’s
viability that are set out below.

Analysis of the market study submitted to the Commission

(179)

In January 2002 Germany submitted to the Commis-
sion, together with the notification, a detailed market
study carried out by the bank and Morgan Stanley in
which the current situation and the prospective
situation in the banking market in Germany, and in
Berlin in particular, are described. The Commission
considers the market study, including the information
which was submitted after
the
procedure to be complete and inherently conclusive.
On the points commented on in the decision to
initiate the procedure,
the Commission refers to
Germany’s additional submissions set out in para-
graph 58 et seq.

the initiation of

(180) Germany stated in particular that BGB’s retail business
(private and corporate customers) was concentrated
on the Land of Berlin and the immediately surround-
ing area, which constituted the relevant geographic
market. In the most important market segments, i.e.
in particular deposits and lending, BGB’s market share
during the years before the crisis underwent only
slightly positive or negative changes or else remained
unchanged. In Berlin a significantly larger number of
inhabitants (just under 4 000) were served by a
branch than the German (1 300) or European (1 800)
average. In future, the number of branches would
continue to fall slightly as customers increasingly
carried out transactions on the Internet. Although
there was in principle no surplus capacity, there was,
however,
further
increased the pressure on margins and promised
further consolidation.

competition which

intensive

to appoint

(177) Once such a short-term insulation of the remainder of
the group from the risks of the real estate financing
business no longer seemed possible, the Commission
had no other choice but
independent
experts to examine BGB’s viability under the existing
restructuring plan. The outstanding issue was whether,
in view of the existing risks in the real estate financing
field, the risk provision could be regarded as adequate.
The report mandate issued on 14 July 2003 for the
auditing firm Mazars, which had been selected as the
Commission’s advisers, was, however, comprehensive
and also covered other risks to the bank’s viability (e.g.
the capital market business of wholesale/foreign
banking).

(178)

report was

The draft
submitted as agreed on
30 September 2003. The main findings were
discussed with Germany on 3 October. The final
version of the report was transmitted to Germany on

(181)

In the real estate financing field, the German mortgage
lending rate was very low compared with the rest of
Europe, and an increasingly strong concentration
process was to be observed among mortgage lenders.
Moreover, no substantial new company had been set
up in the mortgage lending field in recent years. The
heterogeneous supply-side structure and the resulting
competition were also major reasons for the lack of
profitability of
the mortgage lending business in
Germany. In the past, market participants had been
able to achieve growth only through very aggressive
pricing, which, however, in many cases later led to
significant value adjustments, as the example of
BerlinHyp or BGB showed. The strong fragmentation
of the market had resulted in intensive competition
and considerable pressure on margins. Whereas in
western Germany demand was increasing, in the east
a further consolidation was taking place in rents and
asset prices. Generally speaking, demand looked set to

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Official Journal of the European Union

4.5.2005

grow over the next few years in some areas of the real
estate market in Germany. Owing to the intensive
competition and a further tightening of the regulatory
environment, a significant recovery of the German
mortgage market as a whole was not, however, to be
expected.

(182) With regard to the real estate services business (funds
business and project development/building work), no
surplus capacity was directly perceivable in the
domestic funds business. There was, however, highly
intense competition, albeit
largely unchanged for
some time. It should be noted here that a commit-
ment was given in the course of the procedure to hive
off the entire real estate services business from BGB.

(183)

(184)

In the capital market business, BGB is, according to
Germany, active in share and bond trading (for its
own account and on behalf of customers),
in
derivatives
issuing and trading, and in foreign
exchange and currency business as well as other
money market
transactions, mostly with German
customers. The crisis in the capital markets had led to
a sharp drop. The question of surplus capacity could
not be answered conclusively as yet. A sharpening of
competition and an increasing marginalisation of
smaller competitors such as BGB to the benefit of
larger providers were, however, expected.

It

should be achieved here.

To sum up, the Commission would point out, in reply
to Germany’s arguments, that it takes a positive view
in principle of the future development of the market
environment and the market prospects of BGB in the
retail business and the capital market business. In view
of the better economic situation that is expected in the
years ahead in the light of more recent data, relatively
stable earnings
is
substantially for the company itself to translate its
market strategies successfully into practice. On the
other hand, the position with regard to the real estate
financing business looks less favourable owing to the
consolidation process, which is apparently not yet
its
finished. The bank might
strategy further in line with future developments in
this area, where appropriate through further targeted
contractions of
should this prove
necessary. Once the real estate services business has
been split off from the bank by the end of 2005,
market developments in this area will play no more
than a subordinate role as
the bank is
concerned.

thus have to adapt

the business

far as

Analysis
structural
responsible for the difficulties

the

of

and

operational

deficits

(185)

In assessing the structural and operational deficits
responsible for the bank’s difficulties, the Commission
would refer to the information provided by Germany.
It considers the analysis of the past deficits to be

(186)

(187)

appropriate overall and to represent a suitable starting
point from which to bring them under control and to
draw up the restructuring plan.

The Commission concludes that BGB’s crisis was due
above all to the accumulation of risks in the real estate
services field through a steady increase in the granting
of long-term rent, dividend and renewal guarantees
which, from a business standpoint, could be regarded
neither as manageable nor as reasonable from a cost/
benefit angle. Instead, these were based on entirely
unrealistic market estimates which can be described
more as wishful thinking. The same applied to the real
estate financing business: an aggressive rates policy
that was aimed at achieving higher market shares and
did not adequately cover the lending risks and the
incorrect valuation of securities due to negligence led
during the economic downturn of the late 1990s to
massive loan defaults and corresponding losses.

financing businesses, huge

In addition, in both the real estate services and the real
influence was
estate
exerted by a few local politicians who did not have
the bank's business interests at heart or who lacked
the necessary financial knowledge and gave priority to
supposed local development objectives. In so far as
law, the
these acts are punishable under criminal
matter is in the hands of the Berlin judicial authorities.
These
economically unjustifiable practices were
greatly facilitated by a system for recognising and
controlling risks which can be described as rudimen-
tary and in no way appropriate to the standard
requirements of effective risk management. Neither
the bank’s managing board nor its supervisory board
adequately fulfilled its responsibility to manage or
supervise the company properly. It must be added,
the then auditors and competent
however,
supervisory authorities likewise woke up far too late
to the continuing accumulation of risks with which
the bank could ultimately no longer cope and took the
appropriate measures only shortly before the crisis
broke.

that

(188) That the onset of the crisis could be delayed so long
was a reflection of the fact that, as part of the group,
Landesbank Berlin benefited from the comprehensive
state guarantees, institutional liability and guarantor
liability and refinanced the whole group, irrespective
of the true business risks, at little cost on the capital
markets and that the economic effect of institutional
liability and guarantor liability was extended via
to other group
private-law guarantee vehicles
companies, thereby making possible many transac-
tions which made no sense for
the bank. The
abolition of
liability and guarantor
liability in July 2005 will ensure that a crisis
engendered in this way will no longer be possible
in future or will be recognised in time by the market

institutional

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Official Journal of the European Union

L 116/29

and that the taxpayer will no longer have to stump
up billions as a result.

Comprehensive
presented in the
business strategies

description of

the

summer of 2003 and of

restructuring plan
the new

(189) Mazars analysed the detailed restructuring plan, as it
stood in the summer of 2003 (it did not therefore
include the divestment of Berliner Bank). The plan
provided for measures which,
in the Commission's
opinion and in line with the assessment made by
Mazars, are overall suited to clearing the structural and
operational deficits responsible for the difficulties of
the past and to restoring the company’s long-term
viability.

(193)

(190)

(191)

The restructuring plan to overcome the bank’s
structural and operational deficits consists, on the
one hand, of measures for the disposal, merger and
liquidation of subsidiaries or business areas with a
view to the future concentration of the bank on its
core business and, on the other, of measures to
increase the efficiency and profitability of the core
business (reorganisation sphere)
itself through cost
reductions, concentration of activities and reduction
of risk positions. Some of the restructuring measures,
both within and outside the core business, may be
regarded simultaneously as measures to compensate
competitors in so far as they result in a reduction in
the bank’s market presence. The restructuring plan
relates to the period 2001 to 2006.

The target structure of
the restructuring plan as
submitted to the Commission in the summer of 2003
is that of a regional bank focused on the core business
of retail banking (private banking and corporate
banking under the names Berliner Sparkasse and
Berliner Bank), supplemented by higher-margin capital
market business (BGB and LBB) and real estate
financing business (BGB, LBB and BerlinHyp).
In
2006 the retail business should accordingly contribute
just over [...]* of the group’s earnings (just under EUR
[...]*),
[...]* %
the capital market business about
(approximately EUR [...]*) and real estate financing
about [...]* % (approximately EUR [...]*). Owing to the
relatively higher share of the costs accounted for by
retail banking, retail and capital market business
should, however,
to the
operating result.

contribute about

[...]*

(192)

The essential principles of the restructuring are the
permanent restoration of the bank’s earning power
and the lasting reduction of its costs, the lessening of
risks to a normal market level and, through this, the
improvement of the bank's ability to access the capital
market. Specifically, during the restructuring period
2001 to 2006,
should, as
presented to the Commission in the summer of
2003, improve to well over EUR [...]* a year and, to

the operating result

this end, administrative expenditure above all should
be reduced disproportionately by just over EUR [...]*.
Risk positions, which are decisive when it comes to
calculating the core‑capital ratio, should be reduced
between 2001 and 2006 by about [...]* % from just
under EUR [...]* to a little over EUR [...]*. The bank
aims to raise the core‑capital ratio in the medium term
to at least 7 %.

Analysis of the structural and operational measures in the
individual business areas

In view of the main reasons for what went wrong at
BGB, key measures such as a radical reduction in the
number of employees by more than half overall (from
some 15 000 to some 6 500), the abandonment,
reduction or systematic closure of high-risk business
areas or business areas not belonging to the core
business of a regional retail bank, better internal
control mechanisms and leaner structures both in-
house and in subsidiaries are, in the opinion of the
Commission and its advisers, reasonable steps towards
making the company profitable once more and
erasing the mistakes of
the past. The operational
improvements
stem from internal measures and
loss-making activities.
include the abandonment of
The Commission, in the light of the analysis under-
taken by Mazars, views the prescribed measures as
basically sound. They have already largely been
implemented or are on schedule. The detailed picture
is as follows:

Retail business in the private banking field

(194)

For retail business in the private banking field, the
original restructuring plan consisted in focusing on
regional business under the names Berliner Sparkasse
and Berliner Bank (the latter is now, according to
Germany, to be divested separately), optimising the
workflow and substantially cutting back the work-
force. The plan, which has already largely been
implemented, provides for the disposal of holdings
which do not fit in with the defined regional core
business and for branch closures. Total earnings are
set to [...]* in the reorganisation sphere from 2001 to
2006, while total administrative expenditure during
the same period should fall by more than [...]* % and
profit before tax should rise from below minus EUR
[...]* to about EUR [...]*. Risk positions are to be
significantly reduced. The number of employees is to
be cut from about 6 000 in 2001 to a little over [...]*
in the reorganised group in 2006. Private banking’s
cost/income ratio is to be improved from just under
[...]* % in 2001 to just under [...]* % in 2006.

(195)

These measures have already been largely implemen-
ted according to plan. Only the sale of Weberbank
with a total asset value of EUR 4,4 billion has been
delayed but the likelihood is that it will be able to go

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in line with the
ahead in 2004. The Commission,
analysis conducted by Mazars, considers that the plan
at this stage is a sound basis to achieve long-term
viability in the private banking field.

Retail business in the corporate banking field and future
remaining business with the public sector

(196)

The measures taken or scheduled under the original
plan in the private banking field have an extensive
impact at the same time in the corporate banking
field,
in which category the remaining part of the
public sector segment will in future be placed. The
plan provides for a cessation of corporate banking
outside Berlin. Total earnings are set to fall only
slightly, while total administrative expenditure during
the same period should fall by just under [...]* % and
profit before tax should increase from about EUR [...]*
to about EUR [...]*. Risk positions are to be reduced
significantly. Staff numbers are to be cut by more than
[...]* %. Corporate banking’s cost/income ratio is to be
improved from just under [...]* % in 2001 to a little
over [...]* %.

(197) As confirmed by Mazars, these measures had already
largely been implemented or were generally on
schedule. The Commission considered them likely,
as the plan stood; to achieve satisfactory profitability
in the corporate and public sector banking business
and to restrict the bank to its core business in the
Berlin/Brandenburg region in this field too.

Capital market business

(198)

It

is

is

the

The capital market business is being restructured to
free up capital through a suitable reduction in risk
positions and to enhance workflow efficiency. To this
end, own-account business (share and interest credit
products)
to be
in all capital market areas
concentrated under one roof, clearly separated from
is to be
private banking and reduced overall.
restricted to Germany, Europe and the United States,
emerging‑markets business
while
to be
abandoned. The interest derivatives portfolio is also
to be sharply reduced and limited to customer-
oriented positions. On the other hand, the less risky
non-bank customer business is to be expanded,
especially in relation to interest‑rate and equity
products. Total earnings should fall only slightly
between 2001 and 2006, while total administrative
expenditure should fall by about [...]* % during the
same period and profit before tax should increase by
about [...]* %. Risk positions should be reduced by
about [...]* %, as should the workforce. It is intended
that
the capital market
business should be improved from just over [...]* % in
2001 to about [...]* % in 2006.

the cost/income ratio of

(199) According to Mazars, the planned measures had been
largely implemented or were on schedule. The

them to be sufficient

to
Commission considers
safeguard the earning power of this business in the
future and, at the same time, to keep the risks to the
bank within manageable proportions. In the Commis-
sion’s opinion, the focusing on non-bank customer
business and the concentration and organisational
separation of own-account business improves trans-
parency, reduces risks and helps the bank to manage
these better. Thanks to the significant reduction in risk
positions, capital will be freed up, and this will be
conducive to increasing the capital ratio and hence to
securing the bank’s future capital market capability
once institutional liability and guarantor liability have
been done away with.

