2006/742/EC: Commission Decision of 20 October 2004 on aid granted by Germany Landesbank Hessen-Thüringen — Girozentrale (notified under document number C(2004) 3931)   (Text with EEA relevance)
Date: 2004-10-20
Institutions: European Commission
Subjects: Germany, State aid, bank, capital increase, control of State aid, share

7.11.2006

EN

Official Journal of the European Union

L 307/159

COMMISSION DECISION

of 20 October 2004

on aid granted by Germany Landesbank Hessen-Thüringen — Girozentrale

(notified under document number C(2004) 3931)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/742/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(2)

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

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

By letters dated 6 August 1997 and 30 July 1998, the BdB
informed the Commission of two further transfers of assets,
to Landesbank Schleswig-Holstein in Schleswig-Holstein
and Landesbank Hessen-Thüringen in Hessen. As regards
the latter transaction, the Commission wrote to Germany
on 31 July 1998 requesting information. Germany
answered by letter dated 2 October 1998 that this was
currently still only at the planning stage and that the
Commission had no cause for concern either now or at a
later stage.

Having called on interested parties to submit their comments
pursuant to the provisions cited above (1) and having regard to
their comments,

(3)

Whereas:

I.

PROCEDURE

The Commission first examined the transfer of assets to
Westdeutsche Landesbank (‘WestLB’), but announced that it
would review the transfers to the other banks in the light of
the findings in that case (2). It finally adopted a decision on
the WestLB case in 1999, concluding that there was a state
aid component equal
to the difference between the
remuneration paid and the normal market remuneration,
which was incompatible with the common market and
should be recovered (3). The decision was annulled by the
Court of First Instance on 6 March 2003 for not setting out
sufficient reasons as regards two of the factors used to
it was
calculate
confirmed in all other respects (4). On 20 October 2004,
the Commission issued a new decision which took account
of the Court's criticisms.

remuneration, but

appropriate

the

(1)

things

Lower

Saxony,

the Norddeutsche Landesbank,

By letters dated 31 May and 21 December 1994,
the
Bundesverband deutscher Banken e.V. (‘BdB’), an association
established in Germany,
representing private banks
informed the Commission among other
that
housing-promotion loans had been or would be transferred
to the liable equity capital of the Landesbanks in North
Rhine-Westphalia,
Schleswig-Holstein,
Bavaria, Hamburg and Berlin, i.e. the Westdeutsche Land-
esbank,
the Landesbank
Schleswig-Holstein, the Hamburger Landesbank and the
Landesbank Berlin. The BdB considered the resulting
increase in the equity capital of the relevant Landesbanks
distorted competition in their favour, since the parties had
not agreed remuneration consistent with the market-
economy investor principle. In its second letter, the BdB
accordingly lodged a formal complaint and called on the
Commission to initiate proceedings under Article 93(2) of
the EC Treaty (now Article 88(2)) against Germany. In
February and March 1995 and December 1996, several
banks associated themselves individually with the com-
plaint lodged by their association.

(1) OJ C 72, 26.3.2003, p. 3.

(4) On 1 September 1999, the Commission sent Germany a
request for information on the transfers of assets to the
other Landesbanks,
including Helaba. By letter dated
8 December 1999, Germany submitted information on

(2) OJ C 140, 5.5.1998, p. 9 (Decision to initiate proceedings).
(3) OJ L 150, 23.6.2000, p. 1; actions challenging that decision were
brought by Germany (before the Court of Justice, Case-C 376/99), by
North Rhine-Westphalia (before the Court of First Instance, Case T-
233/99) and by WestLB (before the Court of First Instance, Case T-
228/99); the Commission brought proceedings for an infringement
of the Treaty (before the Court of Justice, C-209/00).
Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank
Girozentraleand Land Nordrhein-Westfalen v Commission [2003]
ECR II-435.

(4)

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the transfer of the special assets of the Land to Helaba,
which it supplemented, following a further request for
information from the Commission sent on 31 October
2000, by letter dated 21 January 2001.

2004, the BdB sent comments on the proceedings. The
Commission then asked Germany for further comments,
which were submitted by letters dated 1 October and
6 October 2004.

(5)

(6)

(7)

(8)

(9)

By letter dated 13 November 2002,
the Commission
informed Germany that it had decided, with regard to the
transfer of the special assets by the Land of Hessen as a
silent partnership contribution to Helaba, to initiate formal
proceedings under Article 88(2) of the EC Treaty. At the
same time, the Commission also initiated proceedings in
respect of similar
transfers of assets to Norddeutsche
Landesbank — Girozentrale (‘NordLB’), Landesbank Schles-
wig-Holstein — Girozentrale (‘LSH’), Hamburgische Land-
esbank — Girozentrale (‘HLB’) and Bayerische Landesbank-
Girozentrale (‘Bayern LB’). It had already initiated proceed-
ings in respect of a further similar transfer of promotion-
related assets by the Land of Berlin to Landesbank Berlin
back in July 2002.

The decisions initiating proceedings were published in the
Official Journal of the European Union (5) . The Commis-
sion called on interested parties to submit comments.

By letter dated 9 April 2003, Germany submitted
comments on the initiation of proceedings in the Helaba
case.

By letter dated 29 July 2003, the BdB submitted comments
on all the decisions taken on 13 November 2002 to initiate
proceedings, and those comments were forwarded to
Germany by letter dated 28 July 2003 for its opinion.

By letters dated 10 October and 4 December 2003,
Germany submitted comments on the BdB's remarks in the
Helaba case. By letter dated 30 October 2003, Germany
also forwarded comments by the Government of North
Rhine-Westphalia and by WestLB on the BdB's remarks.

II.

DETAILED DESCRIPTION OF THE MEASURES

1.

HELABA

to

amounts

balance-sheet

(12) Landesbank Hessen-Thüringen Girozentrale (Helaba), with
head offices in Frankfurt am Main and Erfurt, has a group
balance-sheet total of EUR 140 billion (as at 31 December
2003), which makes it one of Germany's largest banks. The
some
total
bank's
EUR 130 billion, which is more than 90 % of the group
balance-sheet total. It is a publicly owned credit institution
operating in the form of a public institution (Anstalt des
öffentlichen Rechts). The owners and guarantors of the bank
have since 1 January 2001 been the Sparkassen- und
Giroverband Hessen-Thüringen with an 85 % stake (at the
time of the transfer at the end of 1998, it was the sole
owner and guarantor), the Land of Hessen with a 10 % stake
and the Land of Thuringia with a 5 % stake. According to its
annual report for 2003, the group had equity capital of
EUR 4,1 billion. As at 31 December 2003, the group's core
capital ratio was 7,8 % and its equity ratio 11,3 %.

(13) Given its ownership structure, Helaba operates as the
principal banker to the Land of Hessen and to the Land of
Thuringia and as the central institution of the Hessen and
Thuringia savings banks. Helaba also operates as a
customer-orientated and market-orientated commercial
bank with a particular emphasis on wholesale banking,
and as a partner for public-sector customers, supporting
the Länder and municipalities in financing and implement-
ing investment plans. Via its holding in the Landesförderin-
stitute, Helaba supports economic and structural-policy
objectives in Hessen and Thuringia.

(10) By letter dated 7 April 2004, the Commission requested
further information from Germany on all the Landesbank
proceedings, and wrote specifically requesting information
on the Helaba case by letters dated 19 May and 3 August
2004. Germany replied by letters dated 1 June, 23 June and
23 August 2004.

(14) The Helaba group had some 3 500 employees as at
31 December 2003. It is present in major world financial
centres. In addition to its two head offices in Frankfurt am
Main and Erfurt, it is represented internationally in London,
New York, Zurich, Dublin, Madrid, Paris and Luxembourg.

(11)

In September and October 2004, talks took place between
the BdB, the Land of Hessen and Helaba on the question of
an appropriate remuneration for the capital provided. No
understanding was reached. By letter dated 28 September

THE TRANSFER OF THE SPECIAL ‘HOUSING AND
2.
FUTURE INVESTMENT’ FUND AS A SILENT PARTNERSHIP
CONTRIBUTION TO HELABA

(5) NordLB: OJ C 81, 4.4.2003, p. 2; BayernLB: OJ C 81, 4.4.2003, p. 13;
HLB: OJ C 81, 4.4.2003, p. 24; Helaba: OJ C 73, 26.3.2003, p. 3;
LBKiel: OJ C 76, 28.3.2003, p. 2.

(15) By the Law of 17 December 1998, the Land of Hessen
established a special ‘Housing and Future Investment’ fund.

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The Hessen Finance Ministry was empowered to transfer all
or part of this fund to a credit institution as a silent
partnership contribution or in any other form of equity
holding recognised for supervisory purposes in return for a
market remuneration that remained with the special fund.

individual institutions. The Land would, moreover, have lost
the flexibility it had to shift the emphasis between the
various aid objectives.

(16) The special fund comprises Land claims from loans granted
between 1948 and 1998 for the purpose of promoting
social housing construction. As at 31 December 1998, the
loan portfolio amounted to DEM 7,829 billion (Land
portion: DEM 6,026 billion). Its cash value was determined
by two independent experts at DEM 2,473 billion
(EUR 1,264 billion). This special fund was transferred to
Helaba as a silent partnership contribution under a contract
between the Land of Hessen and Helaba signed in
December 1998 and entering into force on 31 December
1998.

(17) A contractually agreed re-valuation by an expert on
31 December 2003 put the value of the promotion-related
assets at EUR [...] (*) million. The increase in value is due to
the fact that accruals had exceeded outflows from the
promotion-related assets since 1999. However, pending
final agreement with BAFin on the outcome of the expert
valuation as at 31 December 2003, Helaba continues to
have only the previous reference amount available.

(18) No injection of liquidity or inflow of revenue for the bank
is associated with the transfer of the special fund as a silent
partnership contribution. Income (interest and repayments)
from the house-building loans does not accrue to the bank,
but to the special fund and must be ploughed back into the
promotion of housing construction.

(19) The transfer of the special fund to Helaba should be seen in
the light of the Land's efforts to tighten up its aid and
structural-policy instruments and make them more effi-
cient.

(20) According to information provided by Germany, the Land
initially considered the possibility of inviting bids for the
outstanding claims and selling them by auction (highest
bidder) to private operators for cash and split up into
tranches. Although splitting the special fund into tranches
would have had the advantage of increasing the number of
potential banking partners for the Land given that very few
operators would have been interested in taking on a fund of
the fund was nevertheless a
some DEM 2,5 billion,
revolving fund involving income from loans granted being
ploughed back and thus constituted a single entity. It would,
according to Germany, have been very expensive to carry
out a periodic valuation of the tranches divided between

(*) Confidential information, also indicated below by [...].

(21) The Land consequently decided to keep the house-building
assets undivided,
to continue to use the income for
promotion purposes in house building and economic
promotion, to organise the administration of the assets as
effectively and cheaply as possible and, by using the claims
in other ways, to generate additional income.

(22)

worth

DEM 2,473

In the light of these considerations, Helaba declared itself
the entire fund of
ready to take on and administer
outstanding
billion
claims
(EUR 1,264 billion). Another advantage of transferring it
to Helaba was that the latter had, since 1953, already been
administering the Landestreuhandstellen (LTH) as a legally
independent business division and handling aid pro-
grammes in a trust capacity. Helaba is moreover required
under the State Treaty and its own statutes to comply with
general economic basic principles in pursuing its business
policy. These three factors convinced the Land that Helaba
would be best suited as a banking partner in realising the
objectives of the Special Fund Law.

(23) Under [...] within the meaning of Section 10(4) of the
German Banking Act of 30 December 1998, the Land
transferred the special
fund to the bank as a silent
partnership contribution in the form of an internal
partnership. This means that the Land co-founded a silent
partnership with Helaba under Sections 230 et seq. of the
German Commercial Code, i.e. a partnership whereby the
silent partner has a capital holding in another business
involving the transfer of a contribution to the assets of the
active partner.

(24) According to the [...] the purpose of the contribution is ‘to
serve permanently as liable equity capital in the form of
core capital within the meaning of Section 10(2), the first
sentence of Section 10(2a) and Section (4) of the Banking
Act, taking account of the requirements formulated by the
Basle Committee on Banking Supervision (Bank for
International Settlements) on 27 October 1998’.

(25) For a silent partnership contribution to count as the liable
equity capital of a credit institution under Section 10(4) of
the German Banking Act, it must in particular participate
fully in losses and,
the institution's
bankruptcy or liquidation, be repayable only after all
creditors' claims have been met. The fact that, as was
the silent partnership contribution cannot be
agreed,

in the event of

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capital, or ‘tier 1’ capital, meaning capital items which are at
the credit
institution's disposal without restriction and
immediately in order to cover risks or losses as soon as they
arise. In determining the total own funds available to a bank
for supervisory purposes, the core capital
is of decisive
importance, because additional capital, or ‘tier 2’ capital, is
accepted as underpinning for risk-bearing transactions only
up to the amount of the available core capital.

4.

EFFECTS OF THE TRANSFER ON HELABA'S EQUITY

CAPITAL ENDOWMENT

(29) The scale of a credit institution's business depends to a large
extent on the amount of
its equity capital. This was
increased to a not inconsiderable extent by the transfer of
the special fund to Helaba.

of

amount

(30) Of the silent partnership contribution of DEM 2,473 billion
(EUR 1,264 billion) as valued by an independent expert,
entered in Helaba's balance sheet and recognised for
supervisory purposes as core capital, an annually fluctuat-
ing
some DEM 2,3 billion (around
EUR 1,2 billion), potentially usable to underpin its
is available to Helaba. The rest is,
competitive business,
according to Germany, required as capital coverage for the
claims making up the special fund. However, the Land of
Hessen and Helaba agreed in the contract on a phased
arrangement under which,
in the period from 1999 to
2002, only an annually increasing partial amount of the
usable core capital was to be actually used by Helaba to
cover competitive business, and only this partial amount
was to be remunerated accordingly. Only as from 2003 was
the amount recognised by BaFin, in so far as not required
for promotion-related business, to be usable in full to
underpin competitive business. The precise amounts
available to Helaba as core capital and usable or actually
used for competitive business are shown in the following
table:

withdrawn by the Land of Hessen means that, according to
the information provided by Germany, it does not count
towards the 15 % limit for innovative financial instruments
laid down by the Basle Committee, but is fully recognised
by BAKred, as tier 1 liable equity capital (core capital).

(26) The alternative of transferring the housing construction
fund not as a silent partnership contribution, but as share
capital was, according to Germany, not pursued by the Land
because it was not at the time willing to commit itself to
being a direct shareholder and guarantor, and this was in
any case not desired by the then sole shareholder, the
Sparkassen- und Giroverband Hessen-Thüringen.

(27) The asset transfer to Helaba by the Land of Hessen in 1998
occurred later than the earlier transfers of promotion-
related assets to Landesbanks in Germany, which are also
the subject of the complaint by the BdB and of proceedings
initiated by the Commission. However, according to
Germany, the earlier transfers did to some extent serve as
a model to the Land of Hessen even though, in the asset
transfer to Helaba, account was taken of the developments
which had in the meantime taken place on the capital
market and in banking supervisory rules in the direction of
increased use and recognition of hybrid or innovative
equity capital instruments, which in the first half of the
1990s were not yet available in Germany in that form or to
that extent and could not yet be taken into consideration
for supervisory purposes.

3.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS

AND SOLVENCY DIRECTIVES

(28) The German Banking Act

(Kreditwesengesetz) has been
amended in line with Council Directive 89/647/EEC (6)
(the ‘Solvency Directive’) and Council Directive 89/299/
EEC (7) (the ‘Own Funds Directive’), which require banks to
have own funds of 8 % of their risk-adjusted assets. At least
four percentage points must consist of what is termed core

(6) OJ L 386, 30.12.1989, repealed and replaced by Directive 2000/12/

EC, OJ L 126, 26.5.2000.

(7) OJ L 124, 5.5.1989, repealed and replaced by Directive 2000/12/EC.

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Extent, recognition for supervisory purposes and use or usability of the silent partnership contribution (in
EUR millions; end-of-year figures = annual average figures) (8)

Table:

Nominal value in the bal-
ance sheet

Core capital recognised for
supervisory purposes for
the underpinning of risk
assets

Core capital used as cover
for promotion-related
business

Core capital usable as cover
for competitive business,
but not to be so used under
the agreed phased arrange-
ment

Core capital usable or
actually used under the
phased arrangement to
cover competitive business

1999

2000

2001

2002

2003

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

(33) Through the injection of funds, Helaba's capacity to expand
its business with risk-assets to be weighted at 100 %,
assuming a multiplication factor of 12,5, which corre-
sponds to the equity ratio of 8 %, was enhanced by some
DEM 28 billion (EUR 14 billion). In reality, however, the
permissible credit volume could have been expanded even
more as a result of a DEM 2,3 billion increase in own funds,
since a bank's assets are not usually deemed to bear an
average risk of 100 %.

(34) Since this increase in its core capital enabled Helaba to take
lending capacity

its actual

up further additional capital,
indirectly increased still further.

(31) Pending final agreement with BAFin on the outcome of the
the promotion-related
independent expert valuation of
assets as at 31 December 2003, EUR [...] million continue
to be available to Helaba as the reference amount (usable
for competitive business).

