2006/739/EC: Commission Decision of 20 October 2004 on State Aid implemented by Germany for Bayerische Landesbank — Girozentrale (notified under document number C(2004) 3927)   (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

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Official Journal of the European Union

L 307/81

COMMISSION DECISION

of 20 October 2004

on State Aid implemented by Germany for Bayerische Landesbank — Girozentrale

(notified under document number C(2004) 3927)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/739/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

13 December 1993, to which Germany replied by letter of
8 March 1994.

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,

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

Whereas:

I.

PROCEDURE

The subject of these proceedings is the transfer of housing-
promotion loans to Bayerische Landesbank — Girozentrale
(‘BayernLB’) by the Land of Bavaria. There are a further six
cases in which proceedings have been initiated against
Germany in connection with transfers of assets to Land-
esbanks, and in particular to Westdeutsche Landesbank
Girozentrale (‘WestLB’).

the Commission asked
By letter of 12 January 1993,
Germany for information on a DEM 4 billion capital
increase for WestLB resulting from the incorporation of the
housing organisation Wohnungsbauförderanstalt (‘Wfa’) and
on similar increases in the own funds of the Landesbanks of
other Länder. It asked which Landesbanks had benefited
from a transfer of promotion-related assets and for
information on the reasons for those transactions.

authorities

The German
dated
16 March and 17 September 1993. The Commission
requested further information by letters of 10 November and

replied

letters

by

(1)

(2)

(3)

(4)

By letters of 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 things that, under
a law adopted on 23 July 1994, housing-promotion loans
had been transferred to the liable equity capital of
BayernLB. This increased the own funds at BayernLB's
disposal and, in the BdB's view, distorted competition in its
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 against Germany under Article 93(2) of the
EC Treaty (now Article 88(2)).

(5)

The complaint also related to similar transfers of assets to
Westdeutsche
Landesbank,
Landesbank, Norddeutsche
Landesbank Schleswig-Holstein, Hamburger Landesbank
and Landesbank Berlin. In February and March 1995 and
December 1996 several banks
associated themselves
individually with the complaint lodged by the BdB.

(6)

By letters of 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.

(7)

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
to the difference between the
aid component equal

(1) OJ C 81, 4.4.2003, p. 13.

(2) OJ C 140, 5.5.1998, p. 9 (opening decision).

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remuneration paid and the normal market remuneration,
which was incompatible with the common market and
should be recovered (3) . This decision was annulled by the
Court of First Instance on 6 March 2003 as insufficient
reasons had been given for two of the factors used to
calculate the appropriate remuneration (4) . On 20 October
2004, having been informed of the understanding between
the complainant, all the Landesbanks concerned (with the
exception of Landesbank Hessen-Thüringen) and the
respective Länder, the Commission adopted a new decision
that took account of the Court's criticisms.

(8) On 1 September 1999 the Commission sent Germany a
request for information on the transfers of assets to the
other Landesbanks. By letter of 8 December 1999, the
German Government supplied information on the transfer
of Land housing-promotion loans to BayernLB, supple-
menting that information in letters of 22 January and 3 July
2001 in response to requests by the Commission for
further information.

(9)

By letter of 13 November 2002, the Commission informed
Germany of its decision to initiate the formal investigation
procedure laid down in Article 88(2) of the EC Treaty in
respect of the transfer of the housing-promotion loans by
the Land of Bavaria to BayernLB. At the same time,
it
launched the investigation procedure in respect of similar
transfers of
to Norddeutsche Landesbank —
Girozentrale, Landesbank Schleswig-Holstein — Girozen-
trale, Hamburgische Landesbank — Girozentrale and
Landesbank Hessen-Thüringen. It had already opened an
investigation into a further similar transfer of housing-
promotion assets by the Land of Berlin to Landesbank
Berlin back in July 2002.

assets

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

(11) By letter of 15 April 2003, Germany submitted its
the procedure in the

comments on the initiation of
BayernLB case.

(12) By letter of 29 July 2003, the BdB submitted comments on
all the decisions taken on 13 November 2002 to initiate the
investigation procedure.

(13) The Commission asked for

information on
5 September 2003. Germany replied on 24 October,
commenting also on BdB's comments on BayernLB. On
30 October 2003, Germany forwarded comments by the
Government of North Rhine-Westphalia and by WestLB on

further

(3) OJ L 150, 23.6.2000, p. 1; actions challenging that decision have
been 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 has also brought proceedings for
infringement of the Treaty (before the Court of Justice, Case C-209/
00).
Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank
Girozentrale and Land Nordrhein-Westfalen v Commission [2003]
ECR II-435.

(4)

(5) Norddeutsche Landesbank: OJ C 81, 4.4.2003, p. 2; Bayerische
Landesbank: OJ C 81, 4.4.2003, p. 13; Hamburgische Landesbank:
OJ C 81, 4.4.2003, p. 24; Landesbank Hessen-Thüringen: OJ C 73,
26.3.2003, p. 3 and Landesbank Schleswig-Holstein: OJ C 76,
28.3.2003, p. 2.

the BdB's remarks concerning the proceedings in connec-
tion with the transfer of housing-promotion loans to
BayernLB.

(14) By letter of 15 March 2004, Germany informed the
Commission of an amendment to BayernLB's articles of
association on 5 March whereby,
their
function as liable equity capital, the transferred assets could
no longer be used to underpin BayernLB's competitive
business. The Commission sent
for
information on 7 April, 27 April and 23 June, to which
Germany replied on 1 June and 6 July. The Commission's
last request, dated 27 July, was answered by Germany on
18 August.

irrespective of

requests

further

(15) On 19 July 2004 the complainant BdB, the Land of North
Rhine-Westphalia and WestLB notified a provisional under-
standing concerning the appropriate remuneration for the
transferred assets. In their view, this remuneration should
form the basis of the Commission Decision. The definitive
version of the understanding reached the Commission on
13 October 2004. On 10 September 2004, BdB, the Land of
Bavaria and BayernLB also reached a provisional under-
standing on the appropriate remuneration for the special-
purpose assets transferred. Several letters were subsequently
sent to the Commission by these interested parties and by
Germany. The definitive version of the understanding on
the special-purpose assets to BayernLB
the transfer of
reached the Commission on 24 September 2004. Similar
understandings relating to asset transfers to Landesbanks
were also communicated to the Commission in the other
cases, with the exception of Landesbank Hessen-Thüringen.

II.

DETAILED DESCRIPTION OF THE MEASURES

1.

BAYERISCHE LANDESBANK — GIROZENTRALE

(16) Bayerische Landesbank — Girozentrale (BayernLB), with its
head office in Munich, has a group balance-sheet total of
€313 billion (as at 31 December 2003), which makes it one
of Germany's largest banks. It was formed in 1972 as a
result of
the merger between Landesbodenkreditanstalt
(‘LABO’) and Bayerische Gemeindebank (Girozentrale) (6). It
is a publicly owned credit institution operating in the form
of a public institution (Anstalt des öffentlichen Rechts). It is
indirectly owned by the Land of Bavaria and the Bayerische
Sparkassen- und Giroverband (Sparkassenverband Bayern),
each with a 50 % holding. In 2002 the two owners agreed
to transfer their stakes in BayernLB, in exchange for shares,
to BayernLB Holding AG, in which they each hold 50 % of
the shares. BayernLB Holding AG is the sole owner of
Bayerische Landesbank and is not a bank itself.

(6) Article 1 of the Act establishing the Bayerische Landesbank —
Girozentrale (Gesetz über die Errichtung der Bayerischen Landesbank —
Girozentrale).