Real estate financing business

(200)

In restructuring the real estate financing business, risk
reduction has top priority. To this end, an inventory of
risks is gradually to be compiled with a view to
eliminating the worst
risks and restricting new
business to low-risk customers. The risk management
function is to be expanded. The workflow is to be
optimised and risk control
improved. The core
business is to include in future the financing of
commercial
investors and residential property con-
struction companies primarily in selected large cities
in western Germany less hard-hit by the crisis in the
real estate market as well as, to a certain extent, in
Berlin and Brandenburg. The financing of commercial
investors is a relatively stable,
low-risk business. A
supra-regional focus is necessary to diversify risk and
ensure a sufficiently varied portfolio as well as to
exploit
and existing
regional market know-how. Without supra-regional
components in real estate financing, there was a threat
of a substantial worsening in the credit rating and in
refinancing rates. On the other hand, there is to be a
move away from high-risk segments of the real estate
business with unsatisfactory margins. The bank
considers an improvement
in earnings from new
business through a reorientation of such business to
be realistic.

regional growth potentials

(201)

In order to improve earnings from existing business,
risk specialists are to be employed increasingly for
risky commitments. This will, according to the bank,
lead to a review and critical reassessment of existing
business, where appropriate with the help of outside
consultants acting on instructions
from and in
conjunction with the team of in-house experts. Direct
personnel and non‑personnel costs are to be reduced
by about [...]* % by 2005. Another important means
of
the development of
is
reorganisation strategies for non‑performing commit-
ments and the introduction in 2002 of group-wide
risk control, which previously existed in only a few
areas, as well as the introduction of suitable ear-
ly‑warning instruments.

improving earnings

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(202) Total earnings from 2001 to 2006 are set to rise by
just over
[...]* % to [...]*. Total administrative
expenditure during the same period should, however,
fall by about [...]* %. Pre-tax profit should increase
from distinctly negative figures to about EUR [...]* in
2006. Risk positions should be reduced by over
[...]* % and the cost/income ratio of the real estate
financing business should rise by about [...]* %, inter
alia owing to the above-mentioned cost-intensive
measures aimed at introducing better risk manage-
ment, to a little over [...]* %.

in most

(203) These measures had already largely been implemented
instances, on schedule. The
or were,
Commission regards them fundamentally as steps in
the right direction. However, in the opinion of the
Commission and its advisers, implementation of the
desired improvements is, as regards data quality, still
behind schedule. This unsatisfactory state of affairs
might hamper the operability of the risk management
system.

(204)

in line with Mazars’
In addition, the Commission,
findings, doubts whether the bank will succeed in
generating in future a sufficient volume of business
with the desired high margins from customers with
low risk profiles. According to Germany’s own data,
the real estate financing market is characterised by
highly intense competition and is currently in the
middle of a consolidation process. As the most
attractive market segment in the real estate financing
field, the target customers aimed at by BGB are also
being strongly wooed by other suppliers. Any slippage
from target would have a direct impact on the desired
future interest surplus. On the basis of the figures for
the summer of 2003 made available to the Commis-
sion’s advisers, the underperformance at the time in
the generation of new business would have led on an
extrapolated basis to a considerable interest earnings
shortfall. If the underperformance were to deteriorate
in future, then the shortfall in interest earnings would
likewise increase. The future generation of sufficient
new business depends crucially on market trends in
the Berlin/Brandenburg region, where the focal point
of BGB’s business continues to lie. If the bank were to
have insufficient success here,
this would have a
lasting impact especially on the value of BGB’s holding
in BerlinHyp and would necessitate further write‑-
downs in the current book value of EUR [...]*, which
would have a negative effect on earnings and, perhaps,
the core‑capital ratio of the bank. This question is
discussed in greater detail below (paragraph 249). In
line with Mazars’ findings, the Commission considers,
however, that the bank's overall viability is not called
into question by the remaining problems in the real
estate finacing business.

Liquidation of the large customer/foreign business area

It

(205) The bank intends to withdraw entirely from the large
customer/foreign business area, which also includes
consultancy business in the mergers and acquisitions
field and structured finance/project financing and is
the bank’s core
not viewed as forming part of
accordingly stopped acquiring new
business.
business in principle in 2002. In view of long-term
commitments, especially in the structured finance
field, an immediate exit is not possible, however, the
only option being an extensive reduction in risk
the
positions of about
restructuring period in 2006. The remainder is to
be terminated as soon as possible, apart from a limited
number of export financing operations covered by
export credit agencies and medium‑ to long-term
financing of goods transactions in selected target
countries in central and eastern Europe on the basis of
proven country expertise; these are being integrated
into the capital market business and are to be retained.

[...]* % by the end of

(206) The reductions to do are largely as planned. In the
Commission’s and Mazars’ opinion, they are aimed at
discontinuing this business area as a whole as soon as
possible in an orderly manner and, thanks to the
massive reduction in risk positions, at freeing up
significant amounts of capital which will help to
ensure future capital market capability. The abandon-
ment of this relatively high-risk business area with
high individual financing volumes, which does not
form part of the core business, will also considerably
ease the burden on management, which will be better
able to perform its priority tasks in the key areas. The
original plan of reductions was amended, however, in
June 2003 to take account of the unfavourable market
conditions in 2002. This might cause some, but on
the whole not significant delay in the reduction of risk
positions.

Scaling down and transfer of the real estate services business

(207) As an addition to its notification, Germany offered in
its response to the Commission’s decision to initiate
the procedure not only a scaling down of the real
estate services business but also its complete spin-off
and — apart from a few companies to be defined and
still sellable on the market — transfer to the Land of
Berlin by the end of 2005 as a further compensatory
measure. This measure accordingly became part of the
restructuring plan. It covers all the real estate services
companies protected by the April 2002 risk shield,
and in particular IBAG, Bavaria, IBV, IBG and LPFV.

(208) The April 2002 risk shield covers all risks from the
bank’s old business in the real estate services field
transacted before the cut-off dates mentioned above.

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4.5.2005

considers

This means that risks to the bank in the real estate
services business area now arise only from new
business transacted after those dates. Since the market
for real estate services is still
to be regarded as
problematic and is characterised by a high degree of
forecasting uncertainty, the Commission, supported
by Mazars,
continuing significant
the
reduction in new business in the real estate services
field to be
contribution to the
restoration of long-term viability and concentration
on the core business of a regional bank. The transfer
of old business protected by the risk shield to the Land
of Berlin at the market price likewise enables the bank
to free up resources previously tied up outside the
core business, although the transfer of old business
such have any
already covered should not as
significant impact on the bank’s risk situation.

an important

(209) The Commission,

in line with Mazars’
findings,
considers the complete abandonment of
the real
estate services business area to be to be a clear,
economically meaningful step which should contri-
the bank’s
bute to the long-term stabilisation of
results. This measure should therefore be viewed
favourably by the capital market and should ease the
planned privatisation of the bank.

Staff

(210)

The planned staff reductions during the restructuring
period from 2001 to 2006 amount for the whole
group to some 8 500, i.e. a reduction of almost 60 %
from over 15 000 employees to just over 6 600. By
30 September 2003, the workforce comprised some
10 000 employees in total, i.e. a reduction of almost
5 200 or about 35 %. These figures are largely as set
out in the plan.

Analysis of the financial measures

(211)

The financial measures are,
in the opinion of the
supported by its advisers Mazars,
Commission,
necessary and appropriate as a means of restoring
BGB’s financial stability from the point of view of
liquidity and capitalisation and of ensuring its
refinancing on the capital markets as well as the
restructuring. They consist of
financing of
measures
relating both to own capital and to
borrowed capital. The details are as follows:

its

(212)

The Commission takes the view that the sale of assets
and participations will provide the bank with liquidity
and reduce risk positions outside the core area. It is
not clear, however, that accounting profits of any
significance overall can be achieved in this way.

(213)

(214)

(215)

the bank rests on three main
The refinancing of
pillars: savings deposits (approximately one third),
bank deposits (approximately one third) and securi-
tised liabilities (approximately one quarter). Consoli-
dated liabilities fell from EUR 185 billion at the end of
2001 by EUR 32 billion to EUR 153 billion in mid-
2003. This exceeded by a significant margin the
planned target
for 2003 of a little over EUR
160 billion. By 2006 the figure should have fallen
to just under EUR [...]*.

To prepare for the abolition of state guarantees, the
bank aims to switch from its at present relatively large
stock of short-term liabilities to medium‑ and long‑-
term liabilities and to re-enter the capital market in
the area of unsecured liabilities. To this end, it has
drawn up objectives for the issuance of secured and
unsecured liabilities and is seeking thereby to rebuild
the trust of the capital market and to expand the
investor base. It has held talks with ratings agencies
about the realistically attainable rating in the event of
successful implementation of the restructuring plan
on the basis of the base-case scenario (A- or A3). [...]*.
On the whole, an average increase in refinancing costs
of [...]* basis points can be reckoned on as a result of
the abolition of state guarantees in mid‑2005.

in line with Mazars’
The Commission considers,
findings, that the bank’s refinancing strategy, and in
particular
the base scenario drawn up and the
inference of correspondingly higher refinancing costs,
is fundamentally plausible. However, a question mark
hangs over the bank’s future refinancing because of
potential reluctance on the part of market partici-
pants, which might materialise especially if the bank’s
results fail to come up to expectations. In such an
event, still higher refinancing costs would have to be
reckoned with. What
is more, how far possible
saturation effects might be observed in the market
in mid-2005 if all public banks in Germany lose the
fully foreseeable. The
state guarantees is not yet
placing of certain securities issues might then be at
least hampered.

(216)

For this reason, the Commission sees in the further
reduction of risk positions an essential precondition
for the successful implementation of the restructuring
If the problems described were to occur in
plan.
future, the bank could effectively combat them by
stepping up the reduction effort and thus favourably
influence the confidence placed in it by the capital
market.

(217) Another essential precondition for

securing the
confidence of the capital market is the attainment of
a satisfactory core‑capital ratio that can act as a buffer
against any losses incurred. The core‑capital ratio
depends firstly on the extent of the risk positions and
secondly on that of the core capital itself. The bank is
aiming at a core‑capital ratio at
the
restructuring period of more than 7 %. A capital
in addition to the
contribution by shareholders,

the end of

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Official Journal of the European Union

L 116/33

in order to further
increase,
August 2001 capital
improve the bank’s capitalisation is, however, not
likely before privatisation takes place at the end of
2007. Accordingly, if it is to increase its core‑capital
ratio, the bank must fall back in particular on a
reduction in risk positions or the sale of assets.

(218)

The Commission is aware that the statutory minimum
core‑capital ratio of 4 % is insufficient to give a bank
the necessary breathing space in day-to-day business.
In its rescue aid decision of 25 July 2001,
the
Commission therefore recognised a core‑capital ratio
of 5 % as being necessary in order to enable a bank to
continue to exist. This was based essentially on a letter
from BAKred, as it then was. As confirmed by Mazars,
the Commission is also aware that in the financial
markets a core‑capital ratio of 6 % is generally
mentioned as being the threshold below which
questions arise as to the strength of the institution
concerned and the confidence of the financial markets
suffers. According to Mazars, ratings agencies tend to
view core‑capital ratios as a reflection of a bank’s
financial strength, which is why credit institutions
generally strive to exceed the required capital under-
pinning in order to ensure sound ratings, this being a
precondition for access to the international capital
markets on reasonable terms. A capital ratio higher
than 6 % may also be wise in the light of the reform of
international agreements within the Basel II frame-
work and the abolition of state guarantees in order to
fulfil the market’s expectations of greater strength
especially on the part of Land banks and thereby to
achieve a better rating. The bank is aiming at an A
rating and considers a core‑capital ratio of at least 7 %
to be necessary for this. On the basis of comparable
market data (with the average core‑capital ratio for the
sector in Germany of 6 % being low by international
comparisons and with 8 % or even higher being the
institutions at
average value for
European level), Mazars considers it
indispensable
for the bank to achieve in the medium term at least a
core‑capital ratio of some 6 to 7 %.

reputable credit

(219)

in line with Mazars’

The Commission,
findings,
likewise regards a medium‑term increase in the
core‑capital ratio to over 6 % as being desirable.
in the
However, an increase to over 6 % is,
Commission’s opinion, solely a commercial objective
the responsibility for which must be assumed by the
bank and thus cannot be financed by state aid. The
bank’s competitors are faced with the same market
situation but have to increase their core‑capital ratios
on their own without any state support. Authorisation
of an increase in the core‑capital ratio using state
resources to over 6 % would therefore unjustifiably
place
the bank in a better position than its
competitors, without this being absolutely essential
to the bank’s viability at the time of the decision. The

aid would accordingly no longer be kept
minimum required.

to the

(220)

For this reason, the Commission has insisted that,
under the agreement between the Land of Berlin and
the bank of 26 December 2002 on the treatment of
any claims to repayment brought by the Land arising
out of a Commission decision in aid case C 48/2002,
the amount of any repayment claim will be left in the
bank in the form of a deposit only as far as is
necessary to attain a core‑capital ratio of 6 % (or a
total capital ratio of 9,7 %, as already acknowledged in
the decision on the rescue aid) on the basis of the
2002 annual accounts. However, this agreement can
be approved by the Commission only in so far as the
amount calculated under the agreement also does not
lead to any overstepping of the core‑capital ratio of 6
% for the BGB group as at 1 January 2004 and hence
on basis of the figures current at the time of the
Commission decision (thus taking into account the
hiving off of IBB promised by Germany and described
in paragraph 279).