(32) As a result of

the capital

transfer, according to the
information provided by Germany, the core capital ratio
(as defined by the Basle Capital Agreement) notified to
BAKred, now BAFin, increased from 5,4 % (31 December
1997) to 9,3 % (31 December 1998), while the equity ratio
rose from 9,6 % (31 December 1997) to 13,1 % (31 Decem-
ber 1998). The notified core capital and equity ratios thus
rose by some 72 % and 36 % respectively.

(8)

Letter from Germany of 23 June 2004, p. 2-7.

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(35) Set out in tabular form, the absolute and relative changes in Helaba's core capital since 1997, including
the silent partnership contribution of the Land of Hessen and other silent partnership contributions, are
as shown in the chart, with a distinction being made between the situation in accordance with
recognition for banking supervisory purposes and the situation in accordance with the contractually
agreed phase arrangements.

Chart:

End-of-year figures

1997

1998

1999

2000

2001

2002

2003

EUR
millions

EUR
millions

EUR
millions

EUR
millions

EUR
millions

EUR
millions

EUR mil-
lions

Under
supervisory
rules

Under agreed
phased
arrangements

Silent partnership
contribution Land
Hessen

Other silent partner-
ship contributions

— 1 023

1 264

1 264

1 264

1 264

1 264

153

153

[…]

[…]

[…]

[…]

[…]

Core capital

1 449

2 579

[…]

[…]

[…]

[…]

[…]

Share silent partner-
ship contribution Land
Hessen in %

Share other silent
partnership contribu-
tions in %

Silent partnership
contribution Land
Hessen

Other silent partner-
ship contributions

—

40 %

[…]

[…]

[…]

[…]

[…]

11 %

6 %

[…]

[…]

[…]

[…]

[…]

—

—

[…]

[…]

[…]

[…]

[…]

153

153

[…]

[…]

[…]

[…]

[…]

Core capital

1 449

1 556

[…]

[…]

[…]

[…]

[…]

Share silent partner-
ship contribution Land
Hessen in %

Share other silent
partnership contribu-
tions in %

—

—

[…]

[…]

[…]

[…]

[…]

11 %

10 %

[…]

[…]

[…]

[…]

[…]

5.

REMUNERATION OF THE OWN FUNDS TRANSFERRED

(36) According to the information provided by Germany, for the
silent partnership contribution Helaba paid the Land a
remuneration (the so-called liability commission) of 1,4 % a
year, consisting of a remuneration for the liability function
of 1,2 % a year and a premium of 0,2 % a year for the
perpetuity of the contribution and the bank's unilateral
right of notice, plus trade tax on the part of the special fund
usable by the bank, i.e. a total of 1,66 %. It was agreed
under the phased arrangement
this remuneration
should not be payable in the first four years (1998 to 2002)
on the full value of the fund, but on the agreed fixed
tranches (reference amounts) rising in annual increments,
reached in the transfer
which under
contract were to be used as cover for competitive business.

the agreements

that

According to the information provided by Germany, Helaba
is liable to pay this remuneration on the basis of the phased
arrangements irrespective of whether the silent partnership
contribution is used to underpin competitive business or
the business it pursues as part of its public task or whether
the transferred capital is indeed used for solvency purposes
at all.

6.

GROUNDS FOR INITIATING THE PROCEEDINGS

(37)

In its decision of 13 November 2002 to initiate proceed-
ings, the Commission took the preliminary view that the
transfer of the housing-promotion loans by the Land of
Hessen to Helaba probably constituted new state aid within
the meaning of Article 87(1) of the EC Treaty, which, since

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the derogations provided for in Article 87(2) and (3) and in
Article 86(2) of the EC Treaty were not met, appeared to be
incompatible with the common market.

III.

COMMENTS FROM GERMANY

(38) The starting point for its investigation was the principle of
the market-economy investor. According to that principle,
favourable treatment exists through the provision of public
money if state funds are made available to an undertaking
on terms which it would not have obtained under normal
market conditions.

(39)

in the

same way as before

risk premium. On the other hand,

In view of the long-term risk-free rate (ten-year federal
bonds) of around 4 % at the end of 1998,
it appeared
doubtful to the Commission whether the agreed remunera-
tion could be regarded as appropriate, in particular allowing
for a proper
the
in determining the normal
Commission conceded that,
market remuneration, the lack of liquidity of the capital
provided in this instance should not be ignored. The
promotion-related loans transferred as a silent partnership
contribution would have to be used for public promotion
transfer.
purposes
Consequently, Helaba could not use the
transferred
resources directly for its business. The broadening of the
bank's equity capital base would, it is true, broaden Helaba's
lending capacity (business-expansion function of equity
capital). However, the bank could achieve the full potential
scope of
it
refinanced the additional credit volume to the full extent
on the capital market. In the Commission's view, therefore,
the Land could not expect exactly the same yield as a
provider of liquid capital, and a corresponding reduction
was therefore proper. However, whether this could justify
the deduction of the entire gross refinancing costs from the
usual market remuneration for a liquid silent partnership
contribution was doubtful in view of the tax deductibility of
the refinancing costs.

the increase in business volume only if

the

(40) The Commission doubted that the basic remuneration of
1,2 % a year agreed for the silent partnership contribution
lay within the market corridor for comparable transactions,
particularly as the absolute volume seemed to be above
what was otherwise usual on the market. It also doubted
whether the addition of 0,2 % a year for the long-term
nature of the contribution was usual on the market and
whether the trade tax of 0,26 % a year payable by Helaba
here, but not payable by it if it took on a silent partnership
contribution from commercial investors, could be regarded
as a further constituent part of the remuneration and as
relevant for the market comparison.

(41) The Commission further doubted whether a market-
economy investor in a comparable situation would have
agreed to limit the remuneration in the first few years to
partial amounts. It had moreover to be examined in this
context whether Helaba derived from the non-remunerated
part of the silent partnership contribution further advan-
tages
in particular an
improvement in credit standing, since the silent partnership
in the
contribution was from the outset entered in full
balance sheet and hence was available for liability purposes.

that had to be remunerated,

(42) Germany stated that the Land of Hessen had in 1997/1998
sought ways of achieving additional
income from its
housing-promotion assets, while maintaining the specific
earmarking of their use, by transferring them to a credit
institution. It was intended that the assets should remain
undivided. Only Helaba was prepared to accept
this
arrangement. The shareholders of Helaba would not have
investment by the Land.
agreed to a share capital
Consequently, the only core capital instrument considered
was a silent partnership contribution.

(43) According to Germany, none of the comments made by the
Commission regarding the other Landesbanks applied to
Helaba, particularly since it was profitable and not relatively
under-endowed with liable capital and was not dependent
on a transfer of promotion-related assets in order to
maintain its existing business volume or to underpin its
growth. Helaba was able to cover its capital requirements
through its shareholder, the Sparkassen- und Giroverband
Hessen-Thüringen, and on the capital market.

(44) After the Basle Committee on Banking Supervision had, on
21 October 1998, in the ‘Sydney Declaration’, formulated
new guidelines on the supervisory recognition of core
capital
instruments for credit institutions that operated
internationally, the Land and the bank decided that the
funds raised would be of unlimited rather than limited
duration,
so as to comply with the new provisions
regarding recognition as core capital above the 15 % limit.
However, the Land had required a remuneration premium
of 0,20 % a year in return for the perpetuity of
the
contribution and the bank's unilateral right of notice.

(45) According to Germany,

in the wake of

the Sydney
Declaration by the Basle Committee on Banking Super-
vision, a fungible market for silent partnership contribu-
tions had developed which was characterised by broad
diversification on the investor side, with investors ranging
from private investors to large institutional investors.

(46) A silent partnership differed here fundamentally from a
holding in the share capital. The silent partner did not have
a holding in the undertaking and had only rudimentary
rights of control. Whereas subscribed capital had to be
remunerated through dividends after tax, the remuneration
for a silent partnership contribution was a tax deductible
operating expense. Under German banking supervision law,
silent partnership contributions had been recognised even
before 1998 as core capital without any limitation as to
amount, and under international banking supervision law
too, perpetual silent partnership contributions had been
recognised as core capital since the ‘Sydney Declaration’ in
October 1998. In 1998/99, credit institutions had made
increasing use of silent partnership contributions. The
amounts involved had ranged up to USD 1 billion or
DEM 1,2 billion (around EUR 0,6 billion). Whereas they
had not been very widespread at the beginning of the

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1990s, silent partnership contributions were certainly no
longer a marginal financing instrument in 1998/99.

(47)

In working out the legal arrangements and in agreeing on
the remuneration, the Land based itself on comparable
transactions involving private credit institutions. According
to Germany, in 1998 SGZ Bank, for example, had agreed a
liability remuneration of 1,2 % a year above the reference
rate and HypoVereinsbank Luxemburg one of 1,6% a year,
while in 1999 Dresdner Capital LLC had agreed a liability
remuneration of 1,65 % above the relevant reference rate,
HypoVereinsbank Luxemburg one of 1,25 % a year and
Deutsche Bank one of 1,15 % a year for a so-called
‘perpetual’. The remuneration premiums for the funds taken
up by private institutions were basically in a corridor
between 0,80 % above twelve-month Libor (9) and 2,15 %
above US federal bonds (10)
. Furthermore, the savings
banks in Hessen and Thuringia had granted Helaba a silent
partnership contribution with effect from 5 December
1997, for which the remuneration was 1,2 % a year above
the reference interest rate.

(48) Germany further stated that, in the case of variable interest
rates, the reference interest rates related to money market
instruments (Libor and Euribor), while in the case of fixed
interest rates they related to bond market instruments
(fixed-interest government bonds such as US treasuries and
German federal bonds) or the interest rates on the swap
market. On the euro money market, lendings were usually
carried out on the inter-bank market without any further
premiums on the basis of Libor or Euribor. In so far as these
reference interest rates were chosen for silent partnership
contributions, the premiums were identical to the liability
remuneration for silent partnership contributions. On the
bond market, the yields on government bonds were usually
used as reference interest rates and, since the end of the
1990s, mid-swaps were increasingly used as the reference
rate. Even for first-rank bank bonds, banks had, on credit
standing and/or
to pay a different
premium, varying with the state of the market, compared
with government bonds having the same term. This
premium was described as the refinancing premium. In
assessing the fixed-interest silent partnership contributions
of credit institutions, therefore, these refinancing premiums
had to be deducted from the remuneration premiums.

liquidity grounds,

(49) These refinancing premiums for euro banks (senior bonds,
JP Morgan-Index) compared with federal bonds had,
according to Germany, ranged from just under 20 to over
40 basis points in the two-year period 1998-99. At the end
of 1998, they amounted to just under 40 basis points (11).
In so far as the swap rate (mid-swaps) was chosen as the
reference figure, however, the interest rate premium of a
silent partnership contribution corresponded largely to the

(9) See Germany's letter of 9 April 2003, p. 25: variable-interest-rate
tranche of the silent partnership contribution of USD 700 million
with a term of ten years taken up by Deutsche Bank in January 1998.
(10) See Germany's letter of 9 April 2003, p. 25: tranche of the silent
partnership contribution of USD 1 000 million with a term of 32
years taken up by Dresdner Bank in May 1999.

(11) See chart in annex 15 of Germany's letter of 9 April 2003.

the silent partnership
specific liability remuneration of
contribution, since the swap rate interest premium relative
to federal bonds corresponded roughly in market terms to
the interest premium of ‘covered’ bank bonds relative to
federal bonds and could therefore also be converted into
interest premiums compared with Euribor.

(50) The negotiations on the contribution and remuneration
were carried out between the Land and the bank as between
two independent parties. They had based themselves, in
determining the finally agreed remuneration of 1,4 % a year
(1,2 % plus a 0,2 % premium for the perpetuity of the
contribution and the unilateral right of notice of the bank),
on the above-mentioned corridor, with a whole series of
data from the market as it then stood.

(51) With regard to the premium for the perpetuity of the
contribution, Germany stated that the comparable transac-
tions referred to had terms of ten or twelve years and also
32 years or were of unlimited duration. The premium of
0,2 % a year for the perpetuity of the contribution was in
conformity with the market in view of Helaba's AAA/Aaa
rating at the relevant time, a rating which none of the
comparable institutions achieved. The transactions on the
capital market referred to for comparison purposes did not
moreover
the
remuneration on the amount of the funds taken up, either
from the point of view of the institutions (total amount of
the issue) or from the point of view of
the investors
(amount of the subscribed tranche).

reveal any dependence of

the level of

(52)

In addition, Helaba had to pay trade tax, to which the Land
of Hessen was not liable, on the remuneration of 1,4 %, so
that the total charge was 1,66 % (before tax). According to
Germany, therefore, in comparing the remunerations, the
trade tax effect of 0,26 % a year in relation to Helaba's silent
partnership contribution had to be taken into account.
Commercial investors in Germany pay trade tax on profit
shares from silent participations. However, the Land of
Hessen is not subject to trade tax. In its place, Helaba had to
pay the trade tax applicable to the remuneration of the
silent partnership contribution. A market-economy institu-
tional
investor would therefore have required a higher
remuneration than the Land in order to offset the charge he
had to pay in the form of trade tax. Conversely, Helaba
would have been immediately prepared to pay a remunera-
tion premium to such an investor, since it made no
difference to it whether
it paid the premium as a
remuneration to the investor or as trade tax to the tax
office. Inclusive of the trade tax effect of 0,26 % a year,
Helaba's charge resulting from the remuneration it had to
pay of 1,40 % a year for the silent partnership contribution

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amounted in total to 1,66 % a year, which was clearly in the
market corridor and represented the result of negotiations
between Helaba and the Land of Hessen.

(53) According to Germany, the remuneration paid was tax
deductible by Helaba as operating expenditure. Silent
partnership contributions represented equity capital only
in the calculation of solvability for banking supervisory
purposes, whereas in company and tax law terms they were
treated as outside capital.

(54) According to Germany, the bank needed only DEM [...]
million in equity capital for its planned annual growth,
whereas the value of the promotion-related assets as liable
equity capital for banking supervisory purposes amounted
to over DEM [...]
billion. Helaba would, according to
Germany, not have taken up a silent partnership contribu-
tion amounting to some DEM 2,5 billion in a single step,
since this amount covered its equity capital requirements
for several years; rather, it would have made repeated calls
on the capital market. Despite these effects and the charges
they imposed on Helaba, no deduction from the remunera-
tion rate of 1,4 % was agreed. The Land and Helaba had
instead agreed, as a transitional solution, on a gradual use
and remuneration of the silent partnership contribution
(the phased arrangement). The bank had endeavoured here
to reach an arrangement under which it would remunerate
the silent partnership contribution only in accordance with
the growth targets agreed with its owner to the tune of its
actual use to cover risk assets. However, this had been too
unfavourable for the Land of Hessen and had therefore not
been acceptable to it. Following negotiations to offset the
conflicting interests, an arrangement had been agreed
involving
tranches
(DEM [...] million in 1999, DEM [...] billion in 2000,
DEM [...] billion in 2001, DEM [...] billion in 2002,
DEM [...] billion in 2003, i.e. the upper limit for usable core
capital). These phased arrangements had provided for a
significantly faster increase for the first few years than was
necessary for the bank's planned growth. The managing
board had then asked the board of directors to approve an
additional special quota of DEM [...] million to cover liable
equity capital, from whose yields the remuneration of the
difference was to be financed so as to ensure that the
contribution was used in a way that was neutral in terms of
operating result. In Germany's view, this showed that the
‘over-endowment’ of the bank had not only not conferred
any additional advantage, but that, without the special
quota, it would rather have burdened the profit situation of
the bank, because the remuneration for those parts of the
gradually increasing assessment basis not covered by
additional business would not have been matched by any
income.

remunerated

increasing

annually

(55) This would have produced annually increasing payment
obligations up to an amount of some DEM 33 million as
from 2003. In addition to the remuneration of the silent
the
partnership contribution,
refinancing costs of lending.

the bank had to bear

It

(56) Germany also made comments on the market-economy
investor principle.
followed from case law that an
assessment must be made of the market nature of the
transaction from the investor's point of view. It therefore
had misgivings if the Commission, as made clear in the
to examine
decision to initiate proceedings,
primarily from the recipient's point of view whether Helaba
had received an economic concession which it would not
receive under normal economic conditions.

set out

(57)

for

therefore be right

from the non-remunerated part of

It could not
the Commission,
irrespective of whether a market-economy investor would
have accepted a gradually increasing assessment basis for
the remuneration, to set out to examine whether Helaba
gained further advantages (improvement in general credit
rating)
the silent
partnership contribution. In accordance with paragraph 327
of the WestLB judgment, reference could not be made only
to the single undertaking benefiting from the investment.
Any additional advantage to the recipient was irrelevant if,
for whatever reason, a market-economy investor would not
have required additional remuneration for such advantage.
No institution would have been prepared to pay immediate
remuneration on the total volume if it could use only
slowly increasing partial amounts for business expansion
purposes and also had no use whatsoever for the surplus
amounts. However, the Land of Hessen wanted to invest its
special housing fund, despite its size, en bloc with a single
credit
institution. A private investor would in such a
situation not have insisted on immediate remuneration of
the entire investment, unless
it had found a credit
institution which needed a capital injection on such a scale
either because of explosive growth in its business activity or
to offset massive losses. However, this had not been the
case. Helaba had derived no advantage from those parts of
the silent partnership contribution which in the first few
years it could not use for banking supervisory reasons and
was also not supposed to use because of the wishes of its
owners.

of

the

quota

special

abovementioned

(58) On the basis of the phased arrangements agreed with the
Land of Hessen, Helaba made use for business expansion
purposes only of tranches of some DEM [...] million a year
plus
some
DEM [...] million. In economic terms, the phased arrange-
ments corresponded to the taking up of several silent
partnership contributions spread over time. The amounts
taken up by private institutions were therefore at best to be
compared with the amounts of individual tranches. It could
therefore be said that the order of magnitude involved was
in conformity with the market. The Land could not demand
a remuneration premium for the taking up of the special
fund en bloc, which only Helaba was prepared to do, but had
rather, as a result of the negotiations, to accept that a
remuneration would be paid only on gradually increasing
partial amounts of the investment.