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(17) According to its annual report for 2003, BayernLB's core
capital ratio was 7,8 %, and its equity ratio was 11,3 %. Its
income-to-equity ratio stood at 4,3 % in 2002 and 4,9 % in
2003, much lower than in previous years (15,5 % in 2000
and 18,7 % in 1999).

in close cooperation with its partners,

(18) Given its ownership structure, BayernLB operates as the
principal banker of the Land of Bavaria and as the central
It claims that it
institution of Bavarian savings banks.
contributes,
to
securing and enhancing on a sustained basis the attractive-
ness of Bavaria as a business location. It also operates as an
international wholesale bank active
area of
investment and commercial banking. It also claims to be
one of
Its target
the largest German issuing houses.
customers are Land and municipal authorities, savings
banks, multinational groups, domestic firms, private and
commercial real-estate developers, institutional customers
and financial institutions. BayernLB maintains LABO (an
instrument of Land housing policy) and Landesbauspar-
kasse Bayern (‘LBS’, the Bavarian home loan and savings
bank) as legally dependent institutions.

in the

(19) With more than 9 000 employees, the BayernLB group is
present in the world's main financial centres. On its core
European markets, including central and eastern Europe, in
North America and in Asia,
it offers its customers a
comprehensive range of banking products via its own
branches, representative offices and holdings. After stream-
lining its network in 2003, BayernLB today has, besides its
two offices in Bavaria and 15 LBS-Bayern sales depart-
ments, four offices in Europe and nine offices worldwide.

(20) The 84 Bavarian savings banks (31 December 2003), the
Versicherungskammer Bayern, Landesbausparkasse (LBS)
and Bayerische Landesbank make up the Sparkassen-
Finanzgruppe Bayern group, offering a full
range of
financial services in line with the concept of all-purpose
banking.

equity capital of the Bayerische Landesbank — Girozentrale
(the Special-purpose Assets Act) (7) . Under Article 1(1) of
that Act, the Land Government is empowered to transfer
the Land funds administered by LABO in the period 1957-
1990 to BayernLB for the purpose of forming a special
transferred are to
reserve. The special-purpose assets
continue to be used for the purposes of social-housing
construction.

(22) According to the explanatory memorandum to the Act,
BayernLB's equity capital needed to be increased in order to
guarantee the continued success of
its business opera-
tions (8) . Without such an increase, BayernLB's competi-
tiveness might be harmed in the long term. In addition, its
equity base was to be strengthened by transferring existing
Land building loan claims to it (9).

(23) The first instalment of outstanding claims on promotion
loans totalling some DEM 3 811 million was transferred to
BayernLB on 31 December 1994 in accordance with the
transfer agreement of 15 December 1994 (10) . A second
instalment of outstanding claims on promotion loans
totalling DEM 1 216 million was transferred to BayernLB
with effect from 31 December 1995 in accordance with the
transfer agreement of 28 December 1995 (11) . A total of
DEM 5 027 million in housing-promotion assets was thus
transferred to BayernLB.

3.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS

AND SOLVENCY DIRECTIVES

institutions (12)

(24) The German Banking Act (Kreditwesengesetz, or KWG) was
amended in line with Council Directive 89/647/EEC on a
solvency ratio for credit
(the ‘Solvency
Directive’) and Council Directive 89/299/EEC on the own
funds of credit institutions (13) (the ‘Own Funds Directive’),
which require banks to have own funds equivalent to 8 % of
their risk-adjusted assets, of which at least 4 percentage
points must consist of what is termed core capital, or ‘tier I’
capital, meaning capital
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,
is of decisive
importance because additional capital, or ‘tier II’ capital, is
accepted as underpinning for risk-bearing transactions only
up to the amount of the available core capital.

items which are at

the core capital

2.

TRANSFER OF HOUSING-PROMOTION LOANS TO

BAYERNLB

(21)

In view of BayernLB's growing competitiveness on the
domestic and international markets,
the Bavarian Land
Parliament adopted on 23 July 1994 the Act on the
formation of special-purpose assets through the transfer of
the Land of Bavaria's trustee claims in respect of the liable

(7) Bavarian Official Gazette [Bayerisches Gesetz- und Verordnungsblatt],

No 18/1994, p. 602.

(8) Bavarian Land Parliament, 12th session, document 12/15851 of

7 June 1994.

(9) Bavarian Land Parliament, 12th session, document 12/15851 of

7 June 1994.

(10) Transfer agreement between the Land of Bavaria and Bayerische

Landesbank — Girozentrale of 15 December 1994.

(11) Transfer agreement between the Land of Bavaria and Bayerische
Landesbank Girozentrale of 28 December 1995, which refers
entirely to the rules of the transfer agreement of 15 December 1994.
(12) OJ L 386, 30.12.1989; repealed and replaced by European Parliament

and Council Directive 2000/12/EC, OJ L 126, 26.5.2000.

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

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(25) German banks had to adapt their own funds to the new
requirements of the Solvency Directive and the Own Funds
Directive by 30 June 1993 (14) . Even before the Solvency
Directive was transposed into German law, many Land-
esbanks had relatively weak own-funds positions. They now
had to strengthen their own-funds base as a matter of
urgency in order to avoid restrictions on their business
expansion and indeed to maintain their current level of
activities.

(26) However, because the budgetary situation was tight, public
shareholders were unable to provide any fresh capital but
neither were they prepared to contemplate privatisation
and to raise additional capital on the capital markets. It was
therefore decided to undertake asset and capital transfers: in
WestLB's case, for example, there was a transfer of the assets
of the housing organisation Wohnungsbauförderungsan-
stalt des Landes Nordrhein-Westfalen (‘Wfa’). However, in
BayernLB's case the housing-promotion loans were trans-
ferred only afterwards, so that, apart from their role of
strengthening its capital base, they also served to maintain
and expand its general business activities.

4.

EFFECTS OF THE TRANSFER ON BAYERNLB'S CAPITAL

BASE

of the special-purpose reserve of DEM 655 million as liable
equity capital within the meaning of Section 10 of the
German Banking Act (KWG). Taking into account the entire
special-purpose reserve of DEM 1 197 million, BAKred, in a
letter dated 20 December 1996, fixed BayernLB's liable
at
equity
DEM 14,6 billion as at 23 December 1996 (17) . Of this
liable equity capital a total of DEM 8,8 billion was core
capital.

additional own funds,

including

capital,

(30) The capital

injection by means of

the special-purpose
reserve therefore represented some 8 % of BayernLB's liable
own funds of DEM 14,6 billion at 31 December 1995 and
around 13 % of the recognised core capital of around DEM
8,8 billion.

(31) According to the information available, the funds could
actually be used to cover liabilities as from the receipt of
BAKred's decision, i.e. from 20 May 1996 in respect of
DEM 655 million and from 23 December 1996 in respect
of DEM 1 197 million.

(27) The scale of a credit institution's business depends to a large
extent on the amount of its equity capital. In BayernLB's
case, this was increased to a not insignificant extent by the
transfer of the housing-promotion loans.

(32) According to Germany, the only time BayernLB actually
drew on the special-purpose reserve was in 1998, when it
used DEM 14 million for a period of only one month.