(221) On the basis of

the same considerations,

the
Commission has ensured that Germany commits
itself to leaving the IBB reserve in the context of the
divestment of government assistance business in
2005 in the bank only as far as is necessary to
maintain the core‑capital ratio at a level of 6 % on the
reference date of 1 January 2004. This measure is to
be viewed as part of the compensation to be provided
by the bank in order to limit in the interests of
competitors the distortions of competition caused by
the aid. The above refunding of
the IBB reserve
ensures that,
in the context of the divestment of
government assistance business, the bank does not
have a core‑capital ratio in excess of the minimum
essential to long-term viability which it might be able
to use for expansive business strategies damaging to
competitors.
the bank subsequently wishes to
achieve a higher core‑capital ratio, then it must do
so via suitable changes to the risk assets, by building
up reserves through its own efforts or by borrowing
further
the time of or
following privatisation.

funds on the market at

If

(222) To sum up, the Commission,

in line with Mazars’
findings, proceeds on the assumption that the bank
in its own well-understood business interests,
will,
make every effort
in the long term to reach a
core‑capital ratio which results in a satisfactory rating
from its point of view. According to the bank, this is
at least 7 %. The bank has almost three years before
the end of the restructuring period in 2006 in which
to raise the core‑capital ratio through its own efforts
from [...]* % to 7 % or more. The Commission
considers the aim of successfully implementing the
increase the
relevant measures
core‑capital ratio within this period to be realistic.

so as to further

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Quantification and probabilities of the existing risks being
realised and analysis of the risk provisioning

(225)

Following the improvement of the restructuring plan
through the incorporation of the measures proposed
by the Commission’s advisers Mazars, the Commis-
sion regards the level of provisioning for the known
risks as adequate. It notes with satisfaction that the
bank’s management has taken altogether appropriate
measures to build up a suitable risk control system.
The structure is well on the way to, but has not yet
reached, completion. The Commission trusts that, in
its own well-understood interests,
the bank will
continue this process with as much determination as
the bank’s future
in the past.
is aware that
profitability depends to a considerable extent on
further economic development above all in Berlin and
the five new Länder. In the Commission’s opinion,
these risks are, however, not tangible when viewed
from the current perspective and affect every firm in
the region differently. The Commission takes the view
that the measures contained in the restructuring plan,
which certainly point in the right direction, suffice.
Absolute certainty is, of course, never attainable in the
economic sphere.

It

Risks arising out of capital market transactions

(226) During the restructuring period, the bank’s capital
market transactions account for some [...]* % of the
operating result. This shows that these transactions
are essential to the bank’s profitability. Obviously, the
risks inherent
in such transactions must be kept
properly under control in the interests of the bank’s
viability. This is being done firstly by shifting the
emphasis from own-account business to customer-
related activities. The bank’s risk positions are being
reduced in this connection by [...]* between 2002 and
2006, while average earnings of EUR [...]* are being
aimed at. The second way in which it is being done is
by a risk management system that the Commission’s
advisers, on the basis of their investigations, regard as
being entirely adequate. They advise, however, that the
bank’s dependence on interest‑rate changes should be
lessened by reducing the positions in the bank book.
Bearing in mind this recommendation, the Commis-
sion thus considers the risks arising out of capital
market transactions to be manageable and regards the
buoyancy of this business area as guaranteed.

Risks arising out of the valuation of BGB’s holding in
BerlinHyp

(227) The Commission’s advisers Mazars have discussed
thoroughly the question of the risks arising out of the
valuation of BGB’s holding in BerlinHyp. The book
value of the holding in BerlinHyp is EUR [...]*. If
BerlinHyp were to miss its targets, e.g. owing to a
further worsening of the situation in the real estate

(223)

Since the Commission was unable in the spring of
2003 to allay, on the basis of its own analysis, the
remaining doubts as to the bank’s viability raised by
the failure of the privatisation process and the strongly
negative aggregate result for 2002 and since a suitable,
effective insulation of the credit risks existing above all
in the real estate financing field was, according to
Germany, impossible to achieve without further aid,
the Commission made
sure with the help of
independent experts that, apart from a few points,
the bank had made adequate provision for the existing
risks and had built up suitable reserves. With respect
to these points, the Commission’s advisers Mazars
recommended measures to amend the restructuring
plan as submitted to the Commission in the summer
of 2003. At the Commission’s instigation, these were
incorporated by the bank and the revised restructur-
ing plan was communicated to the Commission on
29 January 2004. The details are as follows:

Risks arising out of lending transactions

(224)

Following an analytical examination of a suitable
sample of the bank’s loan portfolio, the Commission’s
advisers Mazars recommended that the level of risk
provisioning be gradually increased up to the end of
the restructuring period in the base-case scenario by
EUR [...]* and in the worst-case scenario by EUR [...]*.
They also identified an omission in the worst-case
scenario which needs to be offset by an additional risk
provision of EUR [...]*, broken down into EUR [...]* for
2003, EUR [...]* for 2004, EUR [...]* for 2005 and
EUR [...]* million for 2006. Otherwise, the level of
risk provisioning was to be regarded as adequate.
However, the failure of a single large loan might lead
to the risk provisioning being exceeded. This is
especially relevant for project financing in the fields
of air transport, energy and telecommunications. The
worst-case scenario makes an additional risk provision
for this of EUR [...]*. In view of the fairly sizeable stock
of large loans, the Commission, in line with Mazars’
findings, is aware that exceeding the risks provided for
is theoretically possible in the event of the failure of a
large loan amounting to at least EUR [...]*. If specific,
previously absent signs of such a failure were to
appear, the bank would have to increase its level of
risk provisioning accordingly. The Commission, in the
light of Mazars’ findings, concludes that the bank
would be able to take such a measure unaided.

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the increased risks that may ensue,

market, the business plan would have to be revised. In
view of
the
discount factor would then also have to be adjusted
and additional risk premiums might be incurred. Such
a scenario might even lead to a market price for
BerlinHyp of [...]*, […]* .

(228) The difference between the holding’s book value of
EUR [...]* and the net own capital of approximately
EUR [...]* represents the devaluation risk in a base-case
scenario. This therefore amounts to EUR [...]*. An
adjusted, more conservative business plan would
include this devaluation risk, as would the annual
accounts for 2003 and 2004. At the Commission’s
request, the restructuring plan was revised and the
devaluation risk duly taken into account. As recom-
mended by the Commission’s advisers, the maximum
devaluation risk in the worst-case scenario was also
increased by EUR [...]*. However, this has not had any
decisive impact on the Commission’s overall assess-
ment.

(229)

For reasons of risk limitation and because of the
uncertain further development of
the real estate
financing business, the Commission would consider
it desirable in order to safeguard the bank’s long-term
viability for at least the major part of this business to
be sold by the group or reduced in size. To this end,
the Commission recommends
to Germany that
BerlinHyp be sold separately in order to improve the
privatisation prospects of the remainder of the group.
BerlinHyp accounts for about
the
group’s entire real estate financing business and is
technically relatively easy to dispose of by selling the
shares in BerlinHyp. The remaining third is concen-
trated in the hands of BGB and LBB and should be
restructured in accordance with the strategy worked
out by the bank for the real estate financing business.
The future risks to the remainder of the group would
thereby be reduced by well over half overall.

two thirds of

(230) However, Germany provided the Commission with
information according to which an immediate sale of
BerlinHyp might have unacceptable consequences for
the bank. The Commission would therefore ask
Germany to determine at a later date whether and
when a separate sale of BerlinHyp might proceed with
a realistic expectation of success and on terms
acceptable to the bank, i.e. at a price approximating
to BerlinHyp’s net own capital. In that event, potential
losses from write‑downs in the book value might be
kept within bounds and, at the same time,
liquid
resources would be channelled to the bank and capital
freed up. Germany has accordingly communicated to
the Commission its intention to divest BerlinHyp
either separately or as part of the overall privatisation
of BGB by the end of 2007.

Risks arising out of the valuation of BGB’s earnings and
liquidation proceeds claim (24.99 %) with respect to LBB

(231)

BGB has a claim to 24,99 % of profits including the
corresponding liquidation proceeds with respect to
LBB against the Land of Berlin and a 75,01 % interest
in LBB in the form of a dormant holding.

(232) The Commission’s advisers Mazars consider

the
valuation of this claim in BGB’s books to be in need
of auditing because LBB’s underlying value may have
fallen since the relevant year of 1998. A possible
write‑down would have a one-off effect on the group's
consolidated pre-tax profit in 2005 of about EUR [...]*
in a pessimistic scenario and of about EUR [...]* in an
optimistic scenario.

(233) As recommended by its advisers, the Commission
therefore considers it necessary to take this write‑-
down effect properly into account in the restructuring
plan through a write‑down of EUR [...]* in the base-
case scenario and through an additional writedown of
EUR [...]* over and above the EUR [...]* writedown so
far envisaged in the worst-case scenario. These
provisionally estimated adjustments are dependent
on a precise valuation of LBB and should finally be
carried out as soon as that valuation has been effected
the outstanding issues
following clarification of
relating to LBB (exact size of
the remaining IBB
reserve once IBB has been hived off, Commission
decision on the consideration for the IBB housing-
promotion assets). The Commission considers, how-
resulting impact on the bank’s
the
ever,
consolidated core capital
the
group’s viability at risk since, with a core‑capital ratio
of [...]* % or even more, this can be absorbed by the
bank.

likely to put

is not

that

Risks arising out of the introduction of IFRS (IAS)

In the opinion of

(234) The conversion of BGB’s consolidated accounting to
adapt it to IFRS (International Financial Reporting
Standards) in 2005 calls inter alia for reassessment of
the pension provisions.
the
Commission’s advisers Mazars, these could have a
negative impact on the consolidated own capital to
the tune of some EUR [...]*. It will have to be borne in
mind, however, that as a result of the introduction of
from the
IFRS opposite effects may also result
adjustment of other balance‑sheet
In the
opinion of the Commission and its advisers, these
cannot at present be reliably assessed. Even if these
balance‑sheet effects were to prove negative on
aggregate, they are unlikely to be able to impair the
bank’s overall viability. The introduction of IFRS leads
only to a partial reassessment of already known facts,
and not to the discovery of new risks. Moreover, it
concerns all European companies, which must carry

items.

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4.5.2005

out adjustments on the basis of IFRS and resolve any
transitional problems that arise in cooperation with
the competent supervisory authorities. The bank's
viability depends rather on its financial performance
and its ability to manage the risks facing it, which are
to be assessed separately.

Capacity to generate new business

(238)

(235) The bank’s capacity to generate new business in its
various areas of activity is the decisive factor as regards
its viability and privatisation prospects. It has carried
out studies into its market position and future market
prospects from which it has derived its future business
strategy.

(236) This shows that in most business fields the plans and
strategies are realistic. The bank intends to introduce
new products and marketing channels. However, the
Commission considers the qualitative and quantitative
objectives and the strategy in the real estate financing
field to be overoptimistic. [...]*. This will depend
crucially on how the overall economic situation
develops and on the bank’s ability to react to changes
in the market situation and in customer needs and
cannot
therefore be conclusively assessed by the
Commission at present. Should the bank not succeed
in meeting its targets on a lasting basis, its viability
may be endangered, especially if
the real estate
financing business remains at its current size. If the
targets cannot be met in the event of a substantial
scaling-down of the real estate financing business, the
quantitative
considerably
effects would also be
reduced and could be better absorbed by the bank’s
other business areas.

Commission request for further compensatory measures in
the autumn of 2003 and corresponding reworking of the
bank’s restructuring plan in the winter of 2003/04

(237) After

the report by its advisers Mazars on the
restructuring plan submitted had made the Commis-
sion sufficiently certain in the autumn of 2003 about
the bank’s viability and, in particular, the fundamental
suitability of risk provisioning, a positive decision on
the aid requested could be considered only if the
compensatory measures offered could be regarded as
sufficient. As stated below (see paragraph 257 et seq.),
the Commission still had considerable misgivings in
this respect, particularly as regards retail business,
where the bank plays a prominent role on the Berlin
regional market, but also as
real estate
financing, which also benefited from substantial aid.
In the latter area, the Commission experts have also
expressed misgivings regarding the bank's ability to
generate sufficiently profitable new business in the

regards

In the Commission’s view,

the
future.
separate sale of at least a significant part of the real
estate financing business as compensation for compe-
titors would also generally improve the viability and
privatisation prospects of the rest of the group.

therefore,

In the autumn of 2003, on the basis of
the
restructuring plan submitted and the conclusions
reached by its advisers, the Commission therefore
requested Germany to quantify the effects of a
separate medium‑term sale
Bank
(accounting for some one quarter to one third of
BGB’s retail business) by the end of 2005 and of
BerlinHyp (some two thirds of BGB's real estate
business) by the end of 2006. This was to enable the
such further
Commission to ascertain whether
compensatory measures would not jeopardise once
again the banks' viability, which had basically been
confirmed under the current restructuring plan.

Berliner

of

(239) Germany and the bank began by summarising the
underlying situation. On the basis of the medium‑-
term plan of 24 June 2003, the expected additional
charges resulting from the incorporation of
the
Commission advisers’ proposals,
from the already
approved divestment of real estate services business
and the hiving‑off of IBB were quantified. Overall, in
the base‑case scenario these three measures would
have one‑off effects in the period 2003 to 2006 of
minus EUR [...]* ‑ EUR [...]*, of which minus EUR [...]*
for the increase in risk provisioning and minus EUR
[...]* ‑ EUR [...]* for the negative sales proceeds, the
write‑down of the book value of investments and
other consequences of the transactions involved in
divesting the real estate services subsidiaries RGB and
the medium‑term and long‑term
IBAG. However,
effects of those three measures were small. Thus, the
planned tax savings in 2006 were reduced to only a
from EUR [...]*
minimal extent, by EUR [...]*,
(according to the medium‑term plan of 24 June
2003) to EUR [...]* (on the new calculation) and could,
therefore, be achieved by the bank generally without
any significant change in the planned magnitudes. The
medium‑term plan of 24 June 2003 was based on a
target rating of [...]* for the group and a return on
capital of [...]* % in 2006.