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(59) The investment had quite properly not

received any
remuneration for its additional liability function through
payment of a guarantee commission, since it had not been
used by the bank in banking supervisory terms for business
expansion. It would not have made sense in economic
terms for a credit institution that was already accorded the
top credit rating by all
the rating agencies to pay a
remuneration for
the liability function of additional
resources it had taken up. The terms and conditions under
which the institution could take up outside capital would
not have improved any further, so that no monetary
advantage existed. The investor in whose interest the entire
capital was transferred en bloc to the bank could therefore
not have imposed any remuneration for
the liability
function.

(60) The Commission's doubts, referred to in the decision to
the
initiate proceedings, regarding the non-liquidity of
capital were based partly on the methodology of
the
WestLB decision, which could not however be applied to
the present case because of the major differences in the
underlying facts. According to Germany, in the present case
the gross and not just the net refinancing costs had to be
deducted from the remuneration of otherwise comparable,
but
liquid silent partnership contributions. This was
because, even in the case of private credit institutions, the
the silent
remuneration for
partnership contributions taken up by them was tax
deductible. If, in the case of Helaba, only the net refinancing
costs were deducted from the notional remuneration for a
liquid silent partnership contribution, the same process
would have to be applied in the case of private credit
institutions as regards the remuneration actually paid by
them for liquid silent partnership contributions. Otherwise
the comparison would be distorted.

the liquidity function of

IV.

COMMENTS FROM INTERESTED PARTIES

1.

COMMENTS FROM THE COMPLAINANT BDB

and discounts
premiums
peculiarities of the transfer.

applied by virtue of

the

1.1. COMPARISON WITH OTHER EQUITY INSTRUMENTS

the stricter

(64) Nearly all the Landesbanks are said by the BdB to have
required fresh core capital from 1992 onwards in order to
meet
requirements arising from the new
Solvency Directive. Without these increases in capital, the
Landesbanks would have had to scale down their business.
It could therefore be concluded, the BdB argues, that the
capital
injected could be compared only with equity
instruments that were recognised as core capital (‘tier 1
capital’) and available in Germany in the year of the transfer.
This immediately excluded from any comparison non-
voting preference shares, profit participation rights and
perpetual preferred shares. In Germany, these three equity
instruments were recognised not as core capital, but as
additional capital (‘tier 2 capital’).

(65) At the time of the respective transfers, only share capital
and silent partnership contributions were recognised as
core capital in Germany. In the BdB's opinion, the only legal
form properly available to Helaba for the investment was
share capital. The BdB does not challenge the recognition
by the relevant authorities that actually took place. It argues
rather that such recognition should not have taken place,
since the silent contribution by the Land of Hessen that was
specifically agreed was economically and legally compar-
able not with ‘normal’ silent partnership contributions, but
rather with share capital. Given then, that such recognition
had actually taken place, the remuneration at least of the
silent partnership contribution of the Land of Hessen had to
be based on that of share capital, since a market-economy
investor would have required such remuneration on the
basis of its similarity to share capital and specific risk
structure.

(61) The BdB submits that Helaba did not pay an appropriate
remuneration for the transferred core capital and was
therefore in receipt of state aid.

(66) The BdB gives an analysis here, based on a list of criteria, of
why in its opinion the silent partnership contribution of
the Land of Hessen was,
in economic and legal terms,
comparable with share capital and not with silent partner-
ship contributions observed on the market.

(62)

In its comments of 29 July 2003 on the proceedings
initiated on 13 November 2002 in respect of
the
Landesbanks, the BdB states that the question of whether
the remuneration was appropriate should be determined
using the method employed by the Commission in its
WestLB decision.

(63) The first step was therefore to compare the capital provided
with other equity instruments. The second step was to
determine the minimum remuneration which an investor
would expect for a real equity-capital investment in the
Landesbank. Finally, a calculation had to be made of any

(67) The BdB bases this view essentially on the fact that ‘normal’
silent partnership contributions are only of
limited
duration and can be withdrawn and, under the principles
of the Basle Committee on Banking Supervision, cannot be
used for volumes above 15 % of core capital, whereas the
silent partnership contribution of the Land of Hessen, like
share capital, was of unlimited duration and allowed the
15 % limit to be exceeded. Furthermore, it could not be
deduced from an agreement on the junior-ranking nature of
the assets that there was a lower risk for the investor, since
the transferred capital represented an important part of the
entire core capital, in some instances more than 50 %. This

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meant a much higher probability that the transferred capital
would be called upon in the event of a loss, for which
consequently a higher risk premium should be paid. The
BdB also stated that, for banking supervisory purposes,
silent partnership contributions were to be recognised only
as lower tier 1 capital and hence, under the 1998 ‘Sydney
Declaration’ of the Basle Committee on Banking Super-
vision, could make up only 15 % of the necessary core
capital ratio. Large-volume silent partnership contributions
above this limit could not therefore be used. Lastly, the
Deutsche Bank perpetuals referred to by Germany could not
be taken as a criterion for the appropriate remuneration,
since they all lay below the 15 % limit and hence would not
have been alternatives for Helaba at the end of 1998.

(68) Another factor was that the Land made its contribution
available to Helaba without any possibility of withdrawal on
its part, i.e. for unlimited duration. Although a shareholder
could not ‘withdraw’ his share capital, he was nevertheless

there was virtually no market

free to decide to sell his shares and invest elsewhere.
Regardless of the details of the legal form, there was no
such transferability in this instance if only because at all
events
for a capital
investment of this size and of unlimited duration. Private
investors, by contrast, usually kept open the possibility of
withdrawing their capital again in the event of persistently
bad results and of investing again more profitability. A
private investor would — if at all — accept the permanent
tying of risk capital only in return for a correspondingly
high yield.

(69) The form of capital transfer opted for here was therefore a
normal share capital
for which a market-
investment,
economy investor would expect a corresponding yield. In
particular,
it was not sufficient to take account of the
unlimited term merely through a premium on the basic
yield, determined for comparison purposes, on a silent
partnership contribution of limited duration.

(70) The following two tables showed the essential differences between Helaba's ‘silent partnership

contribution’ and other forms of equity capital available at the time of the investment:

Availability on
the German
market in 1998

Status for bank-
ing supervisory
purposes

Helaba's ‘silent
partner-ship
contribution’

Share capital

Silent partner-
ship

Preference
shares

Profit partici-
pation rights

Preferred shares

Yes

Yes

Yes

Yes

Yes

Yes

Core capital

Core capital

Core capital
only under
certain con-
ditions and
15 % limit

Additional
capital

Additional
capital sub-
ject to special
conditions

Additional
capital or core
capital with
15 % limit

Share capital

Helaba's ‘silent partnership
contribution’

Silent partnership

Usability for large volumes

Unlimited duration

Investor has no right of with-
drawal

Participation in current losses

Repayment in insolvency pro-
ceedings, by creditor

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

No

No

Yes

Yes

Yes
No internal ‘junior-rank-
ing nature’ compared with
share capital

Yes
Repayment before share
capital

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Share capital

Helaba's ‘silent partnership
contribution’

Silent partnership

Profit-share remuneration

No subsequent payment in the
event of absence of remuneration

Yes

Yes

Yes

Yes

Yes

No
Cumulative subsequent
payment possible

1.2. TAX DEDUCTIBILITY

the basis of a study by Stehle-Hartmond (1991), a uniform
long-term market risk premium of 4,6 %.

(71) The BdB doubts that the profit share of the Land of Hessen
is tax deductible as operating expenditure. In its view, it was
to be assumed that the Land of Hessen was incurring a
substantial business
risk with the silent partnership
contribution. This was evident not only from the size of
the capital
investment, but also from the fact that the
participation was not withdrawable. This business risk
justified the existence of a partnership (so-called atypical
silent partnership), the ranking of the silent partnership
contribution for tax purposes as partnership equity capital
and the non-deductibility of the silent partner's profit share
as operating expenditure on the part of Helaba.

1.3. MINIMUM REMUNERATION FOR A SHARE-CAPITAL

INVESTMENT IN A LANDESBANK

(72) The BdB argues that all methods of determining an
appropriate remuneration (return)
for the provision of
equity capital start from a risk-free return and add a risk
premium. They can be traced back to the following basic
principle:

Expected return on a high-risk investment

= risk-free return + risk premium for the high-risk
investment

(73) To determine the risk-free return, the BdB uses the returns
on long-term government bonds,
fixed-rate securities
issued by state bodies being the form of investment with
the least or no risk (12).

(75) The BdB then determines the beta value for the Land-
esbanks, i.e. the individual risk premium for the banks, on
the basis of which the general market risk premium was to
be adjusted. The BdB stated that it had determined the beta
values statistically, which means that it had estimated them
on the basis of a historical data sample. The BdB concludes
that all the beta values for all the Landesbanks and periods
considered are greater than one (13).

(76) The BdB therefore calculates

the expected minimum
remuneration for an investment in the share capital of
Helaba to be 11,66 % a year at
the time when the
promotion-related assets were transferred on 31 December
1998.

1.4. PREMIUMS AND DISCOUNTS ON ACCOUNT OF THE

PARTICULARITIES OF THE TRANSACTIONS

(77) The BdB notes that the Commission's deduction in its
decision on WestLB of 4,2 % from the minimum
remuneration of 12 % to take account of
the lack of
liquidity of the Wfa assets was upheld by the Court of First
Instance. It therefore sees no reason to depart from this
method in the present case, with the result that a deduction
for liquidity should also be made here. The amount of the
discount for lack of liquidity would be calculated, using the
WestLB method, on the basis of net refinancing costs (gross
refinancing costs minus the applicable corporation tax).

(74) To derive the risk premium, the BdB first works out the
‘market risk premium’, i.e. the difference between the long-
term average return on shares and that on government
bonds. For the German share market, the BdB assumes, on

(12) To offset the effects of inflation, the rate of return on a long-term
government bond should be determined for each transfer period,
initially disregarding the inflation expectations. Then, to estimate the
long-term risk-free base rate, the estimated figure for average long-
term inflation expectations (3,60 %) is added to the ‘real base rate’ at
the time in question.

(78) The liquidity deduction would be calculated for Helaba on
the basis of a gross refinancing rate of 6,57 % a year
(corresponding to the long-term risk-free base rate at the
time of the transfer in 1998), to which the overall tax rate
should be applied to obtain the net refinancing rate.

(13) For the purposes of comparison, the BdB also gives the theoretical
beta values calculated using the Capital Asset Pricing Model (CAPM),
indicates, differ very little from the empirically
which, as it
determined values.

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(79)

In the BdB's view, three aspects of the transfer increase its
risk compared with a ‘normal share capital investment’: the
in part exceptionally high volume of assets transferred, the
failure to issue new shares in the company and the related
forgoing of additional voting rights, and the lack of
the impossibility of
fungibility of
withdrawing the invested capital from the company again at
any time. The BdB considers a premium of at least 1,5 % a
year justified here in line with the WestLB methodology.

the investment,

i.e.

1.5. CAPITAL BASE AND ELEMENTS OF REMUNERATION

(80) The BdB stresses firstly that, in calculating the appropriate
remuneration in the case of Helaba, the total amount which
was recognised as core capital for underpinning competi-
tive business should be taken as the basis and not solely the
actually used or usable part. It backs up this argument by
stating that a market-economy investor would never agree
to limit his remuneration to the portion of funds actually
used. For a private investor bearing the risk of losing his
investment, it is irrelevant whether the credit institution
actually uses the injected capital to expand its business.
What matters to the investor is that he himself can no
longer invest that amount and obtain a corresponding
return.

(81) The calculation of the remuneration in the period 1998 to
2002 on the basis of tranches rising in annual steps had
been justified not as a discount because of the fact that the
transferred capital had not been ‘split up’ or by the fact that
transfer ‘en bloc’ to Helaba would have had the effect of
imposing a burden on it. Even if the capital transfer was
perhaps not necessary to meet solvability criteria, it had
nevertheless considerably increased Helaba's equity capital
base and had allowed a strong expansion in its competitive
activity. A market-economy investor would therefore
require a full remuneration on the entire amount on the
basis of its recognition as liable equity capital.

(82) The 0,3 % a year guarantee commission (Haftungsprovision)
applied by the Commission in its WestLB decision, which it
calculated by comparing the amount of capital with a
guarantee, had to be charged for the part of the transferred
core capital that could not be used to underpin competitive
business.

(83) Only the guarantee commission (Haftungsprovision) and the
perpetuity premium (Permanenzzuschlag) could be taken into
account as components of the remuneration. Trade tax,
most of which went not to the Land at all, but to the
municipality, was not a part of the remuneration. It was a
charge
stemming from tax-related
circumstances that were independent of the intentions of
the parties.

imposed by law,

(84) Lastly, the return was paid not to the Land of Hessen, but —
after deduction of capital yield tax — ‘allocated as a net

amount to the special fund’. Since Helaba was the (sole)
owner of the special fund, it was in reality paying itself. A
private investor would not have accepted this as a return for
his investment.

2.

COMMENTS FROM THE LAND OF NORTH RHINE-

WESTPHALIA AND WESTLB

(85) On 30 October 2003, Germany forwarded a response from
the Land of North Rhine-Westphalia and WestLB to the
Commission's decision of 13 November 2002 to initiate
proceedings in which they disputed the statement that the
assets transferred to the Landesbanks could be compared to
share capital. They argued that silent partnership contribu-
tions and ‘perpetuals’ had in fact been recognised as core
capital in Germany since 1991. They added that remunera-
tion for an investment depended not on how it was
classified by the banking supervisory authorities, but on its
risk profile. Since the assets were junior-ranking, the risk
pattern had more in common with silent partnership
than with share-capital
contributions or
investments.

‘perpetuals’

(86) WestLB had no objections to the CAPM method for
calculating the minimum remuneration for a share-capital
investment, but it felt that the beta values determined by the
BdB — at well over one — were inappropriate. A beta
factor of more than one meant that a company's shares
represented a higher risk than the market as a whole. Yet
the risk of investing in a Landesbank was well below the
overall market risk because of the institutional
liability
(Anstaltslast) and guarantor liability (Gewährträgerhaftung)
which it enjoyed and which were not challenged at the time.

(87) Moreover, in the specific case of the Landesbanks, it was a
mistake to use as a benchmark the return expected at the
time that the assets were transferred to the banks. Although
this was generally a sensible approach to adopt in relation
to the private-investor test, it here meant using as a basis
the returns expected in 1991. But for an investor to receive
in 2003 the return expected in 1991, which was much
higher than the returns actually achieved, flew in the face of
all economic realities. Permanently and systematically
applying a rate of return of around 12 % placed the
Landesbanks at an unjustifiable disadvantage compared
with private competitors.

(88) As regards the discount for the lack of liquidity of the
transferred assets, WestLB and the Land of North Rhine -
Westphalia considered that the rate for risk-free govern-
ment bonds should be deducted in full from the basic
return. They argued that the Landesbanks had received no
liquidity as a result of
It was not
defensible in economic terms to reduce this rate by the tax
savings since the pricing of capital market instruments was

the asset

transfers.

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independent of the tax situation. Otherwise the price of a
capital market instrument would have to differ according to
tax considerations.

(89) Lastly, the fact that the assets' lack of liquidity did not pose
a risk to the liquidity position should be seen as reducing
the risk — and hence the remuneration. This should be
taken into account by applying a corresponding deduction.
Likewise, a discount should be granted on account of the
‘owner effect’ since an investor who already owned shares
in a company took a different view of an additional
investment from that of a new investor.

(90)

(91)

V.

GERMANY'S RESPONSE TO THE BDB'S

COMMENTS

the BdB was not successful

In Germany's view,
in its
attempt to reinterpret the silent partnership contribution as
a share capital investment, nor was it able to raise doubts as
to the appropriateness of the remuneration which was
agreed and paid to the Land of Hessen. In Germany's view,
therefore, there was no aid.

In Germany's view, there was no justification, in calculating
the remuneration, for taking the roundabout approach of
calculating the remuneration on a fictitious share capital
investment. The Land of Hessen had from the outset
transferred its housing-promotion assets as a silent partner-
ship contribution to the bank. What was involved was
therefore a financing instrument which was defined in
company, tax and banking supervision law and which
differed fundamentally from a share capital investment, in
which the Land was not interested and which the owners of
the bank did not want.

(92) The BdB ignored important differences between share
capital and silent partnership contributions and tried to
identify non-existent differences between ‘normal’ silent
partnership contributions
silent partnership
contribution of the Land of Hessen.

and the

in accordance with the principles of

(93) The BdB essentially argued that silent partnerships were of
could be withdrawn and
only limited duration or
consequently,
the
Basle Committee on Banking Supervision, were recognised
as core capital only up to 15 % of the entire core capital of a
credit institution. Since the silent partnership contribution
of the Land of Hessen had been made available to Helaba
without any time limit and was not covered by the 15 %
limit and therefore did not represent a ‘normal’ silent
partnership contribution, but
functionally represented
share capital, the criterion in assessing the remuneration
should not be other silent partnership contributions or
instruments, but share capital
other innovative capital
investments.