(28) Before the transfer took place, the loans in question had
been valued in two expert reports, dated 5 October 1994
and 30 April 1996, by the auditors […] (15), and the
resulting cash value of
the loan claims was paid to
BayernLB as equity capital in the form of a capital reserve.
The cash value of the first instalment made on 31 December
1994 stood at DEM 655 million, and that of the second
instalment made on 31 December 1995 at DEM 542 million.
This
totalling
constituted a
DEM 1 197 million.

special-purpose

reserve

(29) By letter of 8 May 1996, the Federal Banking Supervisory
das Kreditwesen, or
Authority
‘BAKred’ (16) ) indicated that it recognised the full amount

(Bundesaufsichtsamt

für

(14) Under the Solvency Directive, credit insitutions must have own
funds equivalent to at least 8 % of their risk-adjusted assets, whereas
the previous German legislation required a ratio of 5,6 %; however,
this ratio was based on a narrower definition of own funds than that
which has applied since the entry into force of the Own Funds
Directive.

(15) Confidential information.
(16) Now the Bundesanstalt für Finanzdienstleistungsaufsicht (‘BaFin’).
(17) Letter of 20 December 1996 from BAKred.

(33) Germany also argued that the cash value of the special-
purpose reserve recognised by BAKred as own funds
(DEM 1 197 million) should be understood as merely as an
upper limit on the amount available to cover risk assets and
that it was not permanently available to the full extent of
that amount to underpin lending. Indeed the cash value
fluctuated, mainly because of the current use of
liquid
funds to grant loans afresh (on which the Land alone could
decide in accordance with Section 1(3) of the transfer
agreement) (18) , but also because of discounts granted on
the outstanding principal for reasons to do with promotion.
Thus, the cash value of the special-purpose assets was lower
than the amount of DEM 1 197 million recognised for
supervisory purposes by DEM […] in 1998 and by €[…] in
1999 and had to be offset by drawing on other items of
capital. Germany argued that the full amount of the capital
recognised by BAKred was therefore not available through-
out to cover risk-bearing assets.

(18) As Germany has submitted, this could lower the cash value of the
special-purpose assets where the average maturity was long and lead
to a higher cash value where the average maturity was shorter.
Where the actual cash value exceeded the sum of DEM 1 197 million
recognised by BAKred and entered in the balance sheet,
the
difference was booked as a provision to offset risks arising from
changes in the cash value.

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(34) Germany provided the following figures on the actual fluctuations (Figure 1):

1994

1995

1996

1997

1998

1998

1999

2000

2001

2002

2003

DEM 1000

DEM 1000

DEM 1000

DEM 1000

DEM 1000

EUR 1000

EUR 1000

EUR 1000

EUR 1000

EUR 1000

EUR 1000

655 728 1 233 164 1 229 258 1 255 390

[…]

[…]

[…]

[…]

[…]

[…]

577 436

- 3 906

26 132

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

655 000 1 197 000 1 197 000 1 197 000 1 197 000

612 016

612 016

612 016

612 016

612 016

612 016

728

36 164

32 258

58 390

[…] (1)

[…]

[…]

[…]

[…]

[…]

[…]

Cash value of special-
purpose assets

Change in cash
value of special-pur-
pose assets

Special-purpose
reserve shown as
equity

Difference between
cash value and
amount shown as
equity

(1)

The only reason why this fall of DEM […] brought the cash value to a level that was only DEM […] million below the upper limit recognised for supervisory purposes (DEM 1 197 million) was
the (chance) circumstance that the cash value had exceeded that upper limit in 1997.

5.

REMUNERATION FOR THE OWN FUNDS

TRANSFERRED

the transfer agreement of 28 December 1995, BayernLB
paid a fee of 0,05 % to the Land for a default guarantee for
loans from the special-purpose assets. Germany provided
detailed figures for the payments made.

(35) Under Section 4(1) of the transfer agreement of 15 Decem-
ber 1994 between the Land of Bavaria and BayernLB,
remuneration was agreed for the funds made available as a
result of the transfer, but only on the amount actually used.
The agreed rate was 0,6 % — payable out of income from
banking business — on that portion of the transferred
funds actually used to underpin competitive business, and
the remuneration would fall due when the balance sheet for
the relevant business year was established (19) . According
to the information supplied by Germany, the rate was fixed
taking into account the fact that the special-purpose reserve
liquidity, with the
was being made available without
consequence that any actual business expansion would
have to be refinanced entirely by borrowing liquid funds.

(36) Germany also stated that the remuneration for the special-
purpose assets was treated for tax purposes as use of
profits, could therefore not be deducted as operating
expenditure and, as a result, was payable after tax.

(37) With regard to the basis of assessment for the remuneration
payable, Germany stated during the proceedings that, in the
event of the special-purpose reserve being used in full, the
agreed remuneration of 0,6 % per annum (20) would have
amounted to some DEM 7,2 million. As mentioned above,
Germany stated that BayernLB actually drew on the special-
purpose reserve only once: in 1998 it used DEM 14 million
for a period of only one month,
for which it paid
remuneration of DEM 7 000.

(38) Moreover, under Section 6(2) of the transfer agreement of
15 December 1994, read in conjunction with Section 2 of

(19) Transfer agreement of 15 December 1994, Section 4(3).
(20) Transfer agreement of 15 December 1994, Section 4(1).

III.

GROUNDS FOR INITIATING THE PROCEDURE

(39)

In its decision of 13 November 2002 initiating the
procedure, the Commission concluded that the transfer of
housing-promotion loans by the Land of Bavaria to
BayernLB probably constituted state aid within the meaning
of Article 87(1) of the EC Treaty.

(40) The starting point for its investigation was the principle of
the market-economy investor. According to this principle, it
is not the fact that undertakings are publicly owned and
receive funding from the public authorities which con-
stitutes state aid. The provision of public money confers an
advantage only if funds are made available to such a public
undertaking on terms which it would not have obtained
under normal market conditions.

(41)

In the present case, the Commission regarded the economic
advantage conferred on BayernLB by the injection of own
funds as consisting in particular in the increase in its
commercial, competitive lending capacity (by dint of the
business-expansion function of equity capital). Under
normal market conditions, the capital contribution would
be remunerated in line with the value of the contributed
capital, taking account of its function and the risk incurred.
One method of determining the normal market remunera-
tion for the contributed capital was thus to take the long-
term risk-free rate (for 10-year Federal bonds) and apply to

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it a risk premium corresponding to the higher risk of equity
capital. As Germany had already indicated that the rate of
remuneration for a long-term, risk-free investment stood at
7,9 % per annum at the end of 1994, when the transfer of
assets took place, the Commission had serious doubts as to
whether a remuneration of 0,6 % per annum for the equity
capital actually used could be deemed normal
for the
market, irrespective of any necessary risk premium.

IV.

COMMENTS FROM GERMANY

(46)

In its comments on the decision initiating the procedure,
Germany took the view that, unlike in the WestLB case, the
transfer of
the special-purpose assets to BayernLB was
comparable not to an injection of share capital but to the
contribution of a silent partner within the meaning of
the German Banking Act, something
Section 10(4) of
which the Commission had failed to take into account.

(42) The Commission also doubted whether a market-economy
investor would have agreed to limit remuneration to the
portion of the funds actually used. It also seemed doubtful
that
the additional elements of remuneration cited by
Germany, such as the fee equal to 0,05 % per annum of
guaranteed transferred claims and payable to the Land for a
default guarantee covering the loan claims, the interest
payments made by borrowers (and also accruing to the
investments
Land) or
abroad (21)
the
business-expansion function of equity capital.

the
, actually constituted remuneration for

interest on intermediate

(43) However, the Commission acknowledged that the con-
liquidity should be taken into
tributed capital's lack of
account when determining the normal market remunera-
tion. Under Article 1 of the Special-purpose Assets Act, the
housing-promotion loans
forming the special-purpose
reserve had to be used in the same way as prior to the
transfer for the purposes of social-housing construction.
The transfer of the housing-promotion assets therefore did
not provide BayernLB with liquidity. Although the bank's
non-liquid capital permitted an increase in the volume of its
activities, it had to be borne in mind that BayernLB was able
to achieve the full extent possible of any increase in its
business volume only if it refinanced the additional lending
in full on the capital market. The Land could not therefore
expect exactly the same return as a provider of
liquid
capital, and the appropriate remuneration had to be
reduced accordingly.