(240) Against this, Germany and the bank argued that a
divestment of Berliner Bank by the end of 2005 would
adversely affect the group’s medium‑term planning.
Overall, there would be one‑off effects in the period
2003 to 2005 of EUR [...]*, [...]* of which being
accounted for by the extraordinary costs of the sale
and the rest by provisions for staff, IT, buildings and
In the medium and
additional restructuring costs.

4.5.2005

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Official Journal of the European Union

L 116/37

(243)

in order

this calculation assumed that,

long term, the planned pre‑tax result in 2006 of EUR
[...]* (according to the reworked medium‑term plan
incorporating the three measures mentioned above)
would fall by EUR [...]* to EUR [...]*, of which around
half being accounted for by the discontinuation of
Berliner Bank's earnings contribution to the group
and the rest by the delayed staff cutbacks,
the
abandonment of the planned increase in commission
earnings and remaining (fixed) costs (primarily on
account of back‑office diseconomies of scale). How-
to
ever,
maximise the number of bidders, Berliner Bank would
be sold as an independent bank, with further charges
being incurred. The expected proceeds from the sale
of Berliner Bank of EUR [...]* to EUR [...]* were already
included in the one‑off effect of the extraordinary
costs of the sale. According to the bank, this was, in
any case, more than offset by the necessary core
capital for Berliner Bank equivalent to [...]* % of risk
items amounting to EUR [...]*, giving a negative effect
of EUR [...]* to EUR [...]*. In addition, the divestment
of Berliner Bank would reduce the profit share of retail
business in BGB’s total business from just over [...]* %
to around [...]* % and the share accounted for by
capital market business would accordingly rise from
just over [...]* % to some [...]* %. As a result, given the
core‑capital ratio, there could be a deterioration in the
rating since capital market business was regarded as
being riskier than retail business. This would have a
negative effect on the refinancing, with the result that
the sale of Berliner Bank would also give rise to
operating problems during the restructuring period.
The sale of Berliner Bank would reduce the return on
capital by around [...]* % percentage points from
[...]* % in 2006 according to the medium‑term plan of
24 June 2003 to around [...]* %.

(241)

The Commission has carefully analysed the arguments
adduced by Germany and the bank. In its view, these
do not represent any insuperable obstacles to the
hiving‑off of Berliner Bank on competition grounds.

releasing core capital, or by borrowing fresh med-
ium‑term capital on the capital market. This would
prevent any significant deterioration in the rating and
thus in the refinancing terms, with the result that the
bank could cope with the hiving‑off operation in
operational terms too.

a

of

the

estimating

In the Commission's view,

In calculating the one‑off effects of the divestment of
Berliner Bank, Germany and the bank assume that
Berliner Bank would be sold as an independent bank
in order to maximise the number of bidders. Given
that Berliner Bank is at present incorporated into
Landesbank Berlin as a dependent business area and
branch, Landesbank Berlin would have to be hived‑off
for sale as an independent legal entity. According to
the bank, a core‑capital ratio of [...]* % of the risk
items and hence core capital of around EUR [...]*,
which would have to be provided afresh by BGB are
necessary. However, in spite of a core capital of EUR
[...]*, BGB expects that a sale would bring in only EUR
[...]*‑EUR [...]*.
this
calculation is very conservative. The amount of net
equity usually serves as one out of several benchmarks
for
If
value
Berliner Bank’s core capital is to be some EUR [...]*,
it is, in the Commission’s view, rather unlikely for the
sale proceeds to be only EUR [...]* to EUR [...]*. Given
the well‑established brand name and client basis of
Berliner Bank, the sales proceeds should tend to reach
or even exceed the value of the core capital, which the
bank regards as an expense, and should therefore
reduce BGB's charges to a much greater extent. But
even if, exceptionally and for reasons not clear to the
Commission,
it
would not make sense for BGB to sell Berliner Bank as
an independent bank. The brand, the customers and
other assets of
the working company all have a
positive value. If BGB considers that not even the core
capital, which needs to be provided afresh by BGB, can
be realised in the sale, Berliner Bank's assets can, of
course, be sold as part of a so‑called asset deal that
should at
least generate some proceeds and thus
reduce an extraordinary negative effect from the sale
for BGB. As a result, the negative one‑off effect of EUR
[...]* would be significantly reduced.

the situation here were different,

company.

(242)

For one thing, with the relative reduction in the
contribution of retail business to the bank’s overall
business to which the hiving‑off of Berliner Bank
threatens to give rise, the bank is free to maintain a
balanced structure by carrying out corresponding
reductions
in the other areas of capital market
transactions and real estate financing. The bank’s
structure and the core‑capital requirements would
thus remained unchanged. In fact, such reductions in
the risk items would release additional capital, thereby
helping to boost the core‑capital ratio further. As an
alternative to such reductions, the bank could, with a
view to covering the higher risk, raise the core‑capital
ratio either by making further efforts of its own to
reduce selected risk items more than planned, thereby

(244)

In the Commission's view,
the claimed negative
recurring effect on the return on capital of [...]* %
can clearly be improved on by the bank if the sale is
spread over more than one year.

(245) Having considered the Commission's analysis, Ger-
many finally agreed that BGB would be viable if
Berliner Bank were sold separately. It has stated its
willingness
to sell Berliner Bank separately by
1 February 2007 (real effective date), with a tendering
procedure being launched in 2005 and completed by

L 116/38

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Official Journal of the European Union

4.5.2005

1 October 2006. The formal commitment was
submitted to the Commission on 6 February 2004.

(246) As a result, the entire year’s result for 2006 is still
attributable to BGB, and the adjustment costs can be
spread over a longer period or it will be easier to take
countermeasures such as a further reduction in the
short‑term fixed costs for IT, back‑office staff and
buildings. According to BGB’s own figures,
the
negative effects stemming from abandonment of the
planned increase in LBB's commission earnings
attributable to reorganisation, workforce uncertainty
and the use for restructuring purposes of management
resources of EUR [...]*, from the delay in workforce
cutbacks within the group of EUR [...]* and from the
remaining costs caused by diseconomies of scale of
EUR [...]* would not continue indefinitely. The
Commission shares this view.

(247)

‘one

time-last

time’ principle of

The Commission’s position is confirmed by its review
of the one‑off effects and the long‑run effects on
BGB's return on capital. The outturn figures will
probably be much lower
than those given by
Germany and the bank. If this were not to be the
case because of a series of unfortunate circumstances
or because of unfavourable market developments,
even a return on capital of [...]* % in 2007 (return on
capital of [...]* % according to the medium‑term plan
of 24 June 2003 less [...]* % as a result of
the
divestment of Berliner Bank) would, on the Commis-
sion's estimation, not result in a situation where the
remaining parts of
the group would again be
dependent on government assistance, which, under
the
state aid
legislation, could no longer be granted. The bank
has it within itself to become more stable by raising
the core‑capital ratio to 7 % or more. This would have
a positive effect on the rating and, from an operational
viewpoint, would ensure
satisfactory refinancing
conditions. In the Commission’s view, the return on
capital of [...]* % to [...]* % expected in 2006 under
adverse conditions would, given the current difficult
situation in the German banking sector, be at the
lower end, if anything, of the range that is regarded as
satisfactory on the market for a bank’s long‑term
viability. However, the Commission expects that the
privatisation promised for 2007 will lead to a further
strengthening of the bank. If the new investor were to
regard the return on capital or the capital endowment
of the bank at the time as unsatisfactory, it is to be
expected that it would, in its own interests, carry out
further rationalisation measures, e.g. reductions in
unprofitable areas of business or capital
injections,
which would bring about the necessary improvement
in the rating and in the refinancing situation.

(248) Against this, the Commission agrees with Germany
and the bank that, as things stand, it cannot be ruled
out with sufficient certainty that a strict requirement
to sell BerlinHyp separately in the medium term might
unduly prejudice the bank's viability. However, it still
has — and this has been confirmed by its independent
advisers — some doubts that the bank will manage to
generate to the extent envisaged new, higher‑margin
business in real estate financing. For this reason, the
Commission would generally regard it as a positive
contribution to strengthening the bank's long‑term
profitability if it were to withdraw from real estate
financing to a greater extent than hitherto planned.
This could be achieved above all by selling BerlinHyp
separately, and this was, therefore, thoroughly exam-
ined by the Commission.

to take over

the group’s

(249) According to Germany and the bank, the binding
requirement
to sell BerlinHyp separately in the
medium term would have the following adverse
effects on the rest of the group and would impose
the following requirements, which could not necessa-
rily be met by the buyer. As far as possible, the buyer
would have
internal
refinancing (currently EUR [...]*) on similar terms, i.
e. it must possess a rating at least as good as that of
Landesbank Berlin, and to assume responsibility for
BGB's guarantee for BerlinHyp in order to avoid
applying the methodology for large credits (currently
estimated at around EUR [...]*). In addition, the buyer
would have to offer at least BerlinHyp's book value as
the purchase price since otherwise the book value
might be significantly written down, [...]*. Even if the
tendering procedure had a negative outcome, there
would still be the risk of the book value being written
down further. Moreover, a sale that did not seriously
impair the restructuring plan would be possible only
if the cooperation on marketing between BerlinHyp
and the group could be continued. The requirement of
a separate sale would entail a one‑off write‑down of
the present book value of EUR [...]* by EUR [...]* to
the book value of BerlinHyp's capital of EUR
519 million. The expected pre‑tax result for the rest
of the group in 2006 would be reduced by a further
EUR [...]* or so (difference between the disappearance
of the planned BerlinHyp result of some EUR [...]* and
the interest earnings on the expected sales proceeds of
some EUR [...]*). Together with the separate sale of
Berliner Bank, this would result in a further fall of
some [...]* % in the target return on capital of the rest
of the group in 2006 to a little over [...]* % generally
and a core‑capital ratio of only just over [...]* %.

(250)

to sell BerlinHyp
Since a binding requirement
separately would thus give rise to further significant
risks for the viability of the rest of the group, the
Commission, as things stand, does not regard this
either as an appropriate measure for strengthening
long‑term profitability or as a feasible compensatory
measure on which the decision would rest. It thus

4.5.2005

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Official Journal of the European Union

L 116/39

a

welcomes Germany's intention that the feasibility of a
separate sale of BerlinHyp at a later date should be
re‑examined in the light of the privatisation of the rest
of the group and that, depending on which scenario is
more
likely to improve privatisation prospects,
BerlinHyp will be sold either together with the rest
of the group or separately by the end of 2007 as part
transparent, open and non‑discriminatory
of
procedure. In the Commission's view, BerlinHyp could
realistically be of interest once again, at least from
2006 onwards, to a strategic investor. BerlinHyp's
business plan also assumes an improvement by then
in the general market situation for real estate financing
business. The Commission considers that a review of
the prospects for a separate sale should, therefore, be
conducted in 2006. It also expects that, in line with
the recommendations of its advisers and with the
restructuring plan reworked on this basis, the bank
will [...]* as soon as unexpectedly poor business results
show this to be necessary. This measure would, of
course, minimise the potential risk stemming from the
need to make a further write‑down [...]*.
In the
Commission's view, such measures would be con-
ducive to the long‑term viability and privatisation
prospects of the rest of the group.

(251) On 29 January 2004 Germany submitted the current
restructuring plan including the medium-term finan-
cial plan, which is based on figures as at mid‑Jan-
uary 2004. The latter updates the previous version of
June 2003, on which the viability assessment by the
Commission and its consultants’ was based, and takes
into account, for instance, the recommendations of
the Commission’s consultants
regarding the risk
provisions. As to the divestment of Berliner Bank,
which has not yet been incorporated in the current
medium‑term financial plan, Germany submitted
estimates based on the analysis presented in December
2003. The figures of the current plan do not differ
June 2003 and
significantly from the version of
therefore do not alter the Commission’s assessment of
BGB’s viability prospects.

Commission's summary conclusions regarding long‑term
viability and privatisation prospects

(252) After

incorporating the recommendations of

its
advisers Mazars, the Commission regards the restruc-
turing plan as being generally plausible and complete
in spite of
the continuing uncertainties noted in
connection with future developments. In its view, the
operational, functional and financial measures that
have already been taken or are envisaged are suited to
restoring the bank's long‑term viability and the failure
to date to meet targets is not such overall as to give
rise to any lasting misgivings regarding the feasibility
of the restructuring plan. A number of measures are
running below the targets set in the plan. But some of

the leeway will be made good by overachieving targets
in other areas.

(253) The prospects for viability are dependent to a large
extent on future profits, on steps to strengthen the
core‑capital base and, in particular, on the ability to
generate new business and on the restructuring plan
being implemented in full. The bank will be extremely
dependent on capital market earnings, especially
during the restructuring period. The real estate
financing strategy is ambitious and threatens to fall
short of the targets set. A further deterioration on the
real estate market in the Berlin area and a further
decline in gross domestic product would threaten the
bank's viability. To reduce this risk, the Commission
the real estate
considers
financing business should be hived off
through a
separate sale of BerlinHyp and expects Germany to
carry out a detailed analysis. The bank could then
more easily offset any losses stemming from the
smaller real estate financing business that would
remain within BGB/LBB thanks to expected positive
contributions from retail business and capital market
business.

that a larger

share of

financial

the Commission considers

(254) The bank does not at the moment have any latent
reserves or other
resources that would
absorb larger losses during the restructuring period.
that a
As a result,
core‑capital ratio of 6 % is the minimum necessary
to ensure viability and hence the maximum that can
be financed out of state aid. It expects the bank to
make every effort to raise the core‑capital ratio to
around 7 % or higher by reducing risk assets further
or by borrowing more on the market. The bank's
capital market capability and privatisation prospects
would thus be further improved.