(94) This core argument on which the BdB was relying was, for a
limited

reasons, erroneous. For example,

number of

duration or withdrawability were not a necessary and
indispensable feature of silent partnerships either under
company law or under banking supervision law. Con-
versely, share capital was not necessarily of unlimited
duration and unwithdrawable. Under German company
law, rather, all companies irrespective of their legal form
could be set up for a limited period or it could be agreed
that a contribution could be withdrawn subject to notice,
which did not stand in the way of its recognition as core
capital under German banking supervision law.

(95) The BdB was also wrong in arguing that the 15 % limit for
recognition as core capital under international banking
supervision law did not, under the ‘Sydney declaration’ of
the Basle Committee on Banking Supervision and the
practice of the Germany supervisory authority based on it,
apply to permanent capital instruments, which could be
withdrawn only on the initiative of the issuer (but not of
the investor). Furthermore, the practice of the German
supervisory authority was now based on the assumption
that a contribution with a term of at least 30 years and the
explicit exclusion of withdrawal was made available to the
investor on a ‘permanent’ basis and consequently did not
come under the 15 % limit. This too showed that the
difference between contributions of limited and unlimited
duration was by no means as great as the BdB was arguing.
As far as the appropriate remuneration was concerned,
there was no cause or justification on this account for
reinterpreting silent partnership contributions as share
capital.

(96) Only a few months after Helaba, the Deutsche Bank had
taken up a ‘permanent’ contribution in the form of
‘perpetuals’, and had done so on the capital market.
Contrary to what the BdB asserted, the 15 % limit did not,
according to a newspaper report submitted on the subject,
apply to this contribution, since no increase in the interest
rate had been agreed if the bank did not exercise a right of
withdrawal
(no ‘step-up’
that had been accorded to it
clause). The Deutsche Bank perpetuals were by no means
exceptional
in character, since in the subsequent period
numerous other credit institutions had taken up ‘perma-
nent’ contributions on the market, examples of which
Germany provided. No single issue, whose volumes ranged
from EUR 150 million to over EUR 2 billion, provided
anything like the return of share capital; the remuneration
lay in the range between 110 and 290 basis points above
mid-swaps. Already in 1999, the market had, as regards
remuneration, not attached any major importance either to
the distinction between capital instruments of limited and
unlimited duration or to the question of whether the issue
proceeds fell under the 15 % limit or not.

(97) Nor did Germany accept the criteria selectively applied by
the BdB, which were supposed on the one hand to
demonstrate common features between share capital and
the silent partnership contribution of the Land of Hessen

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‘normal’

and, on the other, differences between this silent partner-
ship contribution and a
silent partnership
contribution. The BdB was overlooking on the one hand
the extent
to which the shaping of silent partnership
contributions could be shaped by agreement between the
parties and, on the other, features that were essential and
indispensable to the distinction between share capital and a
silent partnership.

(98) Share capital did not yield interest, but conferred a claim to
payment of a dividend, which was not only dependent on
profits, but above all
in proportion to profits. The
remuneration on a silent partnership contribution, by
contrast, was only profit-dependent. Whether or not
provision was made for retrospective payments in the case
of a silent partnership contribution was a matter for
agreement between the parties and was not in any case one
of the constitutive features of a ‘normal’ silent partnership.
However, under [...] pursuant
the
German Banking Act, specific provision had been made, in
the event of
losses, for the junior-ranking retrospective
payment requirement typical of silent partnership con-
tributions. The prior-ranking requirement was to replenish
the contribution again to the original amount from future
profits (14).

to Section 10(4) of

(99) The assertion that for very large volumes only share capital
and not ‘normal’ silent partnerships could be used was
contradicted by the size of the silent partnership contribu-
tions which private credit institutions had taken up on the
capital market in 1998/99 and were also currently taking
up. These ranged up into the area of around EUR 1 billion.
In relative terms, any silent partnership contribution even
over the 15 % limit was recognised as core capital if it met
the Basle Committee on Banking
the requirements of
Supervision and was in line with the practice of
the
German supervisory authorities which was based on them.

(100) Current evidence of the possibility of the 15 % limit being
exceeded was provided by a capital measure taken on
the
2 December 2003 by a BdB member institution,
Deutsche Bank. This was the taking up of silent partnership
contributions from private investors totalling EUR 300 mil-
lion for an unlimited term (a so-called ‘perpetual’) (15) . This
illustrated once again how liquid and transparent
the
market for silent partnership contributions in respect of
German banks was, even where large volumes were
involved. With an agreed liability premium of 0,99 %,
moreover, the measure provided further evidence that the
liability remuneration that had been agreed for the silent
partnership contribution of the Land of Hessen to Helaba
had been calculated in a way that was market-related and
market-adequate.

(101) In response to a request from the Commission, Germany submitted a table showing the trend of silent partnership contributions
and other hybrid core capital instruments for selected large banks in the private sector from 1998 to 2003. Germany argued that
this made it clear that the institutions listed had also taken up hybrid core capital beyond the 15 % limit set for banking supervisory
purposes, and the extent to which they had done so, since the proportion of total core capital accounted by such instruments
exceeded 15 % (+).

Hybrid core
capital instru-
ments(of which
silent partner-
ship contribu-
tions)

1998

612
(612)

1999

3 096
(713)

2000

3 275
(768)

[Bank A]

[Bank B]

[Bank C]

Core capital
(€ millions)

Share of hybrid
core capital
( %)

Hybrid core
capital instru-
ments (€ mil-
lions)

Core capital
(€ millions)

Share of hybrid
core capital
( %)

Hybrid core
capital instru-
ments (€ mil-
lions)

Core capital
(€ millions)

Share of hybrid
core capital
( %) (*)

15 978

4 %

—

10 623

—

614

13,0

5 %

17 338

18 %

1 495

12 908

12 %

1 937

14,6

13 %

21 575

15 %

1 574

12 046

13 %

2 014

21,3

9 %

(14) [...] states: ‘[...]’
(15) See Börsenzeitung of 7 November 2003 and International Financial Review of 22 November 2003.

(+) The names of the listed banks in the private sector are confidential information and are referred to as Bank A, Bank B and Bank C.

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Hybrid core
capital instru-
ments(of which
silent partner-
ship contribu-
tions)

3 404
(811)

2 973
(686)

3 859 (**)
(572)

2001

2002

2003

[Bank A]

[Bank B]

[Bank C]

Core capital
(€ millions)

Share of hybrid
core capital
( %)

Hybrid core
capital instru-
ments (€ mil-
lions)

Core capital
(€ millions)

Share of hybrid
core capital
( %)

Hybrid core
capital instru-
ments (€ mil-
lions)

Core capital
(€ millions)

Share of hybrid
core capital
( %) (*)

24 803

14 %

1 923

11 542

17 %

3 650

21,7

17 %

22 742

13 %

1 732

8 572

20 %

4 164

19,1

22 %

21 618

18 %

1 561

7 339

21 %

4 076

14,4

28 %

(*) On the basis of full appropriation to core capital.
(**)

Including cumulative preference shares after deconsolidation of trust companies.

(102) Contrary to what the BdB argued, both the silent partner-
ship contribution of
the Land of Hessen and silent
partnership contributions taken up on the capital market
would be paid back in the event of insolvency before the
share capital, i.e. on a prior-ranking basis compared to the
share capital. Contrary to what the BdB stated, the Land of
Hessen like the investor of any other silent partnership
contribution would in the event of insolvency receive the
recovery percentage, whereas the owner would receive
nothing, resulting in a reduced risk compared with share
capital.

(103) A silent partnership differed significantly from share capital
because the silent partner did not have a stake in the assets
of the undertaking and also did not have any voting rights.
The BdB had mistaken this in its analysis and thought that a
premium should be paid for it. The market did not follow
this line of thinking.

(104) The BdB's doubts as to the tax deductibility of

the

risk nor

entrepreneurial

the
remuneration were unfounded. The Land of Hessen had
taken on neither
the
entrepreneurial initiative necessary for the assumption of
a partnership. The Land of Hessen, like any typical silent
partner, participated, under the contract on the setting up
of the silent partnership, only in Helaba's current profit and
loss, but not in its undisclosed reserves, nor in the business
value and increases in value in the operating assets. Upon
termination of the silent partnership, it merely got back its
contribution. The Land of Hessen had not been given any
possibility of exercising company rights that corresponded
to the voting, monitoring and contradictory rights of a
limited partner or the monitoring rights of a shareholder in
the Civil Code.
accordance with Article 716(1) of

the state contract between the Länder of
Furthermore,
Hessen and Thuringia on the formation of a joint savings
bank organisation had authorised the bank to take up an
atypical silent partner. In the absence of partnership, the
financial authorities had accordingly also recognised the tax
the remuneration paid to the Land of
deductibility of
Hessen.

(105) Balance sheet treatment was also different. Share capital
was serviced from the balance sheet profit (surplus of asset
items over liability items) by decision of
the general
meeting of shareholders. In the case of the silent partner-
ship contribution of the Land of Hessen, by contrast, the
remuneration reduced the bank's operating result by
reducing net interest received (the remuneration was a
component part of expenditure on interest) and did not
constitute profit utilisation, and did not therefore require
any decision by shareholders. This mandatory balance sheet
treatment of the silent partnership contribution reduced
the cost-income-ratio and the balance-sheet equity return.

(106) Contrary to what

the BdB argued, a market-economy
investor would have agreed to the assessment basis for
calculating his remuneration being limited to the part
actually used for business expansion and would, for the
excess part, not have required a remuneration of 0,3 % in
line with the Commission's WestLB decision. Because of
Helaba's limited requirement, made known from the outset,
any other investor would not have been able to achieve any
better negotiating result than the Land of Hessen.

(107) As far as the level of the appropriate remuneration was
concerned, the BdB's argument was mistaken in its very
approach. The criterion could only be remunerations that

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had been agreed during the relevant period on the market
for comparable silent partnership contributions to credit
institutions. Differences in the shaping of the various silent
partnership contributions, but also in the quality of the
credit institutions taking them up, should be taken into
account in the comparison of the remunerations through
deductions from or premiums on such remunerations and
not on the remuneration for a hypothetical share capital
investment.

be made directly. The roundabout approach of taking a
fictitious overall remuneration on a fictitious cash con-
tribution from which the refinancing costs then had to be
deducted was unnecessary and, moreover,
increased the
uncertainty of the quantitative assessment many times over,
since estimates then had to be introduced at a number of
stages.

seven credit

(108) Quite apart from that, the determination of the yield on
share capital investments by the BdB was erroneous. In
determining the beta value, the Landesbanks should not be
equated with credit banks with an above-average systematic
risk. Rather, the proper criterion should be the clearly
defined group of banks listed on the stock exchange, the so-
called CDAX banks. A large proportion of Helaba's balance
sheet total related to low-risk local authority, interbank and
mortgage claims. As part of an objective business appraisal,
an independent expert had, on 1 January 1999, determined
for
institutions with a comparable risk
structure in terms of business risk, business activity,
customer structure and size, an average beta factor of [...],
i.e. well below 1. The expert had started from the
assumption of a long-term market yield of 5,0 % and a
long-term risk-free interest rate of 6,0 %. This gave, on
1 January 1999, an equity capital cost of [...] %. The BdB's
assertion regarding the equity yield of 11,66 % on
31 December 1998 for Helaba was based on an excessive
beta factor and, moreover, on historical data that were no
longer current. The level of interest rates had changed
significantly in recent decades, and the BdB's comments on
inflation and inflation expectations were not comprehen-
sible in this context.

(109) Furthermore, the agreed remuneration for the duration of
the silent partnership contribution could be compared only
with the changing level of the relevant share capital yield
and not, for example, with the share capital yield of the
undertaking at the time of the investment. No-one would
have guaranteed an owner of the bank an equity yield at the
level of the end of 1998 and thus afforded protection from
the risk of yield fluctuations.

(110) The BdB's comments on the level of the deduction of
refinancing costs did not stand up. Reference could be
made to the net refinancing costs only if,
from the
comparative remunerations which private credit institu-
tions pay for comparable silent partnership contributions
taken up by them on the capital market, the theoretical or
actual overall tax ratio of such institutions was deducted.
For the contributions taken up on the capital market,
however, it was usually not the overall remuneration, but
only the remuneration premium that was given, which in
the case of variable interest rate instruments and in the case
of illiquid contributions, was identical with the liability
remuneration. The comparison between the remuneration
on the silent partnership contribution of the Land of Hessen
and the remunerations paid on the market could, therefore,

(111) Contrary to what the BdB argued, there was no justification
for any remuneration premiums. There was no empirical
evidence that a premium was paid on the market for a
particularly large contribution. Comparable capital-raising
operations by private credit institutions did not reveal any
connection between the amount and the remuneration.
Rather, the Land had had to accept the agreed phased
arrangements because Helaba had initially no use for the
special fund en bloc. On the market, no investor would have
been able to receive not only a remuneration immediately
for the entire amount, but in addition a premium as well.

(112) Furthermore, the argument that, in the case of share capital
investments,
the waiving of a voting right must be
compensated for by an additional remuneration could not
be applied to a silent partnership. The silent partner had by
law no voting right, and the market did not grant any
remuneration for
the
possibility of exercising influence.

the silent partner's ‘waiving’ of

(113) It was in principle true that, on the market, an investor
accepted the lack of fungibility of his investment in return
for a higher yield. Indeed, the lack of fungibility of the silent
partnership contribution of the Land as compared with
profit-sharing capital had been taken into account in the
discussions leading up to the transaction. The parties had
taken account of the perpetuity of the contribution in the
the remuneration premium of 0,20 % a year.
form of
However, a private investor would have taken account of
the fact that in this instance an investment was sought not
for cash, but
fund
earmarked for a specific purpose that could be transferred
only as an illiquid capital contribution. When the BdB
argued that there was virtually no market for such an
investment, this applied not only to reinvestment (fung-
ibility), but also to the initial
It was not
plausible that a private investor would in view of this have
demanded or received an even higher premium than the
0,20 % a year agreed for the perpetuity aspect. Nor had the
BdB provided any further explanation or justification on
this point.

for a large, non-divisible special

investment.

(114) In the market comparison, lastly, contrary to the view put
forward by the BdB, the trade tax effect had to be taken into
account. Silent partnership contributions to credit institu-
tions were usually provided by institutional investors which
had themselves to pay the trade tax on the remuneration
received. The Land, by contrast, was not liable to trade tax
and would therefore be satisfied with a correspondingly
lower remuneration. The counter effect of the non-liability

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of the Land was the liability of the bank, which accordingly
had to pay the trade tax. Whether it was paid to the Land or
the municipality was irrelevant, as was the fact that the
trade tax was assessed on the taxable income (usually the
taxable income of the recipient of the remuneration, but
here the taxable income of the bank), so long as the bank
did in fact achieve income. If, by contrast, it suffered losses,
not only was there no payment of trade tax, but also no
payment of the remuneration on the contribution.

(115) Contrary to what the BdB argued, Helaba did not pay the
remuneration to itself either.
In accordance with the
decision of the Land of Hessen, the yield remaining after
tax from the investment of the special fund did not accrue
to the general budget, but was similarly tied to the
earmarked purposes of the fund and was to be used to
strengthen the promotion-related business. This was a
question of the use of the resources paid by Helaba to the
Land.

VI.

ASSESSMENT OF THE MEASURE

1.

STATE AID WITHIN THE MEANING OF ARTICLE 87(1)

OF THE EC TREATY

(116) Article 87(1) of the EC Treaty states that, save as otherwise
provided in that Treaty, any aid granted by a Member State
or through state resources which distorts or threatens to
distort competition by favouring certain undertakings or
the production of certain goods is incompatible with the
common market, insofar as it affects trade between Member
States.

1.1.

STATE RESOURCES

(117) With the transfer of silent partnership assets, the Land of
Hessen opted for a form of contribution of resources based
on the concept of
transferring public aid resources to
Helaba in order to strengthen its equity-capital base, but
also of achieving additional income for the Land of Hessen.
In spite of the fact that the returns from these claims were
still available for promotion-related assets and hence served
a public-benefit purpose, the assets were recognised by the
supervisory authority and could therefore be used to
provide cover for the liabilities of Helaba, which was in
competition with other credit institutions. State resources
therefore were transferred to Helaba.

1.2.

FAVOURING OF A PARTICULAR UNDERTAKING

(118) In order to verify whether the transfer of state resources to
a publicly-owned undertaking favours the latter and is
therefore liable to constitute state aid within the meaning of
Article 87(1) of the EC Treaty, the Commission applies the

‘market-economy investor principle’. This principle was
accepted and developed by the Court of Justice and the
Court of First Instance in a number of cases, in particular by
the WestLB judgment, in a context which is relevant to the
present case (16).

a) Market-economy investor principle

(119) According to this principle, no state aid is involved where
funds are made available on ‘terms which a private investor
would find acceptable in providing funds to a comparable
private undertaking when the private investor is operating
under normal market-economy conditions’ (17). In contrast,
the undertaking is being favoured within the meaning of
Article 87(1) of the EC Treaty if the proposed remuneration
arrangement and/or the financial position of the under-
taking is such that a normal return on investment cannot
be expected within a reasonable period of time.

(120) The market-economy investor principle is applicable in the
same way to all public enterprises, whether profitable or
loss-making. The Commission's view here was upheld by
the Court of First Instance in WestLB (18).