(44) The Commission could not see that

the Land, when
transferring the housing-promotion loans, had ensured that
it was going to participate to an appropriate extent in the
distribution of the bank's profits and the increase in its
value. In particular, the Land did not insist on a change in
the ownership structure in its favour, which it would have
had to do in order to ensure that dividend payments and
increases in value were consistent with the level of invested
capital.

(45) As none of the exemptions provided for in Article 87(2)
and (3) or Article 86(2) of the EC Treaty applied in the
present case, the state aid appeared not to be compatible
with the common market.

(21) Transfer agreement of 15 December 1994, Section 2(1).

(47) What was decisive in Germany's view was that, up to the
end of 1996, when the special-purpose assets were
recognised for supervisory purposes, the Bavarian savings
banks and private investors had provided BayernLB with
core capital of just under DEM 1 300 million (of which
some DEM 900 million from the savings banks) in the form
of silent partnerships. These silent partnership assets were
recognised by BAKred as core capital within the meaning of
Section 10(4) of the Banking Act. At the time of the
transfer, therefore, silent partnerships already constituted a
normal means of procuring core capital for BayernLB.

(48) Furthermore,

the special-purpose assets were, by their
nature, comparable to BayernLB's silent partnerships. In
terms of their economic function, i.e. providing scope for
business expansion, both forms of capital were identical
since both were recognised as core capital. Neither would
have contributed directly to increases in the bank's value or
conferred additional voting rights. Nor was there any
difference between them as far as the risk of
loss was
concerned since both could be used to offset any loss. The
only difference was that the special-purpose assets had been
made available for an unlimited period of time, whereas
silent partnerships were typically limited in time. However,
the special-purpose reserve should not necessarily be
regarded as unlimited, but could be terminated by
agreement at any time. Moreover, unlimited silent partner-
ships also existed. A comparison showed that there was no
significant difference
in price between limited and
unlimited silent partnership contributions.

(49) Germany also argued that the special-purpose assets were
not exposed to the risk of loss in the same way as share
capital. Unlike in the WestLB case, where the transferred
Wfa assets made up almost 50 % of the bank's equity
capital, the transferred housing-promotion loans accounted
for only around 8 % of BayernLB's equity capital at the time
of the transfer. Moreover, unlike WestLB, BayernLB was not
dependent on the core capital constituted by the housing
assets. The bank had always been profitable and already had
significant equity capital before the transfer, by virtue not
least of the silent partnership contributions invested by the
Bavarian savings banks and by private companies from
the Land of Bavaria and
1991 onwards. Furthermore,

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BayernLB had agreed that the special-purpose assets would
be used to cover risk assets only when all other capital
items had been used.

(50) Another

risk in
reason why the Land faced a lower
transferring the assets than an investor in share capital was
that, pursuant to Section 2 of the agreement between the
Land of Bavaria and the Bavarian Sparkassenverband of
15 December 1994, the latter was required, as second
shareholder, to bear half of any loss suffered by BayernLB in
the event of the special-purpose reserve being depleted or
used by BayernLB's creditors to cover losses.

preventing the special-purpose assets from being reduced
by defaults on loans (22) . With reference to the expert
reports by […]dated 5 October 1994 and 30 April 1996,
Germany argued that, without
the default guarantee
provided by the Land, the capitalisation interest rate of
7,5 % used to calculate the cash value of the claims would
have had to have been increased by a risk premium. A
lower cash value would have resulted and so only a lower
amount could have been recognised by BAKred (23).

(54)

the proceedings, Germany expressly
In the course of
abandoned its earlier standpoint
the interest on
that
intermediate investments and the interest payments by
borrowers accruing to the Land could be viewed as
elements of remuneration.

(55) As for the normal market remuneration, Germany stated
that, since the assets were comparable to BayernLB's silent
partnerships,
rate should be that paid by
BayernLB to its silent partners in the relevant period, i.e.
some 7-8 % per annum of their nominal value.

the initial

1.

APPROPRIATE REMUNERATION FOR THE SPECIAL

(56)

PURPOSE ASSETS

(51) Based on the assumption that the capital made available
was comparable — as a core capital instrument — to silent
investment,
partnerships and not
Germany came
appropriate
remuneration was provided for the special-purpose assets
therefore, no advantage was conferred on
and that,
BayernLB, thereby ruling out the presence of any state aid.

to a share capital
conclusion that

to the

(52) According to Germany, the agreed remuneration took the
form of the guarantee commission (Haftungsprovision) —
dependent on capital used and paid out of income from
banking business — equal to 0,6 % per annum of the value
of the special-purpose reserve recognised for supervisory
purposes as core capital.

(53)

In Germany's view, the fee (Bürgschaftsgebühr) of 0,05 % per
annum for the loan claims guaranteed by the Land can also
be viewed as remuneration for the transfer of the special-
purpose assets, as provision of the guarantee was directly
linked to the aim of increasing the Landesbank's equity
capital. According to the explanatory memorandum to the
Act, the guarantee was necessary to ensure the desired
the Landesbank's equity capital by
strengthening of

It argued that the lack of liquidity alone should lead to a
considerable reduction in this initial rate. In this case, not
only the net refinancing costs should be deducted, as in the
WestLB case, but also the gross refinancing costs. Given
that the capital injection into BayernLB made up only 8 %
of equity capital and not 50 % as in the WestLB case, a
private investor could not have deducted the net refinan-
cing costs alone.

2.

FAILURE TO CHANGE OWNERSHIP STRUCTURE AND

OWNER EFFECT

(57)

In its comments on the Commission's decision to initiate
proceedings, Germany also pointed out that, given that the
special-purpose assets only involved capital
that was
comparable to silent partnerships, Germany felt that a
change in the ownership of BayernLB in favour of the Land
was not necessary. Even so, the Sparkassenverband would
scarcely have agreed to a change in ownership to its
detriment since there was no need for additional capital at
the time of the transfer and since it had itself previously
invested DEM 900 million in the bank in the form of silent
partnership contributions (24) , without the Land of Bavaria
making a comparable contribution.

(22) See explanatory memorandum to Article 3, on the default guarantee,
of the Act of 23 July 1994 on the formation of special-purpose assets
through the transfer of trustee claims belonging to the Land of
Bavaria to the liable equity capital of Bayerische Landesbank —
Girozentrale (Bavarian Land Parliament, document 12/15851).
(23) Germany also argues that, without the guarantee, the assets would
have been given a 100 % weighting in accordance with Principle 1 of
the German Banking Act and would in principle have had to have
been covered by 8 % of equity capital. The loan claims did not meet
the particularly favourable conditions for a weighting as real-estate
the Act. The transferred lending
loans within the meaning of
volumes would accordingly have had to be covered by some
DEM 400 million in equity capital and would have reduced the
recognised amount by the same figure.

(24) At the end of 1995, when the second instalment was transferred, the
figure was already DEM 1 100 million, according to the information
in the Commission's possession.

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(58) Germany also stated that, as a 50 % shareholder, the Land
could assume that it would benefit from very favourable
capital returns compared with other credit institutions. The
Land would therefore not have been content with a limited
return or no return at all. This should be taken into account
by the Commission in its assessment of the investment.