(255)

In the Commission’s view, the maximum reduction in
the anticipated return on capital in 2006 from around
[...]* to [...]* % to some [...]* to [...]* % that the
additional compensatory measure of a divestment of
Berliner Bank is expected to bring about does not
threaten the bank's long‑term viability. The Commis-
sion assumes that, following the bank's privatisation,
an investor will take all necessary measures to achieve
for the bank a level of profitability that is acceptable
to a market‑economy investor.

(256) The Commission considers that, after the restructur-
ing period, the privatisation of the bank will have
sufficient prospects of success. Germany has under-
taken to introduce a privatisation procedure immedi-
ately after closure of the annual accounts for 2005
and to complete that procedure by the end of 2007.
The Commission regards this as a realistic timetable.
In this connection, it stipulates that Germany and the
bank must, until then, make every effort to remove

L 116/40

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Official Journal of the European Union

4.5.2005

insufficiently focused product

any remaining obstacles to the privatisation. These
include the still complex structure of the group, which
is to be further slimmed down as part of
the
restructuring process, and the concentration of the
still
range and an
improvement in the group's internal transparency. In
addition, the purchase price will tend to be adversely
affected by the fact that the bank has leased a large
proportion of its business premises at prices exceed-
ing the market level. According to calculations by the
this
Commission's
disadvantage will be somewhere in the region of
EUR [...]* to EUR [...]* in 2006 and an investor can be
expected to take this into account in its tender. The
planned privatisation will take place between one and
two years after the expiry of the State's institutional
and guarantor liability. In the Commission's view, this
will allow a potential investor sufficient time to take a
look at the bank's market operations on a stand‑alone
and
basis
guarantor liability in 2005 and to conduct a proper
analysis with a view to preparing its bid.

following expiry of

cash value of

institutional

advisers,

the

the

Avoidance of undue distortions of competition

reduction of

to the condition that

(257) The exemption in Article 87(3)(c) of the EC Treaty is
the aid must not
subject
adversely affect
to an extent
trading conditions
contrary to the common interest. According to points
35 to 39 of the guidelines, measures must be taken to
mitigate as far as possible any adverse effects of the aid
on competitors. This condition usually takes the form
of a limitation on the presence which the company
can enjoy on its market or markets after the end of the
restructuring period. Point 37 states that the compul-
the company’s
sory limitation or
presence on the relevant market(s) should be in
proportion to the distortive effects of the aid and, in
particular, to the relative importance of the firm on its
market or markets. Under point 38, a relaxation of the
need for compensatory measures may be contem-
plated only if such a reduction or limitation is likely to
cause a manifest deterioration in the structure of the
market, for example by having the indirect effect of
creating a monopoly or a tight oligopolistic situation.
It has already been explained with regard to a
hypothetical case of insolvency that, in view of the
structures and BGB’s position on those
market
markets, a reduction or limitation of BGB’s presence
will not lead to the creation of a monopoly or tight
oligopoly (see below).

(258) Compensatory measures can take different

forms,
such as a hive‑off of assets or subsidiaries or the
closure of capacity. Point 39(i) of the guidelines states
that, where there is structural excess of production in
the compensatory
a market affected by the aid,

measures must make a contribution to the improve-
ment of market conditions by irreversibly reducing
production capacity and that a capacity reduction is
irreversible when the relevant assets are rendered
permanently incapable of achieving the previous rate
of output or are permanently converted to another
use.

(259) The markets in financial services are not markets
where there is structural excess of capacity within the
meaning of point 39(i) of the guidelines, which refers
to ‘production capacity’ and ‘plant’ and thus implicitly
to manufacturing rather than to service industries,
where capacity can generally be adjusted much more
easily. The excess capacity sometimes spoken of in
banking, e.g. with regard to the density of branch
networks,
in the sense of
being the outcome of a lasting drop in demand; rather
the
and hence
cost‑intensive areas where capacity is to be reduced
primarily on grounds of profitability.

to labour‑intensive

is not usually structural

reference

is

(260) But, even if the view were to be taken that financial
services did indeed suffer from excess capacity, that
capacity could not be ‘rendered permanently incap-
able of achieving the previous rate of output’ or be
‘permanently converted to another use’. The capacities
used to provide banking services ‑ primarily staff,
branches, advice centres, back offices and computer
and telecommunications systems ‑ are highly adap-
table and can be reemployed, hired out or otherwise
brought to the market at no appreciable cost. An
irreversible reduction of capacity is thus impossible
and cannot be a test to be applied to the case at issue.

(261)

the

sales,

In what follows, therefore, the Commission considers
whether
and reductions of
closures
subsidiaries, assets and lines of business within the
meaning of point 39(ii) offered as compensatory
measures are sufficient
to mitigate the distortive
effects of the aid.

(262) The measures Germany initially offered as part of the
restructuring plan can be summarised briefly as
follows:

— divestiture of subsidiaries and holdings: The
main sales were to be in retail banking: Allbank,
represented throughout Germany (now sold),
Weberbank in Berlin (not yet sold), BG Zivnos-
tenska Banka a.s. in the Czech Republic (sold)
and BG Polska SA (retail business and ‘Inteligo’
Internet business sold, remainder in liquidation),

— closures: Closure of some 90 branches serving
private and corporate customers in Berlin and
them in Berlin);
Brandenburg (the bulk of

4.5.2005

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Official Journal of the European Union

L 116/41

6 customer centres throughout Germany; 6 real
estate financing offices
in Germany and 3
abroad; 3 capital markets offices located abroad;
and 14 large customer and international business
offices located abroad,

long‑term
— withdrawal
from lines of business:
from large customer and interna-
withdrawal
tional business
loan transactions with
foreign banks, advisory services for large custo-
mers, privatisation and aircraft financing),

(e.g.

— reduction measures: in capital markets, reduction
of risk assets by [...]* % and of debt finance by
[...]* %; in real estate, reduction of the volume of
[...]* % (about
investment
EUR [...]*) and of project development by
[...]* % (about EUR [...]*), and office closure and
staff reductions of 50 %; reduction of the small
public‑sector business and integration of
the
remainder into the corporate business.

funds by over

(263) Germany stated that these measures together would
lead to a reduction in staffing of 50 % (from about
15 000 to 7 500) and a reduction in the balance‑sheet
total
from roughly EUR 190 billion to EUR
140 billion.

(264)

In the decision initiating the procedure, the Commis-
sion commented that, for want of sufficiently detailed
information, it could not make a proper assessment of
the impact of these measures, which in some cases
were described only vaguely, as regards both BGB’s
individual areas of business and its position on the
information.
markets;
Germany then supplied detailed information on the
effects on the individual business areas or markets (see
paragraph 291 et seq.) and the overall impact: total
assets reduced by EUR 51,5 billion, or 25 %; total
liabilities reduced by EUR 57,8 billion, or 27 %; and
consolidated balance sheet reduced by EUR 50,2 bil-
lion, or just under 27 % (25).

thus asked for

further

it

(265) But,

the
in the decision initiating the procedure,
Commission had already expressed doubts as to the
adequacy of the planned compensatory measures. It
seemed questionable whether the proposed reduction
in the balance‑sheet
total could be regarded as
sufficient in view of the large sum to be provided in
aid and the Commission’s practice with regard to

In order

is as follows.

restructuring assistance for banks (26). It drew atten-
tion to the minimum capital ratios required by law,
which might provide a rough guide for the assessment
of compensatory measures in the banking sector. The
argument
to continue in
business, an undercapitalised bank must either reduce
its risk assets, and hence its volume of business, in
proportion to the shortfall in capital (e.g. applying the
legal minimum core‑capital ratio of 4 %, the risk
assets must be reduced by a factor of up to 25); or
seek a capital injection equal to the shortfall. Such a
capital injection will enable it to avoid the reduction
that would otherwise be necessary. This concept of an
‘opportunity reduction’ can serve to render visible the
market distortion caused by a capital injection and
thus provide a rough guide for the assessment of
compensatory measures. But the Commission had
pointed out that this would not be a mechanical rule
and that, in any particular case, account would have to
be taken of the economic circumstances, with special
reference to the viability of
the firm and the
competitive situation on its markets.

(266) As regards the overall impact, Germany argued that
the correct point of reference was not just the core
capital but rather the own funds, made up of core
capital and additional capital; here the legal minimum
was 8 %, so that the expansion of business permitted
by the aid, or the contraction of business it prevented,
had to be valued using a factor not of 25 but of 12,5
In reality, a bank could increase its
at most.
risk‑weighted assets by 25 only if a capital increase
comprised additional capital as well as core capital.
Even if the bank already had additional capital that
could not previously be taken into account, (27) the
assessment should not be based on an expansion of
business that had been made possible only by the
additional capital that had been available in any event.
Germany further contended that the capital ratios
actually required on the market were well above the
legal minimum, at 6 % at least for core capital and
about 10 % for own funds. BAFin had confirmed this
approach and had explained it in detail in compar-
isons with the averages
(a
core‑capital ratio of some 6 to 7 % and an own‑funds
ratio of 9 to 11 % or, in the case of private banks, 10
to 11 %) and with the averages for large European
banks, which were higher (a core‑capital ratio of 8,5
%). Germany concluded that the economic impact on

for German banks

(25) This figure also took into account the hiving-off of the public

development activities of IBB.
See, for example, Decision 98/490/EC.

(26)

(27)

In establishing the own‑funds ratio, the amount of additional
capital taken into account may not exceed the amount of the
available core capital.

L 116/42

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Official Journal of the European Union

4.5.2005

injection of about EUR
the market of a capital
1,8 billion should be valued at about EUR 18 billion.
The Commission accepts these arguments.

(267)

Turning to the risk shield, at the time of the decision
initiating the procedure, the economic value of this
aid was not clear. Since then Germany has argued that
the economic value of
the risk shield should be
estimated at a little over EUR 6 billion (see
paragraph 138).
It has also stated that real estate
services are not subject to the solvency rules, so that
the contraction in business that is avoided cannot be
derived from the capital ratios. It further contends that
the risk shield relates essentially to old business in real
estate services. According to Germany,
it could be
argued that, during the restructuring of IBAG, new
business was made possible only because cover had
been provided for the company. But, in that event, the
market distortion could be measured only by
reference to the new business (estimated at about
EUR [...]* altogether in the restructuring phase; see
paragraph 90) or, at most, to the overall value of the
risk shield (EUR 6,1 billion).

therefore,

(270) This demonstrates the limits to the applicability of the
opportunity argument. An immediate reduction on
this scale would be possible only in the event of
insolvency. Without
the only
the aid,
possible course would have been for BGB to cease
trading; conversely, the only acceptable compensatory
measure would be the insolvency of BGB. But, within
the
time needed for an ordinary restructuring
operation, compensatory measures on the scale
described above can be implemented in the short
and medium term only with difficulty or at the cost of
heavy losses on the sale of parts of the organisation or
the cancellation or termination of long‑term contracts
and positions if the viability of the firm is not to be
jeopardised for a long time to come or
indeed
rendered in all probability impossible. Firstly, such a
consequence would hardly be compatible with the
objective of restructuring aid and the yardstick by
the
which it
it
recipient
would be out of proportion to the impact of the
various aid measures on individual lines of business
and markets. Consequently, the opportunity argument
cannot be applied mechanically to identify the
required level of the reduction in the balance‑sheet
total.

is measured, namely the return of
firm to long‑term viability. Secondly,

(268) The Commission cannot accept this estimate. Without
the risk shield or, alternatively, a capital injection of
about EUR 6 billion, BGB would not have been able to
continue in business as a result of the interlocking
risks within the group. The effect of the risk shield is
thus comparable to that of a capital injection of some
EUR 6 billion. The same applies to the capital
contribution provided for in the repayment agree-
ment, which, in the event of a recovery decision by the
Commission, can be estimated at a maximum value of
EUR 1,8 billion (28).

(271)

The Commission has accordingly sought to ensure an
overall contraction in the volume of business in line
with its practice in the past but, above all, also an
effective reduction in the bank’s presence on the
markets, having regard to the effects of the measures
proposed on the individual lines of business.

(272)

BGB operates primarily in private and corporate retail
banking, real estate financing, real estate services
(investment fund and project business) and capital
markets (money and securities dealings).

(269)

If the total economic value of the aid is EUR 9,7
billion and applying a factor of 10 to the own‑funds
ratio is actually required, the reduction in the balance
sheet that serves as the point of reference for an
estimate of the market distortion and as a rough guide
for the compensatory measures would come to almost
EUR 100 billion out of EUR 190 billion.

(28)

See OJ C 146, 19.6.2002, p. 6 and OJ C 150, 22.6.2002, p. 7.

(273)

lending segment, which is

The other lines of business are less significant in terms
of volume, are to be cut back or closed down and are
of no further relevance here. This applies to the
public‑sector
to be
substantially reduced and will in future form part of
the corporate business, and to the large customer and
international segment (e.g. project and export finan-
cing), which is to be wound up. Investment banking
activities consisted only of a relatively small volume of
share and security issues and will not play an
independent role in future. IBB’s development bank-
ing role is to be hived off from LBB when institutional
liability and guarantor liability for LBB come to an end
in 2005.

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their different

(274) On the basis of the information provided by Germany,
the decision initiating the procedure treated real estate
as one line of business but, in order to assess the
compensatory measures further, this had to be divided
into real estate financing and real estate services
supply and demand
because of
structures. According to BGB’s in‑house definition,
real estate financing is large‑volume financing (invol-
ving sums of EUR 5 million and upward) and thus
primarily commercial
financing (for
real
for
housing construction or
example). It is carried on mainly by BGB’s subsidiary
BerlinHyp, which accounts for about two thirds of the
entire volume, but also by LBB and BGB itself. Private
real estate financing falls predominantly within the
group's private customer business.

shopping centres,

estate

about 160 employees and is covered by the book
value guarantee afforded by the risk shield, so that
under the detailed agreement any profit on the sale is
to be transferred to the Land. If sold to outsiders, the
company will no longer be covered by the guarantees
in the risk shield. All holdings not sold or liquidated
by 31 December 2005 will be acquired by the Land of
Berlin on market
terms, with the price being
determined by an accountant commissioned by the
Land or by arbitration if that proves necessary after
the first valuation has been reviewed by an accountant
commissioned by the bank. Under
the detailed
the Land already has special rights of
agreement,
assent,
in the real estate
information and control
services area, which are exercised by BCIA.