(121) It follows that the key question in examining this case is
whether a market-economy investor would have trans-
ferred to Helaba capital that had the same characteristics as
the Land of Hessen's promotion-related assets and under
the same conditions, especially in view of the probable
return on the investment.

b)

Legal and economic classification of the capital
contributed

(122) The Land of Hessen contributed to Helaba up to
31 December 1998 as silent partnership reserves promo-
tion-related assets with a nominal loan portfolio for the
Land share of DEM 6,026 billion (EUR 3,081 billion) and a
cash value assessed on the basis of an expert evaluation of
DEM 2,473 billion (EUR 1,264 billion). BAKred recognised
these, as stated above,
in full as basic own funds for
supervisory purposes. They were to only a small extent
required, on the basis of an amount which varied from year
to year, to underpin promotion operations. This part of the
silent partnership reserves shown in the balance sheet
served only a guarantee function for Helaba. Most of the
remainder was available to Helaba to underpin and expand
its competitive business.

(123) As in the WestLB case the Commission has determined the
appropriate remuneration for the transferred promotion-
related assets in the light of their commercial usefulness for

(16) Judgment in Joined Cases T-228/99 and T-233/99.
(17) Commission communication to the Member States on the
application of Articles 92 and 93 of the EEC Treaty and of Article 5
of Commission Directive 80/723/EEC to public undertakings in the
manufacturing sector (OJ C 307, 13.11.1993, p. 3, point 11). While
this communication deals explicitly with the manufacturing sector,
the principle can undoubtedly be applied in the same way to all
other sectors. As regards financial services, this has been confirmed
by a number of Commission decisions, e.g. Crédit Lyonnais (OJ
L 221, 8.8.1998, p. 28) and GAN (OJ L 78, 16.3.1998, p. 1).

(18) WestLB judgment paragraph 206 et seq.

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for
Helaba. As explained above,
determining the normal market remuneration is primarily
the remuneration that would be demanded by a market-
economy investor providing a bank with equity capital.

the starting point

(124) The complainant argues that the capital made available to
Helaba is, as in the case of the transfer of the WfA assets to
WestLB, an investment similar to share capital. Germany
disputes its similarity with share capital. It argues, rather,
that the capital is a silent partnership, which affects the
level of the remuneration.

(125) Germany, Helaba and the complainant agree that

the
promotion-related assets comprised in the silent partner-
ship of the Land of Hessen constitute core capital. The
special-purpose reserve was recognised by BAKred as core
capital
(‘tier 1 capital’) and could therefore only be
compared with equity instruments that were recognised
as core capital in Germany in the year of the transfer and
that were available to Helaba at the time of contribution
specifically for an investment of this order of magnitude,
which made up significantly more than 15 % of the core
capital.

(126) The Commission agrees with the parties on this point. It
already made clear in its WestLB decision of 1999 that a
comparison between the Wfa assets, which were also
recognised as core capital, and equity instruments that were
recognised only as additional capital,
such as profit
participation certificates and non-voting preference shares,
cannot serve as a basis for determining the appropriate
remuneration for the transferred capital (Decision 2000/
392/EC, paragraph 199). Core capital is of much greater
use to an undertaking because it can be used to raise
additional own funds (such as profit participation certifi-
cates) up to the same amount in order to increase the
bank's own funds. For the capital provided to be recognised
as basic own funds, there must be greater exposure to risk,
which as a general rule is also reflected in a higher market
remuneration for such instruments. Any point of compar-
ison with ‘additional funds’ that offer only limited scope for
use in business expansion can therefore be ruled out from
the outset.

(127) In the view of the BdB, however, the only legal form
properly available to Helaba for this specific investment
was that of share capital. In the view of Germany, another
legal
form available was that of a silent partnership
contribution of unlimited duration (perpetual), which met
the requirements of Section 10(4) of the German Banking
Act (KWG) and at the same time the criteria of the ‘Sydney
Declaration’ of the Committee on Banking Supervision of
the Bank for International Settlements in Basle, which in
turn guided the decisions taken by the German banking
supervisory authority BAKred. The subject of the agree-
ment between the Land of Hessen and Helaba was,
therefore, the legal form of a silent partnership contribu-
tion of unlimited duration, which was recognised as such
both by the competent banking supervisory authority
BAKred and also by the competent tax authority.

(128) In the Commission's view, Germany has demonstrated
sufficiently that the BdB's argument will not stand up. The
BdB argues that the silent partnership of the Land of Hessen
represented a formal abuse of a ‘normal’ silent partnership.
In economic terms, the silent partnership contribution had
so many points in common with share capital that an
investor would have insisted on the payment of interest
corresponding to the remuneration of share capital.

(129) The Commission notes firstly that the silent partnership
contribution was expressly agreed as such between the Land
of Hessen and Helaba and accepted as such by the
In order to be able to
competent German authorities.
assume that there was an abuse of form, it would have to
be beyond question that the competent German authority
wrongly recognised the silent partnership of the Land of
Hessen as such. However, there is no evidence of this. The
Commission agrees here with Germany's view that the
limited duration or withdrawability of a silent partnership
contribution is, neither from the company law nor banking
supervision points of view, a necessary characteristic
feature for the recognition of a silent partnership as core
capital pursuant to Section 10(4) of the German Banking
Act. Furthermore, the Commission interprets the ‘Sydney
Declaration’ of the Basel Committee on Banking Super-
vision of October 1998 as imposing a 15 % limit only for
the recognition of certain innovative capital instruments,
particularly those limited in time, as core capital. However,
the converse conclusion may not be drawn that permanent
innovative capital instruments may not at all be recognised
as core capital or are also covered by this limit. Moreover,
the usefulness of permanent innovative capital instruments
as core capital above the 15 % limit is testified to by the
practice of private banks as well in recent years, as was
amply demonstrated by Germany.

(130) Nor does the Commission regard the selective criteria
adduced by the BdB as sufficiently convincing. From the
risk analysis point of view, the silent partnership of the
Land of Hessen is more similar in type to a ‘normal’ silent
partnership than to share capital. The Commission agrees
with Germany's comments here too.

(131) For the Commission, it is crucial in this context that both
the silent partnership of the Land of Hessen and other
‘normal’, i.e. time-limited silent partnerships taken up on
the capital market must in insolvency proceedings be paid
back before share capital and that the investor thus gets the
recovery percentage, whereas in the case of a share capital
investment he gets nothing. Germany submitted a legal
opinion demonstrating that, under the contractual provi-
sions, the silent partnership contribution of the Land of
Hessen will, in the event of solvency or liquidation, in so far
as it has not been reduced or used up by losses, be met on a
prior-ranking basis before share capital from any remaining
assets.

(132) Furthermore, so long as the undertaking is not making a
loss, both the Land of Hessen and the investor of a time-

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limited silent partnership get the entire agreed remunera-
tion, whereas the investor in share capital can claim only
payment of a dividend that is in proportion to profits. In
this respect too, the silent partnership contribution of the
Land of Hessen is a typical silent partnership contribution
the German
within the meaning of Section 10(4) of
Banking Act.

(133) Nor is the BdB's objection convincing that

the silent
partnership was equivalent to share capital because in the
long term it had resulted in an increase of almost 50 % in
Helaba's core capital. Account should be taken here firstly
of the phased arrangement which the Land of Hessen and
Helaba had agreed and under which, in the period from
1999 to 2002, in line with its actual capital requirement,
Helaba could use only an annual increasing partial amount
of the usable core capital to actually cover core business.
Furthermore, the Commission would in this context draw
explicit attention to the fact that, in the WestLB case too,
the large volume of the capital
injection is merely an
indicator, but not on its own decisive in assuming similarity
to share capital. In the WestLB decision, the Commission
concluded, on the basis of an overall assessment, that the
similarity of the transaction being examined to a share
capital
investment was predominant. An essential con-
sideration in this respect was, for example, the fact that the
WfA assets had, like share capital, been exposed to the full
risk of
loss in the event of solvency or liquidation.
in the WestLB case, the Commission also
Furthermore,
took account of the fact that, at the time of the transfer of
the WfA assets in 1991 — in contrast to the time of the
transfer of the silent partnership contribution of the Land
of Hessen to Helaba in 1998 — there was not yet a
developed market for hybrid core capital instruments in
Germany and a credit institution such as WestLB could
have taken up a comparable core capital volume on the
market only in the form of share capital. In the current
case, Helaba could also easily have covered its estimated
capital requirement in the period from 1998 to 2002 on
the market by taking up, at intervals, several smaller silent
partnership contributions from a number of different
institutional investors.

(134) The BdB also points out that, with the silent partnership
contribution of the Land of Hessen, Helaba's share capital
buffer was only 50 %, whereas, in the case of private credit
institutions, the share of hybrid instruments in core capital
is below 20 % and hence the share capital buffer amounts
to more than 80 %. An institutional
investor would,
according to the BdB, against the background of this high
share in Helaba's overall core capital, not have agreed to a
comparable contribution. Germany confirmed that
the
proportion of core capital accounted for by the silent
partnership contribution in 2003, i.e. after the last stage of
the phased arrangement had been reached, was [...] % and
the silent
that
silent
the
partnership contributions

the proportion accounted for by all
(i.e. not only

partnership contribution of the Land of Hessen) in 2003
amounted to [...] %. Nevertheless,
in the Commission's
view, it cannot necessarily be deduced from this that an
institutional investor would not have made a comparable
silent partnership contribution because of
the high
proportion of total equity capital it represented. Germany
pointed out that Landesbanks generally make greater use of
silent partnership contributions beyond the 15 % limit as
instruments of core capital procurement, and do so
predominantly from amongst their guarantors, but also
from third-party investors. For example, according to the
information provided by Germany,
the share of silent
partnership contributions of in 2003 was 72 % in the case
of [...] (i), 39 % in the case of [...] (ii) , 33 % in the case of
[...] (iii) 39 %, in the case of [...] (iv) and 42 % in the case of
[...] (v) (19). The reasons for
this high share of hybrid
instruments have to do with the fact that, because of their
public-law structure, the Landesbanks are not allowed to
raise capital on the stock markets.
It also seems that
investors in Landesbanks are more prepared to accept a
smaller share capital buffer, since, because of the different
business orientation and the accompanying reduced risk
structure of the institutions, the capital is exposed to a
generally smaller risk. At least in the case of Helaba, which,
the above-mentioned Land-
even within the group of
esbanks, must be regarded as a comparatively low-risk
credit institution, the Commission cannot therefore exclude
the possibility that, despite a share capital buffer of (only)
some 50 %, an institutional investor would have made a
comparable investment in the form of a silent partnership
contribution to Helaba.

(135) The Commission also examined in detail to what extent the
perpetuity of the contribution,
i.e. the fact that it is of
unlimited duration and not withdrawable subject to notice
by the Land of Hessen, affects the risk analysis to be carried
out here.

(136) The BdB argues here that no hybrid instruments of
unlimited duration exist on the capital market. Institutional
investors were in principle prepared to acquire only hybrid
equity instruments of fixed duration or instruments for
which repayment could be assumed, because the payout
rate was higher (so-called step-up) or the instrument was
transformed into another form of investment at a given
point in time. Step-up clauses gave the debtor (issuer) a
strong economic incentive to repay the silent partnership
contribution. A step-up clause thus made a perpetual
in
into an instrument with a fixed term.
actual
instruments were
innovative core capital
Furthermore,
typically placed only by private investors.

fact

(137) Germany and Helaba argue in response to this that, even in
the case of perpetuals, investors have to reckon with step-up,
that, contrary to possible expectations, at the time when the
step-up clauses become effective, there is no ‘on-schedule’

(i) Confidential information, designated here as bank I.
(ii) Confidential information, designated here as bank II.
(iii) Confidential information, designated here as bank III.
(iv) Confidential information, designated here as bank IV.
(v) Confidential information, designated here as bank V.
(19) Communication from the Federal Government of 1 October 2004,

p. 16.

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repayment and that thus the perpetuity risk exists. This was
due, firstly, to the fact that the right of withdrawal lay solely
with the debtor (issuer); secondly, the economic situation of
the issuer at the time the step-up clause became effective
was crucial for on-schedule repayment; thirdly, the super-
visory authority had to approve the withdrawal, and it gave
its approval only if the debtor had, at the time of the
withdrawal, a comfortable equity capital base or carried out
a replacement transaction on the market. Furthermore,
examples showed that even institutional investors placed
hybrid instruments with unlimited duration and without
step-up, one instance cited by Germany being a junior-
ranking Air Canada loan of unlimited duration from 1987
which, as the Commission ascertained, did indeed not have
any step-up arrangement. Germany also argued that,
although the existence of withdrawal rights was taken into
account in the prices, the remuneration corridor was not
wide.

that

the perpetuity of

(138) For the Commission, the key point in the situation to be
assessed here is the fact
the
contribution in this instance involves primarily the risk
for the investor of not being able to profit from interest rate
increases on the market, since, on the one hand, he has no
possibility of withdrawal and, on the other, cannot rely on a
step-up. The perpetuity aspect does not, however, involve
the risk of loss in the event of insolvency or liquidation.
Against this background and taking account of the market
description provided by Germany, the Commission there-
fore takes the view that the unlimited duration of the
contribution does not in this instance justify changing the
reference to the product from ‘silent partnership contribu-
tion’ to ‘share capital’. However, the Commission will later
examine whether the perpetuity aspect justifies a premium
on the usual market remuneration for the silent partnership
contribution.

(139) The conclusion must be, therefore, that in the case of
Helaba the transfer was undoubtedly made in the legal
form of a silent partnership that has much more in
common with other silent partnerships than with share
capital. There is, therefore, in the Commission's view, not
sufficient evidence of an abuse of the legal form of a silent
partnership for a contribution of capital that in actual
economic terms constituted share capital. The basis for the
remuneration of the relevant capital instrument is, there-
fore,
i.e. time-limited silent partnership assets
typical in size of those observable on the market, on whose
remuneration a premium may possibly have to be charged.
The comments of the BdB on the appropriate remuneration
of share capital are therefore not relevant.

‘normal’,

c) Determination of the capital base to be used in

determining the remuneration

Capital base standard

(140) In determining the capital base to be remunerated, the
Commission distinguishes firstly between the ‘business-
expansion function’ and the (mere) ‘guarantee function’ of
the promotion-related assets made available as equity
capital for the business activity of the credit institution.

(141) The ‘business-expansion function’ of capital refers to the
expansion of business potential by means of risk-bearing
assets following the recognition for supervisory purposes of
a bank's additional equity capital. In this regard the starting
point for determining the normal market remuneration is
the remuneration that would be demanded in the specific
situation by a private investor providing a bank with equity
capital. In so far as capital made available is shown in the
balance sheet as equity capital but is not recognised for
supervisory purposes as equity capital or
is used to
underpin promotion activities or for other reasons cannot
be used to underpin competitive business, it is not available
for business expansion. However, capital is also important
for reasons other than banking supervision. Its availability
to the bank's creditors at least for the purposes of covering
liabilities (‘liability function’) means that
its economic
function can still be compared to that of a surety or
guarantee. The amount of equity shown in the balance
sheet gives the bank's lenders an indication of its soundness
and may thus influence the conditions under which the
bank is able to raise outside funds. The normal market
remuneration of
is
calculated according to the return which a private guarantor
would have demanded in this specific situation from a
credit institution comparable to Helaba in size and risk
strategy.

the ‘liability function’ of capital

(142) Consequently, in calculating the remuneration, the silent
partnership recognised in full as core capital must be
divided into two separate capital bases. The capital base
which was available to underpin Heleba's competitive
business must be remunerated in the same way as a market-
economy investor would have reasonably required for a
silent partnership with the same characteristics in this
specific situation. The capital base that was not available for
Heleba's competitive business must be remunerated in such
a way as a market-economy investor would have reason-
ably required in this specific situation.

Capital base that was available to underpin Helaba's
competitive business

(143) The Commission takes the fundamental view that

the
extent to which the capital provided was actually used
cannot be a factor
in determining the appropriate
remuneration. All that matters is the possibility of using
the capital to expand business. Even a private investor
would not be happy with a remuneration dependent on the
capital being used. In this regard, the Commission agrees in
principle with the BdB's observation that, for the market-
economy investor who runs
losing his
investment, it is irrelevant whether the credit institution
actually uses the injected capital to expand its business. As
the BdB rightly points out in principle, all that matters to
the market-economy investor is that he himself can no
longer use the amount transferred to engage in economic
activity and hence achieve corresponding returns. To
illustrate the point one might take the example of a rented

the risk of

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house: a landlord will insist on rent being paid even if, for
whatever reason, the tenant no longer lives in the house, as
by renting to the tenant, the landlord is forgoing the
possibility of renting to someone else, and, in any event, he
has no control over where the tenant resides. It is therefore
the usability of the house that is the subject of the contract.

(144) The Commission notes firstly that the capital base to be
remunerated as agreed which was available to Helaba to
underpin competitive business is not dependent on actual
use, but focuses only on usability to underpin competitive
business. The arrangement accordingly is in line with the
Commission's criteria outlined above.