V.

COMMENTS FROM THE COMPLAINANT BDB

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

(60)

In its comments of 29 July 2003 on the proceedings
initiated in respect of the Landesbanks on 13 November
2002, the BdB stated that the question of whether the
remuneration was appropriate should be determined using
the method employed by the Commission in its WestLB
decision of 8 July 1999.

in Germany. Any comparison with silent
core capital
partnership contributions could be ruled out across the
board. First, unlike share capital, silent partnerships were
valid for a limited period only or could be terminated and
had to be paid back to the investor on maturity. An investor
could not therefore expect to receive the same remunera-
tion for a silent partnership contribution as for equity
instruments recognised for supervisory purposes for an
unlimited period.

(65) Second, although in some cases it was asserted that the
transferred capital was subordinate in liability to share
capital pursuant to agreements between the Landesbanks'
owners, this did not necessarily mean a lower risk for the
investor. In all the cases the transferred capital made up a
significant proportion of the total core capital, sometimes
even more than 50 %. This made it extremely likely that the
injected capital could be drawn on — at least in part — in
the event of losses (25).

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

applied by virtue of

and discounts

1.

COMPARISON WITH OTHER EQUITY INSTRUMENTS

(62)

In its comments of 29 July 2003 the BdB came to the
conclusion that the transfer of housing-construction and
promotion assets in the BayernLB case and in the other
above-mentioned Landesbank cases can be compared to an
injection of share capital.

(63) Nearly all the Landesbanks are said to have required fresh
core capital from 1992 onwards in order to meet the
stricter
requirements arising from the new Solvency
Directive. Without these increases in capital, the Land-
esbanks would have had to scale down their business. It can
therefore be concluded, the BdB argues, that the capital
injected can be compared only with equity instruments that
were recognised as core capital (‘tier I 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 are
recognised not as core capital but as additional capital (‘tier
II capital’). Moreover, perpetual preferred shares did not
exist in Germany at the beginning of the 1990s.

(64) At the time of the respective transfers, only share capital
and silent partnership contributions were recognised as

(66) Third,

the BdB submits that

the difference in quality
between silent partnership contributions and share capital
is confirmed by the definition of core capital for super-
visory purposes adopted by the Basle Committee for
Banking Supervision. According to this definition, silent
partnership contributions must be recognised for super-
visory purposes as no more than lower tier I capital, which
may account for no more than 15 % of the requisite core-
capital ratio. In other words, where the core-capital ratio is
4 %, 3,4 % must be made up of nominal capital and open
reserves (e.g. the special-purpose reserve transferred to the
Landesbanks). Furthermore, banks only ever
took up
subordinate equity instruments such as preference shares
or profit participation rights in small volumes. Under
pressure from the rating agencies, such instruments hardly
ever accounted for more than 10 % of a bank's total core
capital — a very different situation from that in the cases
under examination. Against this background, silent partner-
ship contributions could not be used for large volumes
invested by a single investor.

2.

MINIMUM REMUNERATION FOR A SHARE-CAPITAL

INVESTMENT IN BAYERNLB

(67) The BdB argues that all methods of determining an
appropriate remuneration (return)
for the provision of
share 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 risky investment
= risk-free return + risk premium for the risky investment

(25) Moreover, a risk or liability premium was paid primarily because of
the risk of loss in the event of insolvency. If this were to happen, the
capital would be irretrievably lost. In the event of ongoing (partial)
losses, i.e. outside insolvency, there was always a chance that the
equity capital might be replenished through profits.

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(68) To determine the risk-free return, the BdB used 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 (26).

(73)

In the BdB's view, the premium added by the Commission
in the WestLB case (1,5 %) and upheld as such by the Court
of First Instance should also be applied in the BayernLB
case. The three factors cited in the WestLB decision as
increasing risk as compared with a ‘normal share capital
in part
investment’
exceptionally high volume of assets transferred, the failure
to issue new company shares and the associated absence of
additional voting rights, and the lack of marketability of the
investment,
the impossibility of withdrawing the
invested capital from the company again at any time

into play here:

also came

the

i.e.

4.

CAPITAL BASIS AND ELEMENTS OF REMUNERATION

(74) Lastly, the BdB argued that, in calculating the appropriate
remuneration in BayernLB's case,
the entire amount
recognised as core capital should be taken into account,
and not just the part which was actually used. It backed 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 correspond-
ing return.

(75) Nor does the BdB regard the guarantee fee mentioned by
Germany as forming an element of remuneration. This was
in particular because the transfer was made at its cash value
its nominal value
(DEM 1 197 million) and not at
(DEM 5 027 million). The fact that the cash value was
used meant that account was already taken of the (default)
risks connected with uncollectible loan claims and that
there was no justification for any additional remuneration
for the default guarantee.

(69) To derive the risk premium, the BdB first worked out the
‘market risk premium’, i.e. the difference between the long-
term average return on shares and that on government
bonds. In its comments of 29 July 2003, it assumed in the
first place a long-term market risk premium of a uniform
4,6 %, with reference to a 1991 study by Stehle-Hartmond.

(70) The BdB then determined the beta value for the Land-
esbanks, i.e. the individual risk premium for the banks by
which the general market risk premium was to be adjusted.
The BdB stated in its comments that it had determined the
beta values statistically, which means that it estimated them
on the basis of a historical data sample. The BdB came to
the initial conclusion that all the beta values for all the
Landesbanks and periods considered were greater than
one (27).

(71) Assuming a risk-free basic interest rate of 8,37 % (for the
first instalment) and 6,57 % (for the second instalment) and
a beta factor for BayernLB of 1,0803 (when the first
instalment was made) and 1,0739 (when the second
instalment was made), the BdB calculated the expected
minimum remuneration for a hypothetical investment in
the capital of BayernLB at the time when the building-loan
claims were transferred to be 13,34 % per annum on
31 December 1994 and 12,87 % per annum on 31 Decem-
ber 1995.

3.

PREMIUMS AND DISCOUNTS ON ACCOUNT OF THE

PARTICULARITIES OF THE TRANSACTIONS

(72) The BdB also noted that the Commission's deduction, in its
WestLB decision,
from the minimum remuneration to
allow for the lack of liquidity of the Wfa's assets was upheld
by the Court of First Instance. It therefore saw 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
the
applicable corporation tax).

refinancing costs minus

(gross

(26) 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.

(27) 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.

(76) Applying the WestLB method, a guarantee commission of
0,3 % per annum should also be paid for the period
between the transfer of the capital and its recognition as
core capital, since the injected capital had at
least a
guarantee function up to that point. This applied up to
8 May 1996 for the full amount of DEM 1 197 million and
between 8 May and 23 December 1996 for the amount of
DEM 542 million.

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VI.

GERMANY'S RESPONSE TO THE BDB'S

COMMENTS

(77)

in the case of BayernLB,

In its reply to the above-mentioned comments from the
BdB, Germany pointed out that an investment in the share
capital of a public limited company does not guarantee
either dividends or an increase in equity price or value and
that an investor naturally bears the risk of his return
expectations not actually being fulfilled. Setting a fixed
remuneration, as
removed
forecasting risks and the return was therefore generally
lower. This shows that it would not have been normal
market practice if BayernLB had, at the time of the injection
the special-purpose assets, guaranteed the Land of
of
Bavaria a return that was merely expected, thereby placing
the investor in special assets on a better footing than an
investor in shares. The BdB's method was also problematic
in that an investor in shares could realise the increase in
value only by selling his shares, without burdening the
company. A private investor could never have persuaded a
company in which he was investing to pay from its assets
the equivalent of increases in value which an investor in
share capital could have realised only by selling to a third
party.