(275)

BGB’s
real estate services consist essentially of
investment fund business and building and develop-
ment work. It was formerly conducted by IBG and is
now handled by IBAG, which is a wholly owned
division of BGB.

(276) Real estate services are the area which was the main
cause of the crisis and of the restructuring measures
under consideration here, and they have benefited
most from the risk shield, the measure that represents
the largest volume of aid. From the outset, therefore,
there were doubts about the continuation of this line
of business.

(277)

In the summer of 2002 Germany offered to hive the
real estate services business off from BGB and to
transfer it to the Land of Berlin. This general intention
was spelt out in detail in the undertaking submitted by
Germany in January 2004. Germany here undertakes
to ensure that by 31 December 2005 the BGB group
sells or liquidates all holdings in real estate service
companies covered by the risk shield.

(279) At an early stage in the procedure, Germany also
announced its intention of divesting LBB of
the
development business of IBB and at least part of the
IBB special reserve, which is currently available to LBB
as core capital. This intention was likewise spelt out in
an undertaking submitted by Germany in Janu-
ary 2004. Germany here undertakes to ensure that
by 1 January 2005 IBB’s development business is
transferred to a newly set up, independent develop-
ment bank belonging to the Land of Berlin and that, at
the same time, the IBB special reserve is hived off from
LBB towards the capital of the new development bank
to the extent possible without
falling below a
core‑capital ratio of 6 % on 1 January 2004. The
section of the IBB special reserve still needed for the
capitalisation of BGB will be invested by the Land in
one or more dormant holdings in LBB and will bear
interest at market rates. At the time these dormant
partnerships are formed, in view of LBB's long‑term
rating (leaving aside the public institutional and
guarantor liability) and having regard to the contrac-
tual structure of the dormant holdings, a premium
will be determined at a reference interest rate in line
with those of comparable core‑capital
instruments
traded on the market. The comparability of such
core‑capital instruments is to be determined on the
basis of the contractual rules governing them and the
risk profile of the issuer.

(278)

the

that

detail,

provides

undertaking

In
by
31 December 2004 the Land and the bank are to
take a final decision settling which holdings can
suitably be sold to outsiders in a transparent, open
and non‑discriminatory bidding procedure. According
to Germany,
such holdings can
reasonably be expected to be small. Essentially, there
is only one fairly large company involved which has

the number of

(280)

In the autumn of 2003 the following updated overall
picture could be given of the measures envisaged by
Germany to reduce the volume of business (measured
on the basis of asset positions)
in the individual
business areas in the period from 2001 (end‑of‑year
figures) to 2006 (planned balance sheets or profit‑-
and‑loss accounts):

L 116/44

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4.5.2005

Reduction measures (29)

(282)

Business area

(in billion euro)

Segment assets

Balance
sheet

Plan

2001

2006

Change

Retail banking
— Private customers
— SME customers

20,0
12,2
7,8

[...]*
[...]*
[...]*

[...]*
[...]*
[...]*

Public sector

11,0

[...]*

[...]*

Capital markets

109,7

[...]*

[...]*

Large customer/international

10,8

[...]*

[...]*

Real estate financing

31,2

[...]*

[...]*

Real estate services

3,2

[...]*

[...]*

Subtotal

185,9

[...]*

[...]*

Interest management and
consolidation

-16,8

[...]*

[...]*

Total assets
(not including IBB)

169,1

[...]*

[...]*

IBB

20,1

[...]*

[...]*

Balance‑sheet total
(consolidated)

189,2

[...]*

[...]*

impression but cannot

IBB’s development/
Even though the hive‑off of
support business cannot be viewed as a compensatory
measure in that development business forms part of
the public service provided by the Land of Berlin and
is not a commercial activity (30), it is to be noted that a
taking
total reduction of roughly a quarter (not
account of IBB) or just over EUR 40 billion is basically
in line with the Commission’s practice in similar cases
in the financial services sector. However, reducing
assets and balance‑sheet items serves primarily to give
in general be
an overall
equated to an effective reduction in business activity,
let alone market presence. This applies in particular to
the three remaining principal business lines. In retail
banking, although shareholdings have been or will be
sold (Polska, Zivnostenska, Allbank, Weberbank) and
branches shut, the restructuring plan valid up to the
autumn of 2003 aimed to keep market presence in
Berlin more or less intact or even to consolidate it
slightly in individual segments. The measures in this
business area should therefore be viewed as primarily
serving to concentrate on the regional core business
and to cut costs by closing branches. In real estate
financing too,
the planned reduction is relatively
modest in relation to total volume. In the capital
market business sector, although there will be major
cutbacks in business lines, a significant volume of
business will remain.

real

estate

(283) Germany and BGB stated that making further
cutbacks or even abandoning an entire business line
would be difficult and would jeopardise the bank’s
viability. The
financing business of
BerlinHyp, LBB and BGB, given current market
conditions and the as yet incomplete restructuring
of this business area, could not be sold in the short
term or could be sold but only with major losses in
book value. Furthermore, a positive profit contribu-
tion was expected from this area before the end of the
entire restructuring process and would be needed to
achieve the overall target result from 2004 at the
latest.

(281) The measures planned by Germany at this stage would
result in an overall reduction in the balance‑sheet total
of 30 %. They include divestments (e.g. some EUR
6 billion in retail banking through the sale of Allbank,
BG Polska, Zivnostenska Banka and Weberbank),
closures (e.g. of some 90 branches and 6 private
banking centres) and asset reduction.
In the large
customer/international and real estate services busi-
ness lines, which are to be wound up or hived off,
residues will remain after 2006 which will have to be
dismantled in stages. The public‑sector business will
be cut back significantly. After restructuring, there-
fore, the main pillars of the bank will be retail business
in the Berlin area, real estate financing and capital
market business.

(29) There may be discrepancies due to rounding.

(284) The Commission examined these arguments, together
with the related data provided, and came to the
conclusion that divestment of the real estate financing
business in the short term would jeopardise the bank’s

(30) Under the agreement on German development banks, devel-
opment/support activities are a public service and not a
commercial activity open to competition; they therefore cannot
be viewed as compensatory measures. Institutional liability and
guarantor liability can be maintained for the development
business only if it is hived off as an independent development
bank.

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viability (see paragraph 230). Moreover, an analysis of
the competitive situation on the German market for
real estate financing showed that BGB is not among
the leading suppliers. According to the original
notification, BGB, with a share of some 5 % in
2000, occupied third place. However, according to
more up‑to‑date data submitted by Germany, which
are adjusted for public‑sector lending, actual market
share in 2000 was only some 3 %, and this is likely to
fall to 2 % by 2006. This coincides with other sources
of information which show that in 2001 BGB did not
reach the third place originally indicated or achieve a
5 % market share, either in the mortgage lending
market as a whole or in the various segments. (31)
Accordingly,
it would not appear to be urgent to
reduce BGB's market presence in this area in order to
avoid unreasonable distortions of competition.

(285) Nevertheless, it would be preferable if the BGB group
were to pull out of this business area since the mere
continuation of its activities on the markets for real
estate financing distorts competition to some extent.
However, this would be on condition that a with-
drawal would not endanger the restoration of long‑-
term viability. In this connection, the Commission
welcomes the intention of Germany and the Land of
Berlin to sell the real estate financing business line
separately or as part of the overall privatisation of
BGB.

(286) The capital market business, whose segment assets
have already been reduced by almost 20 %, was in
2002 the only business line to make a significant (i.e.
hundreds of millions) positive profit contribution. At
the end of the restructuring process in 2006, it is to
together with retail
be one of
the main pillars,
the group’s result and profit. Conse-
banking, of
quently, the capital market business is, first, essential
to the restoration of BGB’s viability and cannot be
reduced much more than it has been. Second, the
competitive weight of BGB on the national money
and securities markets, which are none the less
becoming increasingly international and European,
can be classed as not significant, i.e. as even less than
its weight on the national
real estate financing
markets.

(287) Nevertheless,

the Commission examined whether
further, even if limited, reductions might be made.
In view of the overall aim of the restructuring aid,
which is for BGB to become a regional bank again, the
Commission looked mainly at whether further foreign

subsidiaries might be given up. After the closures and
divestments which had already been undertaken,
however, subsidiaries remained at only three locations
(London, Luxembourg and Dublin), whose continued
existence Germany had described as being vital for the
bank’s retail business and refinancing. In the end, a
commitment was given to abandon BGB (Ireland) plc
in Dublin. The Commission accordingly did not seek
further measures in the capital market sector, for the
reasons set out above.

(288) Under point 37 of the guidelines, an assessment of
compensatory measures must take account of ‘the
the firm on its market or
relative importance of
markets’. The retail banking business (private and
corporate customers)
is therefore by far the most
problematic from a competition point of view.
Already in its decision initiating the procedure, the
Commission expressed doubts about the appropriate-
ness of
the compensatory measures primarily on
account of BGB’s strong regional and local position
on this market.

(289) Through selling subsidiaries or other parts of assets
and through closing branches and other sites, BGB has
already significantly reduced the segment assets
attributable to this business line. The 43 % reduction
originally planned in the segment assets by 2006 (see
table in paragraph 280) has
thus almost been
achieved, and essentially all that remains is to sell
Weberbank. However, the Commission commented
back in its decision initiating the procedure that ‘BGB
is extremely strong locally and regionally in the
markets of retail and corporate banking, with shares
ranging from 30 to 57 % in the individual segments at
local level and from 23 to 46 % at regional level, and
with huge gaps between itself and its nearest
competitors, which achieve only half, a third or a
fourth of BGB’s shares.’ The Commission already had
doubts in this connection about whether the target
reduction in the retail and corporate sectors by way of
the planned divestments would suffice to mitigate the
distortive effects of the aid in the greater Berlin region.

(31) According to the Federal Cartel Office’s decision of 19 June
2002 in Eurohypo, the newly created Eurohypo, the Hypover-
einsbank group, the Depfa group, the BHF group and BayLB led
the various submarkets in the real estate financing sector in
2001,
in terms of both existing and new business. Even
Deutsche Bank itself (i.e. without its share in Eurohypo) came
before BGB, which in this decision was not listed among the
leading competitors with market shares of 5 % or more.

(290) The divestments in retail banking which have already
been planned or carried out, with the exception of
Weberbank, which is small and directed at wealthy
private customers, do little or nothing to reduce BGB’s
presence in Berlin: Allbank is active countrywide and
has only a few branches in Berlin, BG Polska and
Zivnostenska Banka operate abroad. Although some

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4.5.2005

40 to 50 (private and corporate) branches were closed
in Berlin in each category, closing branches in a large
city with high branch density serves mainly to cut
costs and, according to the comments by Germany,
causes customers to change banks only to a limited
extent. (32) Moreover,
information
the
referred to and provided by Germany shows that the
intention was not significantly to reduce market
presence in Berlin, but to maintain BGB’s position in
individual segments or even to strengthen it slightly.

additional

(291)

In response to the Commission’s doubts, Germany
argued that the volume‑based market shares originally
submitted for BGB in the individual segments of the
Berlin market were overstated. This was because of
BGB’s reports to the Land central bank, which were for
the whole group and did not distinguish between
product markets or regions. This meant, for example,
that lending and deposit volumes for the real estate
financing and capital market business areas outside
Berlin were included in the figures for local retail and
corporate business. BGB’s
lending and deposit
volumes and the corresponding market volume for
Berlin had therefore been adjusted for the lending and
deposits not attributable to the region or the product
area. This gave private‑customer market shares for
BGB of some 43 to 45 % for deposits/payments
business and some 22 % for lending in 2000 and
2001. In the corporate sector, BGB had market shares
of some 25 to 26 % for deposits/payments and some
23 to 25 % for lending in 2000 and 2001. Compared
with the originally notified figures, the market shares
submitted by Germany for BGB in the individual
segments,
customer
segment, had thus fallen in some cases by almost half.

especially in the

corporate

(292)

For BGB’s nearest three competitors on the Berlin
retail market (Berliner Volksbank, Dresdner Bank and
Deutsche Bank (group)), Germany gave market share
estimates for 2001 of around 11 to 13 % for lending/
private customers, 8 to 14 % for private customers/
deposits, 5 to 16 % for corporate customer/lending
and around 9 to 18 % for corporate customers/
deposits. With estimates of over 50 % in the private
customer sector (50 to 60 % for the deposit/payments
segments and about 50 % for lending) and close on
60 % in corporate banking (over 40 % for deposits/

(32)

In Berlin a bank retains around 75‑90 % of its customers in the
event of branch closures.

(33) Market shares for the Berlin/Brandenburg region (around 14 to
27 % in personal banking and around 18 to 21 % in corporate
banking) were
sake of
submitted subsequently for
completeness. The reason why they are far smaller is that,
even before
involving
divestments and closures of sites in Brandenburg, BGB’s
presence in Brandenburg was limited. Updated country‑wide
figures were no longer submitted.

restructuring measures

latest

the

the

payments and around 50 to 60 % for lending),
Volksbank assumes far higher market shares for BGB.
It estimates its own market shares at 6 to 10 % in the
private customer segments and some 4 to 10 % in the
corporate segments.

(293) Germany's corrected market shares for private and
corporate retail business refer only to Berlin as it
considered this to be the relevant region and retail
banking to be a regional business (33).