(145) The Land of Hessen and Helaba agreed on the ‘phased
model’ described above. Under that model, although the
cash value of
the entire promotion-related assets was
entered in the balance sheet on 31 December 1998 so as
not to have to divide up the promotion-related assets, most
of the promotion-related assets, i.e. with the exception of
the part
required to underpin the promotion-related
business, were de facto usable to underpin the competitive
business. However, Heleba made it clear from the outset to
the Land that, in line with its business plan, it required the
assets only in stages, i.e. according to the agreed phased
instalments, to underpin its competitive business. Within
the stages, however, the key criterion was the usability of
the capital, i.e. the remuneration was not dependent on
actual use. On the basis of this clear plan of use, the capital
base to be remunerated was clearly predictable for the Land
of Hessen. The Land of Hessen therefore did not leave use to
the bank, but accepted the
the business discretion of
arrangement on the basis of Heleba's clear wish.

(146) The Commission considers this approach compatible with
the conduct of a market-economy investor who,
in the
situation of the Land of Hessen, would not realistically have
been able to achieve any faster increase in the capital base
to be remunerated, since,
in view of its business plan,
Heleba would not have agreed to it. Consequently, in the
Commission's view, from 1999 to 2002 only the stages
provided for and, only from 2003, the full amount of the
silent participation usable to underpin competitive business
are to be remunerated in such a way as a market-economy
investor would have required for a silent participation
having the same characteristics in this specific situation.

Capital base entered in the balance sheet, but not
available to Helaba for competitive business

(147) As stated above, the amount of the silent participation that
could not be used to underpin competitive business was

also entered in Heleba's balance sheet on 31 December
1998. It was in full a component part of the liable equity
capital and was thus from the outset available as security to
the bank's creditors. Potentially at least, this represents an
advantage for the bank, since the level of the equity capital
shown in the balance sheet gives the bank's investors an
indication of its soundness and may thus influence the
conditions under which the bank is able to raise outside
funds.

the

(148) Germany argues that the fact that Helaba entered the full
amount of
silent partnership contribution of
EUR 1 264.4 million in the balance sheet directly after
receiving it cannot be interpreted as having had any effect
in improving the bank's credit standing. Since the mid-
1980s Helaba has been ranked in the top category AAA/
Aaa in the long-term credit standing rating which is
relevant for creditors of the bank, with the key criteria
being the existing liability arrangements such as ‘institu-
tional responsibility’ (Anstaltslast) and ‘guarantor liability’
(Gewährträgerhaftung) and hence the creditworthiness of the
guarantors. Showing the silent partnership contribution in
the balance sheet could not have improved this outstanding
top-rank credit standing any further. (20)

(149) Germany also argues in response to further enquiry from
the Commission that even if the Moody's Investors Service
financial strength rating for Helaba and Fitch's individual
rating during the relevant period are taken into account, the
silent partnership could have had no perceptible influence
on the ranking of Helaba's financial strength. The two
ratings mentioned were based, notwithstanding the existing
state liabilities in the form of Anstaltslast and Gewährträ-
gerhaftung and ownership structures, solely and directly on
the profitability of the relevant institution, the quality of its
management, the market position and also equity capital
endowment. (21) The two ratings remained unchanged from
1997 to 2000, i.e. despite the contribution of the silent
partnership at the end of 1998 (Moody's financial strength
rating remained at C+ and the Fitch individual rating at B/C)
and deteriorated as from 2001 (Moody's financial strength
rating fell to C+ (neg.) and C(neg.) and the Fitch individual
rating to C). In Germany's view, this showed that the silent
partnership had had no influence on Helaba's credit
standing even leaving aside the existing state liabilities. (22)

(20) Germany's reply of 23 June 2004, p. 12.
(21) Germany's reply of 23 June 2004, p. 12, Annex 29/2004, Fitch
Ratings: Bank Rating Methodology: May 2004, p. 12:
‘Principal
considerations are profitability, balance sheet integrity (including capitalisa-
tion), franchise, management, operating environment, consistency, as well as
size (in terms of a bank's equity capital)’.

(22) Germany states that the reason for this, as already mentioned, was
the fact that the minimum supervisory standards for capital ratios
(core capital ratio of 4,0 %, overall ratio or equity ratio of 8,0 %)
were more than met during the relevant period, which was a
significant difference compared to the situation with WestLB. In
1997, for example, i.e. before the contribution, in accordance with
Principle I to Section 10a of the German Banking Act, the core
capital ratio was 4,8 % for the Helaba group and 5,0 % for the
Helaba institution on its own. In accordance with the principles of
the Bank for International Settlements, the core capital ratio (tier 1)
was 5,4 % in 1997. The overall ratio and equity ratio in 1997 were
8,9 % and 9,6 % for the group and 9,2 % for the institution on its
own. Even against the background of the business growth planned
by Helaba for the following financial years, there was no direct need
for the taking-up of core capital amounting to EUR 1 264.4 million.

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i.e. at

the time of

(150) The Commission cannot agree with Germany's argument.
Germany's comments on the financial strength rating and
individual rating show rather than a financial institution's
endowment with equity capital is an important factor for
the quality of a rating and hence also for financial standing.
the
From an ex ante perspective,
agreement on the silent partnership between the Land of
Hessen and Helaba, the two parties had to start from the
assumption that the entering of core capital amounting to
some EUR 1,2 billion was such as to further improve the
bank's financial standing. The financial strength ratings
given by Moody's and Fitch and cited by Germany show
that a further improvement was entirely possible, since the
ratings had by no means reached the highest level. The fact
that ex post no change in the financial strength rating was
discernible does not necessarily mean that there was no
positive influence on the financial strength rating. The
positive influence of the significant increase in the core
capital base could have helped to ensure that the financial
strength rating did not fall for other reasons or did not fall
faster than it in fact did, i.e. only as from 2001.

(151) In assessing the potential influence (to be assessed ex ante)
of a measure on the financial standing of a bank and/or on
future financing conditions,
the Commission sees the
strength rating of a Landesbank as being
financial
important in its own right alongside the long-term rating
based on the existing state liabilities in the form of
Anstaltslast and Gewahrträgerhaftung.

(152) As far as the (from the point of view of 1998) future
borrowing of outside capital is concerned, Helaba obtained
in 1998 and the following years the top rating of AAA/Aaa
on the basis of Anstaltslast und Gewährträgerhaftung. As far
as the Commission is aware and as Germany itself points
out, the actual refinancing costs of a bank vary or fluctuate,
in comparison with other similarly rated banks, within a
corridor for a given rating category. In other words, specific
refinancing costs
cannot be deduced precisely and
unchangingly for all similarly rated banks and over time
from a specific long-term rating, in this instance AAA/Aaa.
follows from this empirical observation that other
It
influences and factors play a role, such as the financial
strength of Helaba in relation to other Landesbanks with
the same long-term rating on the basis of Anstaltslast and
Gewährträgerhaftung. The better Helaba's financial strength
is, the better are its prospects, within the AAA/Aaa rating
category, in specific negotiations on refinancing conditions,
of finding itself at the favourable edge of the corridor of the
refinancing conditions observable on the market for AAA/
Aaa. Furthermore,
its dependence on the rating of the
in the event of a possible
guarantors is reduced,
deterioration in their rating, which cannot be excluded ex
ante, Helaba could use its individual financial strength as an
argument in defence of its favourable refinancing condi-
tions.

i.e.

(153) As far as the (from the point of view of 1998) future
borrowing of further outside funds is concerned, which in

further silent
fact took place in 2001 in the form of
partnership assets, a large capital buffer entered in the
balance sheet reduces the probability of the new capital
being lost in the event of bankruptcy provided that old and
new capital are liable on a pari passu basis. Germany stated
the rule with silent
that
partnerships. From the perspective of 1998, therefore, it
could not be ruled out that new investors might insist on it.

such pari passu liability is

creditor of

the bank and was not

(154) Germany also argued, in response to an enquiry by the
Commission, that silent partnerships within the meaning of
Section 10(4) of the German Banking Act do not fall within
the protected area of Anstaltslast and Gewährträgerhaftung.
the contractually
This was the direct consequence of
arranged participation in losses as a precondition for the
recognition of the silent partnership reserves as liable own
funds. Consequently, the investor was not to be regarded as
a
covered by
Gewährträgerhaftung. Similarly, he was not covered by
Anstaltslast, since that provided only for the obligation of
providing the institution with an economic basis and of
making available the contributions required for maintain-
ing normal business operation. This in no way excluded
third-party participation in losses. Losses were in principle
possible up to the point where the liable own funds had
been used up. Consequently,
the silent partner is not
protected in his asset interests by the intervention of the
guarantor on the basis of Anstaltslast. In view of the fact
that equity investors do not fall within the protective scope
of
the individual
financial strength of Helaba, which was enhanced or kept
constant, had,
in the
Commission's view a positive influence on the future
terms and conditions on which Helaba was able to take up
further equity such as silent partnerships.

‘Anstaltslast’ and ‘Gewährträgerhaftung’,

from the viewpoint of 1998,

(155) The Commission concludes that the substantial improve-
ment in the core-capital ratio for supervisory purposes
which was achieved through the immediate entry of the
silent partnership in the balance sheet in 1998 represented,
at least from an ex ante point of view, a potentially decisive
factor in the assessment of the individual financial strength
and future financing conditions of the bank and hence an
advantage for Helaba, regardless of whether the amount
was used to underpin competitive business. A market-
economy investor who, as a result of the immediate entry
of the entire invested capital in the balance sheet, exposed it
in full to the risk of loss in the event of bankruptcy would
have required an appropriate remuneration reflecting this
loss risk. For its part Helaba, on the basis of the at least
potential advantage to it, whose actual achievement
depended on future developments which were not fully
foreseeable in 1998, would have agreed to a remuneration.
The Commission therefore agrees on this point in principle
and on the basis of a factual analysis with the comments of
the complainant BdB.

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d) Appropriate remuneration for the capital contrib-
uted and comparison with remuneration actually
paid

(1) Assessment of whether the remuneration that was agreed for
the capital to be used to underpin competitive business was
the normal market remuneration

(aa) P r e l i m i n a r y r e m a r k

1,40 % a year, giving a total charge of 1,66 % a year.
According to information provided by Germany, the trade
tax may be divided proportionally between the two
remuneration components, with 0,23 % a year apportioned
to the agreed initial remuneration of 1,2 % a year and
0,03 % apportioned to the agreed perpetuity premium of
0,2 %. For
the market comparison,
therefore, the rate of 1,43 % a year is to be applied for
the initial remuneration and the rate of 0,23 % a year for
the perpetuity premium.

the purposes of

(156) As explained,

the Commission considers

the capital
measure agreed between the Land of Hessen and Helaba
to be a silent partnership. Consequently,
in examining
whether the remuneration specifically agreed was appro-
priate to the market, it is important to determine whether
such remuneration can be regarded as lying within the
corridor of
in
economically and legally comparable transactions involving
silent partnerships.

remunerations agreed on the market

(bb) C u s t o m a r y m a r k e t n a t u r e

o f

t h e

r e m u n e r a t i o n o f 1 , 2 % a y e a r

i n i t i a l
o f 1 , 4 3 % a y e a r
t h e p u r p o s e s o f
f o r
m a r k e t c o m p a r i s o n t a k i n g a c c o u n t o f
t r a d e t a x )

a g r e e d
( r a t e
t h e
t h e

(157) According to information provided by Germany, however,
in making the market comparison of the silent partnership
of the Land of Hessen, the trade tax effect of (in relation to
Helaba's silent partnership) 0,26 % a year must be taken
into account. Helaba had to pay on the remuneration of
1,4 % trade tax to which the Land of Hessen was not
subject, so that there was a total charge of 1,66 % (before
tax). Commercial investors operating in Germany pay trade
tax on dividends from silent partnership assets. However,
the Land of Hessen is not subject to trade tax. Instead,
Helaba had to pay the trade tax applicable to the
remuneration of the silent partnership. A market-economy
institutional
investor would therefore have required a
higher remuneration than the Land in order to offset the
charge he had to pay in the form of trade tax. Conversely,
Helaba would have been immediately prepared to pay a
remuneration premium to such an investor, since it makes
no difference to it whether it pays the premium as a
remuneration to the investor or as trade tax to the tax
office.

(158) When the BdB argues that the trade tax, most of which
does not go to the Land at all, but to the local authority, is
not a component part of the remuneration, but a charge
imposed by law, stemming from tax-related circumstances
that are independent of the intentions of the parties, this is
in itself, in the Commission's view, correct. However, the
BdB fails
in making the market
comparison the question is not ultimately whether the
trade tax does or does not represent a part of
the
remuneration. The point
is rather to take account of
Helaba's special situation in taking up the silent partnership
of the Land of Hessen and, in particular, of the particular
charge involved here, which would not have arisen in
taking up silent partnerships from commercial investors, in
the market comparison to be carried out here.

to recognise that

(160) The initial remuneration of the relevant silent partnership is
to be determined, using the method applied by the Land of
Hessen and Helaba, on the basis of
time-limited, but
otherwise comparable, silent partnerships. The question of
the appropriate remuneration for the unlimited nature of
the period covered by the silent partnership of the Land of
Hessen must be examined separately under point bb) with a
view to a premium on this initial remuneration.

(161) Germany presented comprehensive data on remunerations
of time-limited silent partnerships round about the time of
the contribution at the end of 1998 and thereafter.

(162) According to the information provided by Germany,

in
comparing premiums for silent partnerships, a distinction
should be drawn on the basis of the reference interest rate.
If,
in the case of a variable overall remuneration, the
remuneration premium relates to the (variable) money
market interest rate on the interbank market (Libor or
Euribor), i.e. the refinancing rate for first-class banks, this
corresponds to the liability remuneration for the silent
partnership without any need for
further adjustment.
However, if, in the case of a fixed overall remuneration,
the remuneration premium relates to the (fixed-interest)
bond market rate (generally the yield on public bonds with
a ten-year maturity), the remuneration premium consists of
the (general) refinancing premium of the bank vis-à-vis the
State for the procurement of
liquidity and the specific
liability remuneration for the silent partnership. For the
purposes of comparing the liability remuneration with
money-market-related liability remunerations,
therefore,
the refinancing premium must in this case be deducted
from the remuneration premium. With illiquid capital
the silent partnership
contributions, as in the case of
contribution of
the remuneration
the Land of Hessen,
premium is, however, as with variable-interest money-
market-related instruments, usually identical to the liability
remuneration.

(159) The Commission therefore shares Germany's view that, in
the market comparison, the trade tax of 0,26 % a year to be
paid by Helaba must be added to the remuneration of

(163) It follows from this that the remuneration for the silent
partnership contribution of the Land of Hessen, as an

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illiquid capital contribution, can be compared directly with
money-market-related remuneration premiums (i.e. vari-
able-interest overall remunerations), since these correspond
to the liability remunerations.
In the comparison with
bond-market-related overall remunerations, however, the
refinancing premium (from in principle around 20 to 40

basis points, leaving aside further short-term upward or
downward deviations, in the relevant periods according to
information provided by Germany (23) must be
the
deducted from these in order to determine the specific
liability remuneration for the silent partnership contribu-
tion.

(164) On the basis of the information provided by Germany, the Commission has carried out the market comparison on the basis of the
comparative transactions which are listed in the following table and which were known to the Land of Hessen and Helaba either at
the time of the transaction at the end of 1998 or, where they took place some months later, through their direct chronological
proximity, allow conclusions to be drawn as to the market conditions prevailing at the time of the transaction at the end of 1998:

Relevant comparative transactions (24)

Description of the transaction

Volume

Term

Financial strength/
product ratings

Remuneration
premium p.a.

(in basis points)

Reference interest rate
and any adjustment
(25) of the remunera-
tion premium by
deduction of the refi-
nancing premium

Liability remunera-
tion of relevance for
comparison

Silent partnership contri-
bution to Helaba made in
December 1997 by the
Hessen and Thuringia sav-
ings banks

DEM 300 mil-
lion

10 years

FSR: Aaa/AAA
(because of state
liabilities)
PR: ?

1,2 %

10-year federal
loan (adjustment
through deduction
of 20-40 bp)

80-100 bp

Fixed-interest USD tranche
of the silent partnership
contribution to Deutsche
Bank, January 1998

First tranche of
USD 700 mil-
lion

10 years

FSR: AAA/Aa1
PR: AA-

80 bp

12-month Libor
(no adjustment)

80 bp

Variable-interest USD
tranche of the silent part-
nership contribution to
Deutsche Bank, January
1998

Second tranche
of USD 700
million

10 years

FSR: AAA/Aa1
PR: AA-

140 bp

75 bp

10-year US treasu-
ries
(adjustment
through deduction
of 65 bp (26)

Variable-interest silent part-
nership contribution to
SGZ-Bank, October 1998

DEM 50 million

10 years

FSR: A1/A+
PR: ?

120 bp

12-month Libor
(no adjustment)

120 bp

(23) See Germany's reply of 9 April 2003, Annex 15-16. The figures
relate to the refinancing premium for euro banks as opposed to
federal loans and the refinancing premium on bank bonds (10-year
loans. In the absence of
mortgage bonds) as opposed to federal
figures for the corresponding refinancing premium as compared
with US treasuries and on the basis of their fundamental economic
comparability,
the Commission is using the above-mentioned
corridor for refinancing premiums for US treasuries as well, since
it is not precise figures, but the order of magnitude that matters in
determining the corridor for the relevant liability remuneration..

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Relevant comparative transactions (24)

Description of the transaction

Volume

Term

Financial strength/
product ratings

Remuneration
premium p.a.