(78) The CAPM method was

said to be unsuitable for
determining the market return.
the risk
assumed in the CAPM to account for market fluctuations
did not exist, as the Landesbanks were not quoted on the
stock exchange. There were therefore no historical data
series for beta factors.

In particular,

(79) Germany also felt

that

to take account of

the BdB committed errors in
determining the individual components of the CAPM. It
was incorrect
long-term inflation
expectations
in setting the risk-free base rate. What
mattered was only which rates could actually be obtained
on the market. At the time of the transfers of the special-
purpose assets to BayernLB, these were only 7,50 % and
6,10 % per annum respectively. Current inflation expecta-
tions were already factored in.

(80) The market risk premium of 4,6 % applied by the BdB was
inappropriately high. Among other
things Germany
pointed out that the 1991 study of trends in returns on
the German stock market, carried out by Stehle/Harmond
and referred to by the BdB, said nothing about the market
risk premium on the German capital market. Furthermore,
there were different methods of determining the market
risk premium, all producing different results. Using its own
calculations, Germany demonstrated that in the last 30
years the market risk premium had never reached anything
approaching 4,6 %.

(81) Also, in defining the beta value, Landesbanks should not be
compared to ‘commercial banks’, which, moreover, had not

been clearly defined by the BdB. At most, the calculation
should be based on the clearly defined group of
listed
banks, the so-called CDAX banks. Taking a reference period
of five years, a beta value of 0,85 at 31 December 1994 and
0,80 at 31 December 1995 was obtained for this group on
a monthly basis, as could be seen from the attached
calculations from the Datastream database, which correctly
used only a five-year period for calculating beta factors. The
period from 1974, which the BdB used to calculate the beta
factor, was too long, as both the capital market environ-
ment and the banking sector changed significantly in the
early 1990s.

(82) Germany therefore argued that all the factors required for
the CAPM had been wrongly established and that the
appropriate minimum market rates for the transactions in
question had been overestimated.

VII.

COMMENTS BY THE LAND OF NORTH RHINE-

WESTPHALIA AND WESTLB

(83) On 30 October 2003 the Federal Government forwarded a
response from the Land of North Rhine-Westphalia and
WestLB to the Commission's decision of 13 November
2002 to initiate the investigation procedure in which they
disputed the statement that the assets transferred to the
Landesbanks could be compared to share capital. They
argued that silent partnership contributions and ‘perpetuals’
had in fact been recognised as core capital in Germany
since 1991. They added that remuneration for an invest-
ment 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 contributions or ‘perpe-
tuals’ than with share-capital investments.

(84) 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
BdB — at well over 1 — were inappropriate. A beta factor
of more than 1 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.

(85) Moreover, they argued that,

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

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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.

of the study by […], the beta factor was calculated at 0,593
on 31 December 1994 and 0,475 on 31 December 1995. A
market-risk premium of 4 % was determined for all the
Landesbanks.

(86) 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
independent of the tax situation. Otherwise the price of a
capital market instrument would have to differ according to
tax considerations.

the asset

transfers.

(87) Finally, 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 — and 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.

VIII.

UNDERSTANDING BETWEEN THE BDB, THE
LAND OF BAVARIA AND BAYERNLB

(88) On 24 September 2004 the BdB, the Land of Bavaria and
the BayernLB submitted to the Commission an under-
standing on the BayernLB case. Irrespective of their basic
interpretations of
the legal situation, which remained
unchanged, the parties to the understanding agreed on
what they themselves regarded as suitable parameters for
determining an appropriate remuneration for a hypothe-
in BayernLB. The parties
tical share-capital
asked the Commission to take account of
this under-
standing in its decision.

investment

(89) Applying the CAPM,

the parties first determined the
a hypothetical
minimum expected remuneration for
share-capital
investment in BayernLB. On this basis, the
appropriate minimum renumeration for the first instalment
of the special-purpose assets should amount to 9,87 % per
annum and for the second instalment to 8,0 %.

(90) To arrive at this figure, the parties used the long-term risk-
free interest rates calculated on the basis of the REX10
Performance Index of Deutsche Börse AG and beta factors
estimated on the basis of a study by […] of 26 May 2004
commissioned by the Landesbanks. In practical terms, this
resulted for BayernLB in a risk-free basic interest rate of
7,5 % on 31 December 1994 and 6,1 % on 31 December
1995 (the dates when the transfers took place). On the basis

(91) The initial interest rate of 9,87 % (31 December 1994) was
calculated as follows: risk-free interest rate of 7,5 % +
(general market-risk premium of 4,0 % × beta factor of
0,593).

(92) The initial interest rate of 8,00 % (31 December 1995) was
calculated as follows: risk-free interest rate of 6,1 % +
(general market-risk premium of 4,0 % × beta factor of
0,475).

(93) A deduction was then made to take account of the lack of
liquidity of the special-purpose assets. For this the risk-free
interest rates of 7,5 % and 6,1 % were applied generally as
gross refinancing costs. To determine the key net refinan-
cing costs, the overall tax rate for BayernLB was fixed at
50 %, leading to deductions for lack of liquidity of 3,75 %
(31 December 1994) and 3,05 % (31 December 1995).

(94) Lastly, a premium of 0,3 % was added because no new

voting rights were granted.

(95) Altogether this produced an appropriate remuneration for
the special-purpose assets of 6,42 % (first instalment) and
5,25 % (second instalment) after tax, which is payable on
the full amount recognised by BAKred as core capital, from
the end of the month in which recognition was granted (i.e.
from 31 May 1996 onwards for the amount of DEM 655
million and from 31 December 1996 onwards for the total
amount of DEM 1 197 million). For 1998 and 1999, when
fluctuations actually pushed the cash value below the
amount recognised by BAKred, only the lower cash value is
used as a basis for the calculation.

(96) According to the understanding, the aid element, which
BayernLB must pay back, resides in the difference between
the 0,6 % per annum remuneration actually paid by
BayernLB on the part of the special-purpose assets used
to cover risk-bearing assets and the remuneration deter-
mined as appropriate — 6,42 % for the first instalment and
5,25 % for the second instalment.

(97) The parties were unable to agree on whether the 0,05 %
commission paid by BayernLB for a guarantee by the Land
of Bavaria on the nominal value of the special-purpose
assets constituted an additional element of remuneration
that had to be deducted.

(98) The understanding itself made no mention of any guarantee
commission payable for the period between the transfer of
the capital into the Bank and its recognition by BAKred as

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core capital. However, in a table calculating the aid element
and attached to the understanding, the parties took as a
basis a guarantee commission for that period of 0,15 % per
annum after tax for both instalments.

IX.

ASSESSMENT OF THE MEASURES

1.

STATE AID WITHIN THE MEANING OF ARTICLE 87(1)

OF THE EC TREATY

(99) Article 87(1) of the EC Treaty states that, save as otherwise
provided in the 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 trade between Member States is
affected.

1.1.

STATE RESOURCES

(100) With the transfer of assets described above, the Land of
Bavaria opted for a form of capital increase based on the
transferring public building-loan claims to
concept of
BayernLB in order to strengthen its equity-capital base (28) .
In spite of the fact that the returns from these claims were
still available for housing construction 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 BayernLB, which was in
competition with other credit institutions. Also, under a
law adopted by the Bavarian Parliament, the Land of Bavaria
was empowered to conclude an agreement transferring to
BayernLB the public loans used to promote housing
construction. Thus state resources were transferred to
BayernLB.