(294)

In its comments, the Berliner Volksbank also argued
that Berlin was the relevant geographic market for
assessing the aid in retail banking and that this was in
line with the Commission’s usual assessment criteria
for defining the market in merger control. Merger
decisions in the banking sector had cited such factors
as the general preference of banking customers for
local suppliers, the significance of a dense branch
network and the need for the bank to be physically
close to its customers (34). If the Commission had
none the less tended so far to assume in merger
decisions relating to financial services that markets
were national in scope, this was because an absence of
competition concerns (indications of a dominant
market position) meant that no thorough analysis of
retail banking was necessary. However, it would be
inappropriate to define the market as national when
assessing the distortive effects of the aid in this case
on competition on the Berlin retail banking market. It
was precisely in this area, given its pre‑eminent
market position,
that BGB would have to offer
compensatory measures to reduce its market presence.
On account of its dual brand strategy, among other
things, BGB’s market position was far greater than was
usual for regionally strong savings banks in some
German cities. This concentration made market access
more difficult
for potential competitors and had
meant that the market share of foreign banks in Berlin
was negligible.

(295)

For the purposes of this decision, the Commission has
no cause to depart from the position of Germany and
Berliner Volksbank with respect to the geographical
focus on Berlin in retail banking. As stated in the
decision initiating the procedure, it has to date in the
area of merger control generally assumed that the

(34) Commission Decision of 11 March 1997 declaring the
compatibility with the common market of a concentration
(Case No IV/M.873 — Bank Austria/Creditanstalt) based on
Council Regulation (EEC) No 4064/89 (OJ C 160, 27.5.1997,
p. 4).

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markets in the financial sector are national in scope —
with the exception of financial services - but has left
room for a regional definition in private‑customer and
corporate banking (35). The significance of the branch
network and that of the bank’s local physical presence
in retail banking suggest that the focus should be on
the Berlin market. Customer behaviour also points to
this approach since, when branches are closed or sold
off in a large city such as Berlin and to the extent that
customers change banks at all, they tend to switch to
another locally represented credit institution, despite
the increase in telebanking. The inclusion of Branden-
burg, apart from the areas adjoining Berlin, therefore
seemed to be casting the net too wide, as BGB’s
withdrawal from Brandenburg and its concentration
on the core region also suggest.

(296)

For the purposes of this decision, however, a precise
definition of the geographic market is not important
since it is not a question of proving that there is a
dominant position but of assessing whether
the
proposed compensatory measures suffice to offset
the distortive effects of the aid at issue by reducing
market presence. There can be no doubt and no
disputing the fact that the aid has helped the bank to
remain on the various markets and thus also to
preserve its strong position on the Berlin retail
market.

(297) The Commission has doubts about the reliability of
the market share estimates that had been submitted by
Germany and adjusted downwards,
first because
similar reporting problems in individual cases may
also affect the other competitors but may not have
been taken into account in the market volumes given,
and second because third parties which submitted
comments in the course of the proceedings and were
asked for their own estimates more or less confirmed
independent market
the original
share calculations with verifiable distinctions by
region and product are not available. Enquiries
showed that no competition‑based analysis in the
antitrust/merger control field has been carried out in
this connection by the Bundesbank/Land central bank,
the Federal Cartel Office or the Commission. In the
state aid field, the Commission does not have the
necessary powers to conduct investigations among
competitors.

figures. However,

(298) Nevertheless,

this decision, a
precise analysis of market share is not necessary since,

for the purposes of

(35) Commission Decision of 11 March 1997 (Case No IV/M.873 —
Bank Austria/Creditanstalt); Commission Decision of 25 Sep-
tember 1995 declaring the compatibility with the common
market of a concentration (Case No IV/M.628 — Generale
Bank/Crédit Lyonnais Bank Nederland) based on Council
Regulation (EEC) No 4064/89 (OJ C 289, 31.10.1995, p. 10).

as explained above, assessing state aid does not
involve proving that a dominant position exists. It is
indisputable that the aid concerned here distorts or
threatens to distort competition, especially on the
markets on which BGB has a strong position; this also
corresponds to BGB’s view of itself as the leading retail
bank in Berlin. The adjusted market shares of between
a little over 20 % and more than 40 % in the
individual segments do not contradict this even if they
are correct, which is doubtful. In this connection, it
should also be noted that, according to the informa-
tion submitted by Germany, BGB’s share or market
penetration in 2002 in terms of first giro accounts
held by private customers was 48 % and that,
according to comments by BGB’s chairman of the
the bank’s market share, with the brands
board,
Berliner Sparkasse and Berliner Bank, was in some
cases more than 50 % (36).

(299) Consequently, there is no doubt that BGB enjoys a
strong market position and is clearly the leading retail
group in the greater Berlin area, which has a
population of roughly 4 million. Its market position
has not significantly changed since its foundation in
1994, when Berliner Bank and Berliner Sparkasse
(then already combining the former Sparkasse in West
Berlin and that in East Berlin, with the latter enjoying a
quasi‑monopoly position) were brought under one
roof or since the start of the crisis in 2001. This
‘stability’ serves as an indicator for its market power
vis-à-vis actual and potential competitors.

(300) Against this background, the Commission made it
clear that approving restructuring aid on the basis of
compensatory measures which leave BGB’s position
on the Berlin market for retail banking basically intact
would not be compatible with the EU's state aid rules.
Germany, however, remained preoccupied with the
bank’s arguments about the threat to its viability.

(301) After intensive further negotiations on 18 December
2003 with representatives of the Federal Government
and the Land of Berlin, Germany finally committed
itself to the divestment of Berliner Bank as a further
compensatory measure with a view to enabling the
Commission to approve the aid without imposing
further extensive compensation measures. It accord-
ingly undertakes to ensure that the group sells the
‘Berliner Bank’ division as an economic entity,
including at least its trade name, all customer relations

(36)

Speech at the general meeting on 4 July 2003.

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the

associated with the trade name, as well as branch
offices and staff in a legally effective, open, transparent
and non‑discriminatory procedure by 1 October 2006
(closing by 1 February 2007). The effective date for
the number of customers,
the determination of
branches and front‑office staff
is 31 December
2003, taking into account the planned implementa-
restructuring plan notified to the
tion of
Commission and natural business fluctuations,
i.e.
increases and decreases in the number of customers,
staff, assets and liabilities that are based on individual
decisions (such as the relocation of customers or
employees and dissatisfaction with the previous bank
or employer) and not influenced by the bank. This
means in particular that BGB is not allowed to incite
customers to transfer from Berliner Bank to other
parts of the group, such as Berliner Sparkasse. A
trustee appointed by Germany (the Land of Berlin) and
approved by the Commission will ensure that the
to restructure Berliner Bank in
bank continues
accordance with business sense, investing in it and
not taking any steps to reduce its value, in particular
by the transfer of private or corporate customers or
sales staff to Berliner Sparkasse or other parts of the
Bankgesellschaft group.

(302) By 2006 (37) the sale of Berliner Bank will reduce the
assets in retail banking by a further EUR [...]* (and,
together with the measures already planned and
promised, by some EUR [...]* in all. BGB’s market
share in the individual segments of the Berlin retail
business will be reduced by one third to one sixth as a
the sale. The balance‑sheet total will be
result of
reduced from roughly EUR 189 billion to about EUR
124 billion.

(303)

In the Commission’s view, therefore, the completed,
planned and promised divestments, closures and
reductions of other kinds suffice as a whole to
mitigate the distortive effect of the aid measures at
issue.

(304)

it must be mentioned that,

Lastly,
in its original
notification, Germany stated that Berlin was a region
the
within the meaning of Article 87(3)(c) of
EC Treaty and qualified for regional aid and that
points 53 and 54 of the guidelines would have to be
taken into account in assessing compensatory mea-
sures, without giving further explanations or specific
details. Points 53 and 54 state that the assessment
criteria in the guidelines also apply to assisted areas
but that the capacity reduction required on markets
with excess structural capacity may be less stringent.

(37) The divestment of Berliner Bank has to take effect by 1 February
2007 at the latest. It is possible therefore that the effects will be
shown only in the balance sheet for 2007.

In its decision initiating the procedure, the Commis-
sion noted that it was not in a position, in the absence
of further specific details, to assess the extent to which
this criterion applied. Since Germany did not come
back to this point in the course of the proceedings and
since, as explained above, the banking sector does not
involve markets with excess structural capacity, the
Commission considers that points 53 and 54 are not
applicable in this case.

Aid limited to the minimum

(305)

the amounts of

In the Commission’s view, Germany has demonstrated
the three aid
satisfactorily that
measures granted — the capital
injection, the risk
shield and the agreement on the treatment of any
claims to repayment brought against the bank by the
Land of Berlin — are limited to the strict minimum
needed to enable restructuring to be undertaken in the
light of the existing financial resources of the bank
and its shareholders. The bank received no surplus
cash or surplus own resources which it could have
misused for the purposes of an unreasonable expan-
sion of its business at the expense of its competitors.

(306) The EUR 1.755 billion capital

in particular by reducing its

injection in August
2001, initially granted as rescue aid, was assessed on
it could help the bank secure a
the basis that
core‑capital ratio of 5.0 % and an own‑funds ratio
of 9,7 %. As stated above, the Commission regards
this as vital for a bank’s short‑term survival. By its
own efforts,
risk
exposure, the bank subsequently managed to increase
its core‑capital ratio to above 5 %. At the end of 2003
the ratio stood at around 6 %. In view of current
practice on financial markets and the corresponding
expectations of ratings agencies and market partici-
pants, the Commission regards a core‑capital ratio of
6 % as absolutely vital in the longer term to ensure the
bank’s attractiveness to capital markets. The amount
of
injection in 2001 was absolutely
necessary to maintain the bank’s core‑capital ratio.
In the assessment of restructuring aid as a whole, it
can therefore be regarded as corresponding to the
strict minimum and can thus be approved. Further-
more, as explained above, in order to prepare for the
the
end of
introduction of the IAS and the Basel II accord, the
bank sees itself constrained to increase its core‑capital
ratio to at least 7 % by its own efforts and thus to
secure the rating required for refinancing terms that
are operationally defensible. The Commission wel-
comes these plans to stabilise the bank further.

the two forms of public liability,

the capital

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the

this

state

future

losses.

‘blank

cheque’

aid. On

(307) As explained in paragraph 138, the risk shield, which
has a nominal value of EUR 21,6 billion, is worth EUR
6,1 billion in economic terms for the purpose of
assessing
point
Berliner Volksbank argues that the Land’s risk shield
actually constitutes an unlimited additional funding
commitment since the Land of Berlin’s associated
liability cannot be estimated at present and is therefore
a
In
for
Berliner Volksbank’s view,
it is disproportionate in
both size and duration, affords the bank virtually
unlimited creditworthiness and gives it an ‘uncondi-
tional licence’ to submit offers on whatever terms it
wants and, as no precise figure can be put on the
additional funding commitment, it is not eligible for
approval. The Commission believes this argument to
be incorrect and endorses Germany’s views instead.
Contrary to Berliner Volksbank’s claims,
the risk
shield structure specifically does not allow the bank to
expand its banking or other business. Of course, it
ensures that the bank does not disappear from the
market altogether. But
confined to
its
protecting the bank from risks deriving from old
business. It cannot be used as such to generate new
business. At most, it makes new business possible in
that the shielded real estate service companies in
particular — and the bank in general — continue to
exist. But this is no more than an indirect consequence
of any aid measure and cannot be used as a criterion
to determine whether the amount of the aid as such is
limited strictly to safeguarding the continued existence
of the undertaking. The risk shield does not provide
the bank with liquidity but merely indemnifies it
against the continuing losses of the real estate service
companies which the bank could not absorb by itself.
The Land only makes payments ex post
for the
amount of actual claims by creditors based on a legal
entitlement. In addition, under the detailed agreement,
the Land exercises — via its own risk‑controlling
company — extensive rights to carry out inspections
and to reserve approval. For an in-depth description of
the workings of the detailed agreement, the Commis-
to Germany’s comments. The
sion would refer
Commission accordingly regards the risk shield as a
whole as being limited to the strict minimum.

role

is

annual results for 2002 and on its own funds.
However, at the time when its annual accounts for
2002 were drawn up, and also thereafter, the bank
reported a core‑capital ratio that was no more than
6 % and was partly below that figure. The bank would
not have coped with any further pressure on the
core‑capital ratio at this stage of restructuring. As
explained above, the Commission believes that in the
long term a core‑capital ratio of 6 % is absolutely vital.
If, in its decision in case C 48/2002, the Commission
were to oblige the Land of Berlin to recover from the
bank the aid element incompatible with the common
market, the Land of Berlin would leave its claim in the
form of a deposit with the bank. However, this would
happen only in so far as it were necessary to maintain
a core‑capital ratio of 6 % on the critical date of
1 January 2004 and so, in the Commission’s view, it
constitutes the strict minimum. The authorisation by
the Commission of the repayment agreement with a
maximum economic value of EUR 1,8 billion is
limited to an exceptional case similar to the present
case, i.e. where and only to the extent the repayment
would inevitably undermine the viability of
the
company and the restructuring plan is otherwise
the agreement
acceptable. Within this framework,
itself constitutes restructuring aid and thus creates the
need for additional compensatory measures to which
Germany has finally committed itself,
in particular
with the divestment of Berliner Bank.

Conclusions

(309) The aid totalling EUR 9,7 billion consists of three
measures: a capital injection of EUR 1,755 billion by
the Land of Berlin for BGB in August 2001; the risk
shield amounting to a maximum of EUR 21,6 billion
in nominal terms that was made available by the Land
of Berlin to BGB in the period December 2001 to
April 2002 and that has an economic value of EUR
6,1 billion; and the repayment agreement between
the Land of Berlin and BGB of December 2002
regarding a potential recovery following a Commis-
sion decision in case C 48/2002 (Landesbank
Berlin ‑ Girozentrale), which has an economic value
of up to EUR 1,8 billion.