(in basis points)

Reference interest rate
and any adjustment
(25) of the remunera-
tion premium by
deduction of the refi-
nancing premium

Liability remunera-
tion of relevance for
comparison

Silent partnership contri-
bution to HypoVereins-
bank, December 1998

First tranche of
DEM 1,2 bil-
lion (27)

10 years

FSR: Aa2, Aa3/
AA-
PR: A2

160 bp

DEM Libor
(no adjustment)

160 bp

Euro tranche of the silent
partnership contribution to
Dresdner Bank, May 1999

EUR 500 mil-
lion

12 years

FSR: Aa1/AA
PR: Aa2; A+

165 bp

USD tranche of the silent
partnership contribution to
Dresdner Bank, May 1999

USD 1 billion

32 years

FSR: Aa1/AA
PR: Aa2; A+

215 bp

125-145 bp

150 bp

10-year German
federal loan
(adjustment
through deduction
of 20-40 bp)

30-year US treasu-
ries
(adjustment
through deduction
of 65 bp (28)

Silent partnership contri-
bution to HypoVereins-
bank, May 1999

EUR 500 mil-
lion

12 years

FSR: Aa2, Aa3/
AA-
PR: ?

125 bp

12-month Euribor
(no adjustment)

125 bp

Euro tranche of the perpe-
tual for Deutsche Bank, July
1999

EUR 500 mil-
lion

No limit

FSR: Aa3/AA
PR: A1

USD tranche of the perpe-
tual for Deutsche Bank, July
1999

USD 200 mil-
lion

No limit

FSR: Aa3/AA
PR: A1

Overall 6,6 %
(corresponds to
115 bp)

Corresponds to
30-year federal
loan (adjustment
through deduction
of 20-40 bp)

Overall 7,75 %
(corresponds to
160 bp)

Corresponds to
30-year US treasu-
ries (adjustment
through deduction
of 65 bp)

75-95 bp

95 bp

(24) See in particular Germany's reply of 9 April 2003, Annexes 2-4, 8-12, 17-18.
(25) Downward adjustment carried out by the Commission on the basis of the data provided by Germany.
(26) Refinancing premium as compared with US treasuries having the same term, see letter from Germany of 9 April 2003, p. 27.
(27) Second tranche fixed-interest, but equivalent terms.
(28) Refinancing premium as compared with US treasuries having the same term, see letter from Germany of 9 April 2003, p. 27.

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(165) The above table gives a corridor for the market comparison
of relevant liability remunerations of 0,75 % to 1,6 % a
year. In support of this, Germany also presented a survey
from the investment bank [...] which shows the trend of
liability
remunerations on euro-denominated, hybrid
capital instruments that can be treated as core capital from
December 2001 to July 2004 (29). This shows that, during
this period, the average liability remuneration in relation to
all rating classes (as a premium above Libor) moved within
a corridor between 2,25 % a year (briefly around the end of
2002 and beginning of 2003) as an upper limit and around
0,8 % a year (in 2004) as a lower limit, with a rate of just
under 1,5 % a year being the average for the period. The
figure for credit
is,
according to the survey, some 10 to 20 basis points lower
and the figure for credit institutions rated BAA some 10 to,
during the brief peak in the spring of 2003, around 250
basis points higher.

institutions rated at A or better

(166) The Commission is aware that the market remunerations
contained in the table can in methodological terms give
only a very rough indication. For example, the transactions
differ in many respects, in particular as regards the rating of
the issuing financial
the volume and the
institutions,
underlying reference interest rate. These factors all have a
significant
influence on price formation and a further
market survey would have to be carried out to quantify
their respective influence on price formation in methodo-
logically correct terms.

(167) For the purposes of the competition assessment of the
market nature of the silent partnership contribution by the
Land of Hessen, however, any such further market survey
can in the Commission's view be dispensed with. It is
sufficient if, on the basis of trends, the Commission checks
that
the agreed remuneration lies within the market
corridor.

(168) It is apparent that the comparative transactions shown are,
in terms of volume, in an area of under DEM 50 million
(some EUR 25 million) to some USD 1 billion (taking
account of evolving exchange rates, around EUR 1 billion).
The volume of the silent partnership contribution of the
Land of Hessen, at some EUR 1,2 billion,
is somewhat
above this area. However, the Commission agrees with
Germany that the silent partnership contribution of the
Land of Hessen can, on the basis of the above-mentioned
phased model, be compared with a series of four smaller
silent partnership contributions each amounting to around
EUR 150 million and EUR 300 million. Helaba was not
dependent on the immediate injection of such a large
amount, but would have been able, in accordance with its
business plan, to take up silent partnership contributions of

(29) Germany's reply of 23 August 2004, Annex 6.

this size gradually on the market. The Commission notes
that it was primarily in Germany's interest that the silent
partnership contribution could from the outset be provided
to Helaba in one whole so as not to have to divide up the
promotion-related assets.

(169) On the other hand, as a result of the silent partnership
contribution of the Land of Hessen, even if it is understood
as a series of several silent partnership contributions, the
proportion of Helaba's core capital accounted for by silent
partnerships rose to some [...] %. According to Germany,
this is significantly higher than is usually the case with
hybrid core capital
instruments in the case of private
banks. (30) The Commission considers that the higher the
proportion of hybrid core capital compared with share
capital, the higher the remuneration would tend to be
which a private investor would require, since there would
silent partnership
then be a greater probability of
contributions being claimed rather than share capital
if
the bank got
into difficulties. Germany disputes this,
arguing that silent partnership contributions usually have
equal liability ranking and that silent partnership contribu-
tions taken up later are not prior-ranking. However,
regardless of the liability relationship of silent partnership
contributions amongst themselves, the Commission also
sees an increased risk in the fact
that, with silent
partnership contributions making up a larger proportion
of the core capital, the bank's risk assets are necessarily
based more on silent partnership contributions and hence
the buffer effect of the core capital decreases, with the result
that the probability of their being utilised in the event of a
loss
is greater and the speed with which they are
replenished in the event of improved profitability is slower.
Germany also points out that it cannot be deduced from
market data that investors contributing silent partnerships
in undertakings with an already high proportion of silent
partnership contributions also require higher
liability
remuneration. The Commission notes this point and
considers that it is not feasible to carry out a methodo-
logically sound quantification of any such premium for the
purposes of this Decision. Nevertheless, the Commission
sees this as evidence that a market-economy investor would
at least not have accepted a remuneration in the lower part
of the market corridor.

(170) Contrary to the view taken by Germany, the Commission
does not regard Helaba's top rating of AAA/Aaa at the end
of 1998 on the basis of the state liabilities in the form of
in
Anstaltslast
examining the remuneration on the silent partnership
contribution. As explained above, the silent partnership
investor is not protected by intervention by the guarantor
on the basis of Anstaltslast in the interests of his assets.

and Gewährträgerhaftung

significant

as

(30) Germany's reply of 23 August 2004, pp. 11-12. In the case of the [...]
private banks in Germany listed there, [...], [...] and [...], the relevant
proportion rose from some 5 % in 1998 to around 20-30 % in
2003. According to the information provided by Germany, the
relevant proportion in the case of Helaba lies within the 33 % to
72 % range typical of Landesbanks.

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Official Journal of the European Union

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(171) The Commission concludes here too that the rating based
on Anstaltslast and Gewährträgerhaftung cannot be taken as
an indicator of the risk the investor is running. In the
Commission's view,
the long-term rating without state
liabilities is more significant. Germany argues in this
context that this type of rating could not be determined for
the period at the end of 1998, since a corresponding rating
methodology for Landesbanks as a whole was developed
only after the agreements on the abolition of the state
guarantees, i.e. after 2001 and 2002. For the purposes of
this Decision, therefore, the Commission assumes that a
market-economy investor in Helaba would have started
from the assumption of a somewhat similar risk of loss as
in the case of an investment in one of the large private
banks included in the market comparison whose rating was
consistently in the A category, and not of a reduced risk
corresponding to the top rating of AAA. Consequently, a
reduction in the appropriate remuneration premium as
compared with the market comparison data does not
appear apposite; rather, the market comparison data can be
applied directly.

(172) For the reasons set out above, the Commission would
regard any remuneration of the silent partnership con-
tribution of the Land of Hessen in the lower part of the
market corridor as not being in line with the market.
However, given the market corridor of 0,75 % to 1,6 %
determined for the liability remuneration for silent partner-
ship contributions, the relevant comparative figure for the
silent partnership contribution of the Land of Hessen at
1,43 % (taking account of the trade tax effect) is in the
middle to upper range of the corridor. In view of this,
therefore, the Commission does not, in respect of the initial
remuneration, see any evidence of favourable treatment of
Helaba and hence of state aid.

(cc) M a r k e t n a t u r e o f

t h e a g r e e d p e r p e t u i t y
p r e m i u m o f 0 , 2 % a y e a r ( m a r k e t c o m -
p a r i s o n r a t e o f 0 , 2 3 % a y e a r t a k i n g
a c c o u n t o f

t r a d e t a x )

(173) The silent partnership contribution of the Land of Hessen is
of unlimited duration and is what is known internationally
as a perpetual. This distinguishes it from most of the other
transactions cited by Germany for comparison purposes
and typical during the 1990s, which generally have a term
of ten or twelve years.

rate fluctuation risk is not relevant. Furthermore, the Land
restricted its freedom in the use of the silent partnership
contribution more than would normally have been the case
with limited duration. (31) The unlimited duration of the
silent partnership contribution does, on the other hand,
give Helaba the added economic benefit that it can be
recognised above the 15 % limit as core capital and was in
fact so recognised. This was provided for by the above-
mentioned ‘Sydney Declaration’ of the Basle Committee for
Banking Supervision in October 1998.

(175) For these reasons, the Land of Hessen and Helaba agreed to
a further premium on the initial remuneration, the so-called
perpetuity premium, of 0,2 % a year. Taking account of the
above-mentioned trade tax effect, the rate applicable for the
market comparison rises to 0,23 % a year.

(176) In assessing whether this rate of0,23 % a year is in line with
the market-economy investor principle, the Commission
cannot, or can to only a very limited extent, rely on market
data from the time of the transaction. According to the
information provided by Germany, Helaba and the Land of
Hessen were to some extent market pioneers in arranging
the transaction in such a way that, in coordination with the
relevant banking supervisory and financial authorities,
recognition in full as core capital above the 15 % limit was
achieved. According to Germany,
the transaction was
evidently the first of this kind. Comparative data on the
market nature of the perpetuity premium were not available
to the parties at the end of 1998, since,
in the period
between the ‘Sydney Declaration’ of 28 October 1998 and
1 December 1998, it was not possible for a transparent
market for permanent silent partnerships to develop.

(177) The Commission notes firstly that a public investor or a
public bank cannot be prevented from acting as a market
pioneer. On the contrary, a market pioneer must actually be
allowed greater leeway in setting terms and conditions than
is the case with established benchmarks that determine the
relevant market corridor on the basis of which the market
test is to be carried out. The Commission can therefore at
most examine whether the determination of the perpetuity
premium was wrong in economic terms, i.e. was based for
example on false premises.

(178) In carrying out this examination, therefore, reference must
be made to market data from a later period.
In the
Commission's view, there is no reason to believe that a
premium for the perpetuity of a silent partnership varies

(174) Looking at the market in abstract terms, unlimited duration
means that an investor is faced with a higher risk of non-
payment and a higher interest rate fluctuation risk, which a
premium is supposed to offset, although in the present
instance, because liquidity was not provided, the interest

(31) This does not automatically mean that the Land has committed itself
to Helaba ‘forever’ or can never again have at its disposal the funds
comprised in the silent partnership. The Land can assign its rights
from the silent partnership (at least with Helaba's agreement) to a
third party against payment. The fungibility of the silent partnership
is not thus necessarily reduced to zero.

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much over time. However, no specific data on the level of
the perpetuity premium can be deduced from the market.
Perpetuals, including the silent partnership contribution of

unlimited duration, have established themselves on the
market since the Sydney Declaration of October 1998, but
more particularly since 1999.

(179) Germany did not therefore present separate data on the level of the appropriate perpetuity premium for
carrying out the market comparison, but rather presented data on overall pricing of perpetuals and silent
partnerships of unlimited duration observable on the market since 1999 (contributions with a term of
thirty years or more are also regarded as being of unlimited duration on the market). The data are
summarised in the following table, with the perpetuals from 1999 listed in the above table being listed
here once again for the sake of completeness:

Relevant comparative transactions (32)

Description of the
transaction

Volume

Term

Financial
strength/pro-
duct ratings

Remuneration
premium p.a.
(in bp)

USD tranche of the
silent partnership
contribution to
Dresdner Bank, May
1999

Euro tranche of the
perpetual for
Deutsche Bank, July
1999

USD 1 bil-
lion

32 years

215 bp

FSR: Aa1/
AA
PR: Aa2; A+

EUR
500 million

no limit

FSR: Aa3/
AA
PR: A1

Fixed 6,6 %
(corre-
sponds to
115 bp)

USD tranche of the
perpetual for
Deutsche Bank, July
1999

USD
200 million

no limit

FSR: Aa3/
AA
PR: A1

Fixed
7,75 % (cor-
responds to
160 bp)

Deutsche Bank,
December 2003

EUR
300 million

no limit

PR: A2/A

Fixed
6,15 % (cor-
responds to
99 bp over
mid-swaps)

Reference inter-
est rate and any
adjustment (33)
of the remu-
neration pre-
mium by
deduction of the
refinancing pre-
mium

30-year US
treasuries
(adjustment
through
deduction of
65 bp (34)

Corresponds
to 30-year
federal loan
(adjustment
through
deduction of
20-40 bp)

Corresponds
to 30-year US
treasuries
(adjustment
through
deduction of
65 bp)

Corresponds
to mid-swaps
(no adjust-
ment)

Liability remu-
neration of
relevance for
comparison

150 bp

75-95 bp

95 bp

99 bp

(32) See in particular Germany's reply of 9 April 2003, Annexes 2-4, 8-12, 17-18.
(33) Downward adjustment carried out by the Commission on the basis of the data provided by Germany.
(34) Refinancing premium as compared with US treasuries having the same term, see letter from Germany of 9 April 2003, p. 27.

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resulting from the stronger and longer

(180) The few specified comparative data for perpetuals do not
produce any change here in the market comparison
corridor as compared with silent partnership contributions
of
limited duration. However, economic theory dictates
that a market-economy investor naturally requires a
premium for perpetuity as compared with an otherwise
similar silent partnership contribution of limited duration,
so as to offset in particular the additional risk of non-
payment
tie.
However, it is evident from the data presented that, on
the market for perpetuals, it is not necessarily the case that a
significantly higher liability remuneration is required than
for silent partnership contributions of
limited duration.
This finding, though it certain cannot be described as
statistically robust, given the lack of a sufficient number of
comparative transactions, also lends further plausibility to
Germany's argument that the perpetuity aspect does not
change the silent partnership contribution into a capital
instrument of a different type, as argued by the BdB, for
example.

(181) Germany presented a comparative calculation of

the
perpetuity premium for the Deutsche Bank's euro transac-
tion (perpetual) of
July 1999, which was of unlimited
duration, as compared with the Dresdner Bank's transaction
of May 1999, which was of limited duration (35) . It stated
that the Deutsche Bank perpetual of July 1999 showed an
overall remuneration of 6.6 % a year (see above table). In
1 July 1999, the current yield for ten-year federal loans was
4,66 % a year, which meant
the remuneration
premium in relation to them amounted to 1,94 % a
year (36) . By contrast, the euro tranche of the twelve-year
silent partnership contribution to Dresdner Bank of
May 1999 was remunerated at 1,65 above ten-year federal
loans. This gave a difference of 0,29 % a year. This, it was
argued, was only slightly above the premium agreed here of
0,20 % a year (0,23 % a year with the trade tax effect).
Another reason for the difference was that the Deutsche
Bank perpetuals were rated lower by Moody's at A1 than the
Dresdner Bank silent partnership contribution, rated Aa2,
and consequently had a higher remuneration.

that

(182) The Commission believes this comparative calculation is
plausible, bearing in mind the limited data available in the
period 1998/1999, which is not the fault of the Land of
Hessen and Helaba. The figure of 0,29 % resulting from the
the
comparative

calculation is only

slightly

above

federal

loans in order

(35) Letter from Germany of 9 April 2004, p. 28.
(36) The remuneration premium of the Deutsche Bank perpetual (agreed
fixed-interest remuneration of 6,60 %) is put here at 1,94 % a year in
to make it more
relation to 10-year
comparable with the 12-year silent partnership contribution to
Dresdner Bank (1,65 % above 10-year federal loans) and thus to get
some idea of the level of the perpetuity premium. In the above table,
the remuneration premium for the same perpetual is put at 1,15 % a
year in relation to 30-year federal loans, since these are equivalent to
the relevant period (30 years are regarded on the market as being
‘quasi-permanent’). The remuneration premium in relation to 30-
year federal loans is lower, since with a normal interest rate curve, as
is the case here, longer-term (30-year) loans yield a higher return
than shorter-term (10-year)
loans and thus represent a higher
deduction item from the agreed fixed-interest remuneration of
6,60 % a year.

perpetuity premium agreed between the Land of Hessen
and Helaba, i.e. 0,23 %. In addition, at least part of the
difference is attributable to differences in product rating,
which would probably be smaller if one were to compare
silent partnership contributions to Helaba of limited and
unlimited duration, since the issuer is identical.

(183) Consequently, the Commission has no evidence that the
comparative rate of 0,23 % a year for the perpetuity
premium lies below the market corridor and that there was
therefore any favouring of Helaba, i.e. state aid.