1.2.

FAVOURING OF A PARTICULAR UNDERTAKING

(101) 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’. The European Court
of Justice and Court of First Instance have accepted and
developed this principle in a number of cases, most recently
in the judgment of the Court of First Instance of 6 March
2003 in the WestLB case (29).

a) Market-economy investor principle

(102) 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’ (30) . In con-
trast, the undertaking is being favoured within the meaning
of Article 87(1) of the EC Treaty if the agreed remuneration
and/or the financial position of the undertaking are such
that a normal return on investment cannot be expected
within a reasonable period of time (31).

(103) The market-economy investor principle applies to all public
undertakings, regardless of whether they are profitable or
not. This view of the Commission has been confirmed by
the Court of First Instance in WestLB (32).

(104) It

that

is also clear

the Commission must base its
assessment of a case on the information that was available
to the investor when he decided on the financial measure in
question. The transfer of the special-purpose assets was
decided in 1994 and 1995 by the relevant public bodies.
The Commission must therefore assess the transaction on
the basis of the information available and the economic
and market circumstances obtaining at
the time. The
figures provided in this decision that refer to subsequent
years are used only to illustrate the effects of the transfer on
BayernLB's situation and not to justify or question the
transaction after the event.

(105) As explained above, application of the ‘market-economy
investor principle’ entails an assessment of whether the
expected and/or agreed remuneration for the transferred
resources is lower than the remuneration paid on the
market for comparable investments. The fact that the Land
of Bavaria already owned half of the credit institution's
shares does not stand in the way of such an assessment. In
this regard Germany argues that the Land's investment here
is not comparable to that of any third party which is
interested only in achieving the best possible return on its
capital. According to Germany, the main concern of the
Land, as owner of half of the shares, was to maintain the
long-term competitiveness of its affiliated state bank and,
by injecting new funds, to ensure that ‘its’ bank could carry
on serving its existing customers in future. Lastly, the
investment was also said to be guided by considerations
relating to brand image. Given the bank's position at that
time, Germany argues, even a private shareholder such as a
private holding company or group of companies would

(30) Commission communication to the Member States: 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; see paragraph 11. Although this
communication deals expressly with manufacturing, the principle
doubtless applies likewise to all other sectors of the economy. As
regards financial services, this approach was confirmed by a number
of Commission decisions, e.g. in Crédit Lyonnais (OJ L 221, 8.8.1998,
p. 28) and GAN (OJ L 78, 16.3.1998, p. 1).

(28) Bavarian Land Parliament, 12th session, document 12/15851 of

(31) Public authorities' holdings in company capital — Commission

7 June 1994.
(29) See footnote 4.

position (Bull.-EC 9-1984, pp.93-95).

(32) See footnote 4 and paragraphs 206 et seq of the judgment.

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have injected capital, and achieving an optimum return
would not have been the only major consideration.

(106) However,

the Commission cannot accept Germany's
arguments. Even if a market-economy investor already
holds shares in an undertaking, he will investigate other
investment options outside that undertaking. As a rule he
will then choose to invest further resources in the public
undertaking only if he can expect a reasonable return on
the investment of the fresh capital contributions. So, in
determining whether a capital
injection constitutes state
in principle disregard the shareholder's
aid, one must
long-term profitability or even the simple
prospects of
concern to maintain a brand image. Whatever the motives
behind it, a capital injection by a shareholder should be
measured instead according to whether the investor can
expect a normal return on the additional resources within a
reasonable period.

(107) The European Court has raised no objections to this
interpretation of the market-economy investor principle,
which the Commission has already applied in its decision
on WestLB (paragraphs 161 et seq.). The Court also adopted
as a guiding principle that even a private investor who
already owns share capital
in an undertaking is not
normally content with the fact that an investment does
not cause him a loss or yields only limited profits. On the
contrary, he will always seek to achieve a reasonable return
on his investment according to the particular circumstances
and the satisfaction of his short-, medium- or long-term
interests (33).

(108) According to the market-economy investor principle, the
key question in examining this case is, therefore, whether a
market-economy investor would have transferred under the
same conditions capital that had the same characteristics as
the promotion-related assets of
the Land of Bavaria,
especially in view of the expected return of the investment.

b) Article 295 of the Treaty

(109) Article 295 lays down that

the system of property
ownership in the various Member States must not be
affected. This does not, however, justify any infringement of
the competition rules of the Treaty.

(110) In connection with the Landesbank cases, Germany has
stated that the resources transferred could not have been
used in any other profitable manner than by being injected
into a similar public institution. Consequently, the transfer
represented the commercially most sensible use of those
assets. So any remuneration for
i.e. any
additional
return on the assets transferred, would be
sufficient to justify the transfer in the light of the market-
economy investor principle.

the transfer,

(111) This line of argument cannot be accepted. It may be that the
transfer of the promotion-related assets to BayernLB and
the resulting opportunity for the bank to use the capital for
solvency purposes was the economically most sensible use
to which it could be put. However, as soon as public monies
and other assets are used for commercial, competition-
oriented activities,
rules must be
applied. This means that the State, once it decides to use
certain assets (also) commercially for public purposes, must
demand a remuneration in line with the normal market
remuneration.

the normal market

c)

No change in ownership structure

(112) One way of ensuring an adequate return on the capital
provided would have been to increase the Land's participa-
tion in BayernLB accordingly, provided that the bank's
overall profitability corresponded to the normal rate of
return that a market-economy investor would expect from
his investment. However, this course was not adopted by
the Land.

(113) Germany argues here that, given the circumstances, not
even a private investor could have pushed through a change
in ownership structure. As owner of the other half of the
shares, the Sparkassenverband would not have agreed to a
change in ownership structure, since, at the time when the
special-purpose reserve was transferred, BayernLB needed
no extra core capital whatsoever in order to maintain its
credit volume and, under Section 2 of
the transfer
agreement, the Sparkassenverband would have borne half
of the cost of any depletion of the special-purpose reserve.
Moreover, when the first instalment was transferred, the
Bavarian savings banks had already contributed a total of
around DEM 900 million — by the time of the second
instalment it was already EUR 1 100 million — in the form
of silent partnerships, without this being matched by a
comparable contribution by the Land of Bavaria.

(114) However, if a redistribution of shares were not feasible, a
market-economy investor would,
in the Commission's
view, have embarked on the investment only if agreement
had at
least been reached on an appropriate direct
remuneration. Normally a private investor is not content
to avoid losses or to obtain a limited return on his
investment, but attempts to maximise the return on his
assets according to the circumstances in question and his
interests (34). So a private investor who already holds shares
in the beneficiary undertaking will usually insist on either a
change in ownership structure or an appropriate fixed
the
remuneration. Otherwise he would forgo part of
additional returns achieved as a result of
the capital
injection, as the other shareholders would also profit from
higher dividends and an increase in the undertaking's value
without having made a corresponding contribution.

(33) See footnote 4 and paragraphs 241, 314 of the judgment.

(34) See footnote 4 and paragraphs 320 and 335 of the judgment.