(308) The Commission also considers that the aid with a
maximum economic value of EUR 1,8 billion
contained in the agreement between the Land of
Berlin and the bank on the treatment of any claims to
repayment brought by the Land of Berlin arising out of
a decision in case C 48/2002 is limited to the strict
minimum. Without that agreement the bank would,
at the request of its auditors, have had to include in its
2002 annual accounts reserves against
impending
liabilities amounting to hundreds of millions of euros.
This would have had a negative impact on the bank’s

(310) All the preconditions for the existence of state aid
under Article 87(1) of the EC Treaty are met (state
resources, favourable treatment for a specific under-
taking, distortion of competition, effect on trade
between Member States). Of the derogations from the
principle of the incompatibility of state aid with the
common market, only Article 87(3)(c) of
the
EC Treaty, read in conjunction with the Community
guidelines on state aid for rescuing and restructuring
firms in difficulty, is applicable.

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(311)

In its assessment — and in the light of the criteria in
the guidelines — the Commission concludes that the
restructuring measures already carried out and those
planned are reasonable,
logical and fundamentally
appropriate in order to enable BGB to restore its
long‑term viability.

referred to in paragraph 1 are
2. The aid measures
compatible with the common market, provided that Germany
fully observes the undertakings communicated by Germany
and set out in Article 2(1) of this decision and in the Annex
hereto and provided that the aid referred to in paragraph 1(c)
does not give rise to a core‑capital ratio, as at 1 January 2004
of over 6 % for BGB group (taking into account the hiving‑off
of IBB in accordance with Article 2(1)(d).

(312)

In the Commission's view, the sales, closures and
reduction measures already carried out, planned or
promised are sufficient to offset the market‑distorting
effects of the aid measures in question.

Article 2

1. Germany has undertaken:

(313)

that

The Commission considers
the three aid
measures granted — the capital injection, the risk
shield and the agreement on the treatment of any
claims to repayment brought against the bank by the
Land of Berlin — are limited to the to the strict
minimum needed to enable restructuring to be
undertaken in the light of
the existing financial
resources of the bank and its shareholders. The bank
received no surplus cash or surplus own resources
which it could have misused for the purposes of an
unreasonable expansion of its business at the expense
of its competitors,

(a)

to ensure
the notified
timely implementation of
restructuring plan in accordance with the conditions
laid down in the Annex;

(b)

to ensure that the Land of Berlin sells it holding in BGB in
accordance with the conditions laid down in the Annex;

(c)

to ensure that the BGB group sells or liquidates all
holdings in real estate service companies covered by the
risk shield of 16 April 2002 in accordance with the
conditions laid down in the Annex;

HAS ADOPTED THIS DECISION:

(d)

to ensure that IBB's special reserve is transferred back in
accordance with the conditions laid down in the Annex;

Article 1

(e)

to ensure that the BGB group sells the ‘Berliner Bank’
division of LBB in accordance with the conditions laid
down in the Annex;

1. The following measures for the Bankgesellschaft Berlin
AG group (‘BGB’) constitute state aid within the meaning of
Article 87(1) of the EC Treaty:

(f)

to ensure that the BGB group sells its holding in BGB
Ireland plc by no later than 31 December 2005.

(a)

the capital injection of EUR 1,755 billion by the Land of
Berlin in August 2001;

2. Where appropriate, and on a sufficiently reasoned request
from Germany, the Commission may:

(b)

the guarantees (‘risk shield’) with a maximum nominal
value of EUR 21,6 billion granted by the Land of Berlin
on 20 December 2001 and 16 April 2002;

(a)

grant an extension of
undertakings, or

the deadlines specified in the

(b)

in exceptional cases, dispense with, amend or replace one
or more of the requirements or conditions set out in
those undertakings.

(c)

the agreement of 26 December 2002 between the Land
of Berlin and the Landesbank Berlin (LBB) on the
treatment of any claims brought by the Land of Berlin
against LBB following a final decision by the Commission
in case C 48/2002, which is pending.

If Germany requests that a deadline be extended, a sufficiently
reasoned request shall be sent to the Commission at the latest
one month before expiry of that deadline.

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Article 3

Germany shall inform the Commission, within two months of
notification of this decision, of the measures that have been
taken and the measures it intends to take to comply with this
decision.

Article 4

This decision is addressed to the Federal Republic of Germany.

Germany is required to forward a copy of this decision to the
recipient of the aid immediately.

Done at Brussels, 18 February 2004.

For the Commission
Mario MONTI
Member of the Commission

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ANNEX (1)

Article 2(1)(a)

Germany will ensure will that the notified restructuring plan, as last amended in accordance with the Federal
Government communication of 29 January 2004, will be implemented, including all the undertakings contained in
Article 2(1), in line with the timetable indicated therein. As regards those elements of the restructuring plan in respect
of which no deadline is indicated, they are to be implemented forthwith and, in any event, in sufficient time to allow
the deadlines specified to be met.

Article 2(1)(b)

Germany will ensure that the Land of Berlin introduces an open, transparent and non‑discriminatory tendering
procedure as soon as the annual accounts of Bankgesellschaft Berlin AG for 2005 have been approved and completes
the procedure by 31 December 2007.

The buyer must:

— be independent of the Land and must not be connected to BGB AG or Berliner Bank within the meaning of
Article 11 of Commission Block Exemption Regulation No 2790/1999 (2) regarding vertical agreements,

— be in a reasonable position to satisfy all the necessary conditions imposed by the relevant competition and other

authorities for the acquisition of the holding in BGB AG, and

— be capable on the basis of its financial strength, and in particular its rating, to guarantee the bank's solvency in

the long run.

In applying the review clause contained in Article 2(2) to the undertaking to sell, the Commission will take due
account of the supply‑side conditions and the situation on capital markets.

Article 2(1)(c)

Germany will ensure that, for balance‑sheet purposes, the BGB group will, in accordance with the rules set out below,
sell or liquidate by 31 December 2005 at the latest all holdings in real estate service companies that are covered by the
risk shield of 16 April 2002.

By 31 December 2004 the Land and the bank will definitively determine those holdings in real estate service
companies that appear suitable for sale to third parties. These holdings are to be sold by way of a transparent, open
and non‑discriminatory tendering procedure.

Holdings in real estate service companies that are neither liquidated nor sold to third parties by the balance‑sheet date
of 31 December 2005 will be acquired by the Land of Berlin on market terms. The purchase price will be determined
by 31 March 2005 on the basis of a valuation carried out by an independent auditor commissioned by the Land, with
a subsequent review by an independent auditor appointed by the bank. This will take place on the basis of recognised
valuation procedures. In the event of a divergence between the two valuations and in the absence of agreement
between the contracting parties, the value will be determined by a third expert to be appointed by the Institut der
Wirtschaftsprüfer in Deutschland e.V. (German Auditors Institute). The independent value assessments will be sent to
the Commission by 31 July 2005 at the latest.

(1)

(2)

The following summarises the contents of the commitments communicated by Germany on 6 February 2004. The original
German text of the communication contains the wording relevant for this decision.

OJ L 336, 29.12.1998, p. 21.

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The business of the real estate service companies that are to be transferred to the Land or wound up will be confined
to the orderly management of the risks covered by the detailed agreement. The bank will invest in those companies to
the extent necessary for that activity.

In order to avoid a heavy land transfer tax burden, a remaining holding of not more than 6 % in Immobilien- und
Baumanagement der Bankgesellschaft Berlin GmbH (IBG) may remain within the Bankgesellschaft group. The group
will not, however, have any influence over the management of IBG. Moreover, Immobilien und Beteiligungen
Aktiengesellschaft (IBAG) can remain within the Bankgesellschaft group following the change of trade name and re-
orientation of the Work‑out‑Competence Center as the holding company for the companies on the so‑called negative
list (3) (companies excluded from the risk shield) in which the Bankgesellschaft group has shares. Apart from its
function as the holding company for the companies on the negative list for the orderly administration and winding-
up of the risks resulting from these companies and as the Work‑out‑Competence Center in connection with the
liquidation of real estate financing, IBAG will, however, no longer carry on any real estate service business.

Article 2(1)(d)

Germany will ensure that, by 1 January 2005 at the latest, the development business of Investitionsbank Berlin (IBB),
an unincorporated institution, which has to date been managed as a department of Landesbank Berlin (LBB), will be
transferred to a new and independent development bank of the Land of Berlin.

The IBB special reserve of Landesbank Berlin will be used, to the extent possible on 1 January 2004, to provide capital
for the new development bank and will, therefore, be hived off from Landesbank, without the core‑capital ratio (tier
one) within the Bankgesellschaft group (following the hiving‑off of IBB) falling below 6 %, but not for an amount of
more than EUR 1,1 billion.

The part of the IBB special reserve that may still be necessary to provide capital for the Bankgesellschaft group in
accordance with the above paragraph will be injected into LBB by the Land of Berlin directly or indirectly as a
contribution in kind (which may, however, not exceed EUR 1,1 billion) in the form of one or more dormant holdings
ranking as core capital. A claim by the Land of Berlin on LBB for the transfer of the corresponding part of the special
reserve can be created and will then be injected into the dormant holdings.

The dormant holdings bear interest at normal market rates. In this connection, when the contract to set up the
dormant companies is signed, a mark‑up on a reference interest rate determined according to the comparable
core‑capital instruments traded on the market will be calculated on the basis of the long‑term rating of LBB, taking
into account the discontinuation of institutional and guarantor liability (Anstaltslast and Gewährträgerhaftung) and in
compliance with the contractual form of the dormant holdings. The comparability of the core‑capital instruments will
be determined on the basis of the contractual rules for those instruments and the rating of each issuer.

Article 2(1)(e)

Germany will ensure that the Bankgesellschaft group will sell the Berliner Bank department of LBB as an economic
entity, inclusive at least of the trade name (and all related intellectual property rights), all private, corporate and other
customers associated with the business carried on under the trade name Berliner Bank, the branches and the
front‑office staff. The effective date for the number of customers, branches and front‑office staff is 31 December
2003, taking into account the planned implementation of the restructuring plan notified to the Commission in
accordance with Article 2(1)(a) and natural business fluctuations, i.e. increases and decreases in the number of
customers, staff, assets and liabilities, that are based on individual decisions (such as the relocation of customers or
employees and dissatisfaction with the previous bank or employer) and not influenced by the bank. Other assets or
staff may be included in the sale as appropriate. A trustee will closely monitor compliance with these conditions. The
tendering procedure must be open, transparent and non‑discriminatory and must be started in 2005. It must be
completed by 1 October 2006 so that the sale can take effect by 1 February 2007 at the latest.

(3)

Annexes 4.1, 11.1, 22.1, 29.1, 37.1.2 and 44.1 to the detailed agreement of 16 April 2002; Annex 25 to the notification.

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Within three months of receipt of this decision, Germany will propose to the Commission a suitable trustee mandate
and an independent trustee who will be required by law to observe professional secrecy and who will, at the expense
of Germany, monitor the proper course of the sale and ensure in particular that the bank continues to restructure
Berliner Bank in a sound business manner, invest in it and do nothing that will reduce its value, above all by
transferring private or corporate customers or sales personnel to Berliner Sparkasse or to any other part of the
Bankgesellschaft group. The trustee will take up his work without delay after having been commissioned. If the trustee
discovers any irregularities, the Commission is to be notified immediately.

The buyer must be independent of Bankgesellschaft Berlin and must have the financial resources, proven expertise
and incentives to maintain and develop Berliner Bank as a viable and active economic force in competition with
Bankgesellschaft Berlin and other competitors. This does not rule out incorporation of Berliner Bank into the buyer’s
company and corporate identity.

The amendments to the mid-term financial plan of 29 January 2004 that are necessary for the implementation of this
commitment will be submitted forthwith by Germany to the Commission for approval.

General provisions governing implementation and reporting

(a) Germany will not amend the notified restructuring plan of 29 January 2004, which takes account of all the

undertakings given in Article 2(1) of this decision, without the prior approval of the Commission.

(b) Germany will ensure that the divestments and sales provided for in Article 2(1)(b), (c) and (e) take place
according to transparent procedures that will be open to any potential domestic or foreign buyer. The sales
conditions must not contain any clause that inappropriately restricts the number of potential bidders or is
tailored to a specific potential bidder. Germany will ensure that those divestments and sales are adequately
publicised. With the exception of sales in accordance with Article 2(1)(c), this will take place via publication in
at least one international press medium that is available throughout the Community in English. As far as the law
permits, bidders will be afforded direct access to all the necessary information in the due‑diligence procedure.
The buyers will be selected on the basis of economic criteria. The proceeds from the bank’s sales will be used in
full to finance the bank’s restructuring plan, in so far as they do not accrue to the Land of Berlin under the
detailed agreement of 16 April 2004 (Annex 25 to the notification).

(c) Germany will ensure that the performance of all the undertakings set out in Article 2 can be verified at any time
by the Commission or by an expert acting for it until such time as they have been carried out. It will ensure
unrestricted access for the Commission to any information necessary for the monitoring of the implementation
of this decision. The Commission may, with the consent of Germany, seek explanations and clarifications
directly from the bank. Germany and the bank will cooperate fully in any enquiries made by the Commission or
by a consultant acting for it.

(d)

Each year until 2007 (inclusive) Germany will send a progress report to the Commission. The report must give
the details of the sales and closures of subsidiaries and departments in accordance with Article 2(1) of this
decision, with an indication of the date of sale or closure, the book value as at 31 December 2003, the purchase
price, all profits and losses in connection with the sale or closure and the details of the measures still to be taken
to implement the restructuring plan. The report must be submitted by the supervisory board of Bankgesellschaft
Berlin AG within one month of BGB group's annual accounts being approved for the relevant financial year, and
in any event at the latest by 31 May of each year.