(dd) Ta k i n g a p p r o p r i a t e a c c o u n t o f

l i q u i d -

i t y c o s t s

(184) The arguments of Germany, Helaba and the BdB regarding
liquidity costs, which are in agreement in this respect, can
be accepted, in so far as a ‘normal’ capital injection into a
bank supplies it both with liquidity and with an own funds
base which it requires for supervisory reasons to expand its
activities. In order to use the capital in full, i.e. to expand its
100 % risk-adjusted assets by a factor of 12,5 (i.e. 100
divided by a solvency ratio of 8), the bank must refinance
itself on the financial markets 11,5 times over. Put simply,
the difference between 12,5 times the interest received and
11,5 times the interest paid minus other costs of the bank
(e.g. administration) gives the profit on the equity. (37) Since
the silent partnership contribution of the Land of Hessen
did not provide Helaba with initial liquidity because the
assets transferred and all the income from them remained
earmarked by law for housing promotion, Helaba faced
additional funding costs equal to the amount of the capital
if it was to raise the necessary funds on the financial
markets to take full advantage of the business potential
opened up by the additional capital, i.e. to expand risk-
adjusted assets by 12,5 times the capital amount (or to
maintain existing assets at that level). (38) Because of these
extra costs, which do not arise in the case of liquid equity
capital, the appropriate remuneration must be reduced
accordingly. A market-economy investor could not expect
to be remunerated in the same way as for a cash injection.

(185) Unlike the BdB, but like Germany and Helaba, however, the
Commission takes the view that the gross refinancing
interest rate is deductible. Refinancing costs are operating
expenses and thus reduce taxable income. However, the
same applies to the remuneration on a silent partnership

(37) Of course, in reality the situation is much more complex because of
off-balance-sheet items, different risk weightings of assets or zero-
risk items, etc. However, the principal reasoning holds.

(38) The situation does not change if one takes into account

the
possibility of raising additional own funds up to the same amount of
original own funds (a factor of 25 instead of 12,5 for original own
funds).

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L 307/189

contribution which from the outset is made in liquid form.
In comparison to the latter, which, as stated above, provides
the appropriate market test, no further tax advantage arises.
The bank's net result is thus reduced in both cases by the
amount of the interest paid for the liquidity. The entire
refinancing costs are thus deductible.

(186) This

situation distinguishes Helaba significantly from
WestLB and the other Landesbanks, which were also the
subject of proceedings, since in the case of the latter the
promotion-related assets were entered in the balance sheet
as reserves and the entire remuneration is to be regarded as
profit utilisation, but not as operating expenses, and must
be paid from taxable profit. In the case of the others,
therefore, there is a tax advantage if the costs for liquidity to
be procured once more are deductible from tax as
operating expenses, while this would not be the case with
an investment which was from the outset cash, but
otherwise identical, and which represents the relevant
comparative reference.

(187) In the absence of any (further) tax advantage, consequently,
Helaba has to pay only the remuneration for the risk to
which the Land of Hessen is exposing its promotion-related
assets in the form of the silent partnership contribution, i.e.
the liability remuneration, expressed in basis points, above
the relevant reference interest rate.

(2) Determination of a minimum remuneration for the capital
required to underpin the promotion-related business and for
the capital not initially used, on the basis of the phased
arrangement, to underpin competitive business

(188) In the WestLB Decision of 1999, the Commission applied a
bank guarantee commission of 0,5-0,6 % before tax and
0,3 % after tax for the amount entered in the balance sheet,
but not usable to underpin competitive business. This
guarantee commission is in line with the rate of 0,3 %
before tax which Germany had indicated as the appropriate
commission on a bank guarantee for a bank like WestLB at
the end of 1991. The Commission raised this rate to 0,5-
0,6 % before tax (0,3 % after tax) for two reasons. Firstly,
the amount of DEM 3,4 billion (EUR 1,74 billion) in the
case of WestLB exceeded what was normally covered by
such bank guarantees. Secondly, bank guarantees were
normally associated with certain transactions and limited in
time.

if, despite

(189) In the present proceedings on Helaba, the Commission
similarly asked Germany to specify a guarantee provision
that could be regarded as corresponding to market terms
for a bank such as Helaba. Germany did not do so, but
argued that guarantees were always issued only for certain
transactions and that there was therefore no market from
which the remuneration for such guarantees could be
the
deduced. However,
Commission insisted on a remuneration being specified,
the level of such remuneration could, in Germany's view,
only be calculated individually taking account of
the
specific risk which, on the basis of this approach, the Land
had incurred in view of the differential amounts involved.
Since the planned growth of
the risk assets, at only
DEM [...] million a year, represented a modest growth
policy compared to WestLB, the very low probability of the
differential amount, which was decreasing annually, being
called on by the bank's creditors should at all events result
in the application of a very low liability remuneration.

these objections,

Furthermore, Helaba had only partly used the graduated
amounts that had to be remunerated in full and, in contrast
to WestLB, more than filled the minimum core capital
ratios required for banking supervisory purposes, so that
Helaba's business
risks were as a result more than
adequately covered. This safety margin meant that neither
the basic remuneration rate of 0,3 % a year before tax nor a
premium on this rate of 0,2-0,3 % a year before tax could
be transferred from the WestLB Decision (a total of 0,3 % a
year after tax) to the Helaba case.

(190) The Commission therefore must itself examine an appro-
priate guarantee commission for a bank such as Helaba. In
view of the basic similarity of WestLB and Helaba and in
the absence of other criteria, the Commission assumes here
that, as in the case of WestLB, a basic rate of 0,3 % a year
before tax can be regarded as appropriate. However, in the
Commission's view, premiums on this
rate are not
appropriate. In the first place, the amount of the silent
partnership contribution (EUR 50 to 100 million) available
in the long term to underpin the promotion-related
business is much smaller than the corresponding amount
of some EUR 1,7 billion in the case of WestLB. Secondly,
the amount which, under the phased arrangement, was not
usable to underpin competitive business was, as a result of
the phased arrangement, limited in time and accordingly
fell to zero by 2003. These facts show clearly that the risk
to the Land of Hessen was no higher than in the case of a
market guarantee for a bank such as Helaba and does not
accordingly justify any increase in the basic rate of 0,3 % a
year before tax. Since the remuneration for the entire silent
partnership contribution is, as operating expenses, deduc-
tible from tax and, on this point too, differs from the tax
treatment of the remuneration in the WestLB Decision, the
Commission establishes the guarantee commission in this
Decision as a pre-tax rate which is fully eligible as operating
expenditure.

e) Aid element

(191) As stated above, the Commission considers a remuneration
of 0,3 % a year before tax to be appropriate for the part of
the capital which is not usable by Helaba to underpin its
competitive business, but was entered in Helaba's balance
sheet with effect from 31 December 1998.

(192) Helaba pays a remuneration of 1,4 % a year only on the
amount which,
in accordance with the phased arrange-
ment, is usable to cover risk assets, but not on the part of
the silent partnership contribution which is entered in the
balance sheet, but not used to underpin competitive
business.

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(193) The aid element can therefore be determined as the product of the guarantee commission of 0,3 % a year
before tax regarded by the Commission as corresponding to market terms and the part of the silent
partnership contribution entered in the balance sheet but not used to underpin competitive business, in
accordance with the following table:

Year-end values

in EUR millions

1999

2000

2001

2002

2003

1)

Nominal value in the balance sheet

1 264,4

1 264,4

1 264,4

1 264,4

1 264,4

2)

3)

4)

5)

6)

7)

8)

Core capital actually usable for com-
petitive business in accordance with
the phased model

[…]

[…]

[…]

[…]

[…]

Core capital used for promotion
related business

[…]

[…]

[…]

[…]

[…]

Core capital usable for competitive
business, but whose usability is gov-
erned by the phased model

[…]

[…]

[…]

[…]

[…]

Difference between (1) and (2), corre-
sponds to the sum of (3) and (4)

[…]

[…]

[…]

[…]

[…]

Safety margin deduction because of
lower preliminary determination in the
balance sheet as at 31.12.1998 (*)

Capital base to be remunerated with
guarantee commission of 0.3 % a year
(before tax)

Remuneration to be paid that is
deductible as operating expenses, cor-
responds to aid element

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

1,92

1,95

1,34

0,73

0,15

(*) Remark on item (6) Safety margin deduction because of lower preliminary determination in the balance sheet as at 31 December
1998: according to information provided by Germany, (39) the process of banking supervisory recognition had not yet been
completed on 31.12.1998, so that initially a figure of EUR 1 023 million (DEM 2 000 million) had been entered in the balance
sheet. The figure of EUR 1 264 million produced by the assessment process had been entered directly after the assessment and
had accordingly featured in the annual accounts for 1999. In view of this process, the Commission considers it appropriate to
make a safety margin deduction on behalf of Helaba from the capital base to be remunerated for 1999. Helaba's creditors based
their assessment of its financial strength during 1999 on the figures in the 1998 annual accounts, which contained the preliminary
lower amount of EUR 1 023 million for the silent partnership contribution. Consequently, in 1999 only the difference between
this amount and the core capital usable, under the phased arrangement, to underpin competitive business is to be remunerated
with the guarantee commission of 0,3 % a year (before tax), i.e. EUR [...] million. For the following years, the figure in the previous
year's balance sheet corresponds to the figure for the silent partnership contribution specified in the annual balance sheet.

(39) See Germany's reply of 23. August 2004, p. 6-7.

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f)

Preliminary result

(194) The Commission thus concludes that Helaba was favoured
only in so far as it did not pay an appropriate liability
remuneration for that part of the capital made available in
the form of a silent partnership contribution by the Land of
Hessen which was required to underpin its promotion-
related business and, on the basis of the phased arrange-
ment, was initially not used to underpin its competitive
business. In the Commission's view, a liability remuneration
of0,3 % a year (before tax) would have been appropriate. In
so far as it was possible for the capital to be used to
underpin the competitive business, however,
this was
remunerated appropriately through the agreed remunera-
tion of 1,43 % a year (taking account of the trade tax) for
the silent partnership contribution.
In this respect, no
favourable treatment exists.

1.3. DISTORTION OF COMPETITION AND EFFECT ON TRADE

BETWEEN MEMBER STATES

(195) As a result of liberalisation of financial services and the
integration of
financial markets, banking within the
Community has become increasingly sensitive to distor-
tions of competition. This development is intensifying in
the wake of economic and monetary union, which is
dismantling the remaining obstacles to competition in the
financial services markets.

(196) Helaba carries on regional and international banking
It defines itself as an all-purpose commercial
business.
bank, central bank for the savings banks and the bank of
the Land and its municipalities. Despite its name, tradition
and legally stipulated tasks, Helaba is much more than a
mere local or regional bank.

(taking account of the trade tax) that had to be paid only on
this amount is to be regarded as being in conformity with
the market. In this respect, there is no favourable treatment
and hence no state aid within the meaning of Article 87(1)
of the EC Treaty for Helaba.

2.

COMPATIBILITY WITH THE COMMON MARKET

(199) In so far as

the transfer of

the silent partnership
contribution involves state aid within the meaning of
Article 87(1) of the EC Treaty, an assessment must be made
as to whether the aid can be considered compatible with
the common market.

(200) None of the exemption clauses of Article 87(2) of the EC
Treaty are applicable. The aid does not have a social
character and is not granted to individual consumers. Nor
does it make good the damage caused by natural disasters
or
the
compensate
economic disadvantages
caused by the division of
Germany.

exceptional occurrences or

for

(201) Given that

the aid has no regional objective — it

is
designed neither to promote the economic development of
areas where the standard of living is abnormally low or
where there is serious underemployment nor to facilitate
the development of certain economic areas — neither
Article 87(3)(a) nor (c) of the EC Treaty, as regards the
latter's regional aspect,
is applicable. Nor does the aid
promote the execution of an important project of common
European interest. The aid is not aimed either at promoting
culture or heritage conservation.

(197) These facts show clearly that Helaba offers its banking
services in competition with other European banks outside
Germany and, since banks from other European countries
are active in Germany, inside Germany. It is clear, therefore,
that aid given to Helaba distorts competition and affects
trade between Member States.

(202) Since the economic survival of Helaba was not at stake
when the measure was implemented, there is no need to
consider whether the collapse of a single large credit
institution like Helaba could lead to a general banking crisis
in Germany, which might possibly justify aid to remedy a
serious disturbance in the German economy under
Article 87(3)(b) of the EC Treaty.

1.4. RESULT

(198) In so far as Helaba did not pay an appropriate liability
remuneration for the part of the capital made available
which was required to underpin its promotion-related
business and, on the basis of the phased arrangement, was
not initially used to underpin its competitive business, all
the preconditions for state aid within the meaning of
Article 87(1) of the EC Treaty are met. With regard to the
the capital which was used to underpin the
part of
competitive business, the remuneration of 1,43 % a year

(203) Under Article 87(3)(c) of the EC Treaty, aid may be found
compatible with the common market if it facilitates the
development of certain economic activities. This might in
principle also apply to restructuring aid in the banking
sector. However, in the case at hand the conditions for the
application of this exemption clause are not met. Helaba
was not an undertaking in difficulty whose viability had to
be restored with the support of state aid.

(204) Article 86(2) of the EC Treaty, which allows exemptions
from the Treaty's state aid rules under certain conditions, is

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in principle also applicable to the financial services sector.
This has been confirmed by the Commission in its report
on Services of general economic interest in the banking
sector. (40) However, the formal conditions are not met in
this case: the tasks which Helaba carries out in providing
services of general economic interest are not specified, and
nor are the costs generated by such tasks. It is therefore
clear that the transfer was effected without any regard to
any services of general economic interest. Accordingly, this
exemption clause does not apply either in the case at hand.

(205) Since no exemption from the principle of the ban on state
aid pursuant to Article 87(1) of the EC Treaty applies, the
aid in question cannot be found compatible with the
Treaty.

3.

NOT EXISTING AID

(206) Nor, contrary to what was argued by Germany in other
Landesbank proceedings, can the capital
injection be
regarded as being covered by the existing state aid scheme
for ‘institutional responsibility’ (Anstaltslast) and ‘guarantor
liability’ (Gewährträgerhaftung), but must be regarded as new
aid.

within the meaning of Articles 87(1) and 88(3) of the EC
Treaty, and examined as such.

VII.

CONCLUSION

(209) The aid cannot be found compatible either under Article 87
(2) or (3) or under any other provision of the Treaty. The
aid should therefore be declared incompatible with the
common market and the aid element of
the measure
illegally put
into effect should be recovered by the
Germany,

HAS ADOPTED THIS DECISION:

Article 1

1. The waiver of an appropriate remuneration amounting to
0,3 % a year (before corporation tax) for the part of the capital
transferred by the Land of Hessen to the Landesbank Hessen-
Thüringen — Girozentrale which the latter has been able to use
as a guarantee as from 31 December 1998 is aid which is
incompatible with the common market.

2. The aid referred to in paragraph 1 amounts to EUR 6,09
million for the period from 31 December 1998 to 31 December
2003.

(207) Gewährträgerhaftung is a default guarantee offered to
creditors in the event that the bank's assets are no longer
sufficient to satisfy their claims, and this is not the case
here. The capital injection is not intended to satisfy the
Landesbank's creditors and the bank's assets have not been
exhausted.

Article 2

1. Germany shall discontinue the aid referred to in Article 1(1)
by 31 December 2004.

(208) Nor does Anstaltslast apply. Anstaltslast

requires

long as

the
guarantor, the Sparkassenverband Hessen-Thüringen, to pro-
vide Helaba with the resources it needs to function properly
for as
the Sparkassenverband Hessen-Thüringen
decides to maintain it in existence. However, at the time
of the capital injection, Helaba was far from being in a
situation where it was no longer able to operate properly
for lack of sufficient resources. The capital injection was
therefore not needed in order to keep the Landesbank in
operation. The conscious economic calculation by the Land
as (joint) owner also enabled the Landesbank to seize future
opportunities in its competitive business. The ‘necessity
requirement’
for Anstaltslast does not apply to such a
normal economic decision by the Land as (joint) owner of
the bank. In the absence of another applicable existing state
aid scheme pursuant to Articles 87(1) and 88(1) of the EC
Treaty, the capital injection must be classed as new aid

2. Germany shall take all necessary measures to recover the aid
referred to in Article 1(1) which was unlawfully made available
to the beneficiary. The amount to be recovered shall include the
following:

for the calculation period 31 December 1998 to 31 Decem-

(a)
ber 2003, the amount specified in Article 1(2);

for the calculation period from 1 January 2004 to the time
(b)
when the aid is discontinued, an amount determined in
accordance with the calculation method specified in Article 1(1).

Article 3

Recovery shall be effected without delay and in accordance with
law provided that they allow the
the procedures of national
immediate and effective execution of this Decision.

(40) This report was presented to the Ecofin Council on 23 November
1998 but has not been published. It can be obtained from the
Competition Directorate-General of the Commission and can also be
found on the Commission's website.

The amount to be recovered shall include interest from the date
on which the unlawful aid was at the disposal of the beneficiary
until the date of its recovery.

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Interest shall be calculated in accordance with the provisions of
Chapter V of Commission Regulation (EC) No 794/2004 (41)

Article 5

This Decision is addressed to Germany.

Article 4

Done at Brussels, 20 October 2004.

Germany shall, using the form set out in the Annex, inform the
Commission, within two months of notification of this Decision,
of the measures which it has taken in order to comply with it.

For the Commission

Neelie KROES

Member of the Commission

(41) OJ L 140, 30.4.2004, p. 1.