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there is no vital direct

(115) Nor is there is any call here to adopt another view based on
the fact that, at the time of the second transfer in 1995, the
Bavarian savings banks had already contributed a total of
around DEM 1 100 million to BayernLB in the form of
silent partnerships. The question can remain open as to
whether a private investor would forgo a shift in share
structure only if
the other shareholders carried out a
similar, corresponding capital injection, at the same time as
and directly linked to his own capital injection, and if their
transfers were just as likely to increase the returns. In the
link here
Commission's view,
between the silent partnership contributions and the
transfer of
the housing-promotion assets. When the
special-purpose reserve was transferred, the silent partner-
ship contributions, only some of which were for an
unlimited period, had already been transferred to BayernLB
in a series of small instalments between 1991 and 1995.
They were therefore unconnected with the transfer of the
housing-promotion assets both in timing and in material
terms. And, as far as can be ascertained, no such link can be
established later either, at
the time the assets were
transferred. For example, there was no agreement to the
effect that the savings banks must always maintain the total
volume of their investment at a constant level (35) . Nor is it
otherwise apparent that the Land took the savings banks'
contribution into account in determining the remuneration
for its capital injection.

(116) Furthermore, the contributions are not objectively compar-
able. According to Germany, the sole compensation for the
silent partnership contributions was a fixed remuneration
at the market rate, whereas the capital contribution of the
Land of Bavaria was
remunerated partly by a fixed
remuneration and — Germany argues — partly by the
expected value increases. There was therefore no symmetry
between the two capital contributions in respect of the
components of the remuneration, which consisted of a
direct remuneration on the one hand and a value increase
on the other. The capital contribution by the Land of
Bavaria therefore differed fundamentally from the silent
partnerships of the savings banks.

remuneration in a situation comparable to the transfer of
promotion loans to BayernLB.

Owner effect

(119) Germany also submits that, as owner of half of the shares,
the Land could assume — at least at the time when the
housing-promotion assets were transferred to BayernLB —
that it would have the benefit of very advantageous capital
returns in comparison with other credit institutions, as is
clearly borne out by the capital returns achieved at that
time. So, in making its investment, the Land of Bavaria was
not content with a limited return or no return at all, but
had in mind an undertaking with above-average profit-
ability. Germany maintains that the ‘owner effect’, i.e. the
fact that the investor already holds shares in the under-
taking in which he is investing, must be taken into account
at least where an undertaking has above-average profit-
ability, the Court of First Instance having acknowledged as
much in its judgment in WestLB.

(120) The Commission cannot accept Germany's argument. At
the time of the investment, the Land of Bavaria owned only
half of the shares. It would therefore benefit from only half
of the increase in the undertaking's value and dividends
which might be expected as a result of the investment,
although it alone had made that investment. No market-
economy investor would agree, as joint owner, to bear the
entire cost of an investment if it were then to realise only
part of the gains from it. Contrary to Germany's claims, the
Court has specifically confirmed this view in its judgment
in WestLB (37). The Court found that it is not consistent
with the conduct of a market-economy investor if an
increase in capital generates profits for the other share-
holders of an undertaking without their contributing in any
way to them.

Instance in Alitalia (36). However,

(117) Germany also refers here to the decision by the Court of
First
that decision
concerned investments by a private investor, whereas the
Sparkassenverband and the savings banks are not private,
the
but public-law bodies. Moreover, as shown above,
capital contributions were not comparable to the transfer of
the housing-promotion assets either
in
content.

in timing or

(118) In conclusion, there is nothing to indicate that a private
an appropriate direct

investor would have

forgone

(35) Nor can this be inferred from the law or the by-laws, which merely
state that the ‘share capital’ is to be supplied by the two shareholders
or — in the case of the Sparkassenverband — by the savings banks
themselves.

(36) Judgment given on 12 December 2000 in Case T-296/97 [2000]

ECR II 3871.

the

(121) Even in the case of an undertaking with above-average
profitability, as BayernLB is described by Germany, the key
point is not by how much its profitability lies above the
average and whether
investor may nevertheless
continue to achieve a satisfactory return in overall terms
at the time of the investment. Even where the undertaking
is far more profitable than average, the private investor
would take care to realise all the additional gains made
possible by his investment. Where the investment is made
by only one joint owner and there is no proportional
increase in shares at the expense of the other (inactive) joint
owners or
to make a
corresponding and proportional parallel contribution, this
can be achieved only by opting for an advance remunera-
tion at the expense of all joint owners, paid direct to the

joint owners

the other

fail

(37) See footnote 4 and paragraph 316.

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investor, independently of his owner status and for his sole
benefit, before the regular dividends.

d)

Capital basis for the remuneration and elements of
the remuneration

i)

Capital basis

(122) As in the WestLB case, the Commission has determined the
appropriate remuneration for the transferred housing–
commercial
promotion assets
usefulness for BayernLB, while drawing a distinction in
the present case between the ‘business-expansion function’
and the (mere)
‘guarantee function’ of the assets made
available as equity capital for the bank's business activities.

light of

in the

their

(123) 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 remu-
neration is the remuneration that would be demanded by a
private investor providing a bank with equity capital.
Where the capital provided is shown in the balance sheet as
equity but
is not recognised as such for supervisory
purposes or is intended to underpin promotion activities, it
is not available for expanding business. However, equity is
also important for reasons other than banking supervision.
for the
Its availability to the bank's creditors at
purposes of covering liabilities (‘guarantee 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 is an indication for the bank's lenders of its
soundness and thus influences 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 from a credit institution
comparable to BayernLB in size and risk strategy.

the ‘guarantee function’ of capital

least

sheet (38). Germany submits that all of BayernLB's housing-
promotion assets concentrated in the special-purpose
reserve were also available to underpin its competitive
business (39). Unlike in the WestLB case, there were no
plans to use part of the special-purpose reserve for the
additional purpose of underpinning the bank's promotion
business. So the question does not arise here as to whether
part of the special-purpose reserve shown in the balance
sheet as own funds might only have served a guarantee
function for BayernLB. The value of the special-purpose
therefore
reserve recognised for
forms the basis for determining the appropriate remunera-
tion for the business-expansion function of the capital
provided.

supervisory purposes

(126) The Commission acknowledges here that,

by

the

amount

recognised

in 1998 and
1999, the cash value of the special-purpose reserve fell
below
BAKred
(DEM 1 197 million) and hence during those years the
full amount of the special-purpose reserve recognised by
BAKred was not available for underpinning competitive
business. Although the Land's default guarantee for loans
from the special-purpose assets secured at least the return
flow from the loan claims concentrated in the special-
purpose reserve, the cash value could still fall below the
reference amount, for example when the returned funds
were granted afresh to promote housing construction,
whereby the Land held sole decision-making power
pursuant to the transfer agreement. No agreement was
concluded whereby the Land guaranteed that the trans-
ferred assets would not fall below a certain cash value.
Consequently,
for 1998 and 1999, when fluctuations
pushed the cash value below the amount recognised by
BAKred, only the lower cash value should be used as a basis
for calculation. The parties to the understanding submitted
on 24 September 2004 also agreed on this point (40).

(124) The Land of Bavaria transferred to BayernLB interest-free
and low-interest loans with a residual value of around
DEM 3 798 million on 31 December 1994 and loans with a
residual value of around DEM 1 219 million on 31 Decem-
ber 1995. An expert evaluation put the cash value of these
housing-promotion assets at DEM 655,7 million for the
first instalment and DEM 542,1 million for the second
instalment. This constituted a special-purpose reserve
totalling DEM 1 197 million, which was
shown in
BayernLB's balance sheet as own funds.

(125) BAKred had recognised as original own funds for super-
visory purposes the cash value of the two instalments —
DEM 1 197 million in total — as determined at the time of
each transfer and shown as own funds in the balance

(38) Contrast this with the WestLB case,

in which only part of the
established cash value of the housing-promotion assets shown in the
balance sheet as own funds was recognised as equity capital for
supervisory purposes.

(127) The Commission would point out once again 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

(39) Moreover, where the cash value of
the special-purpose reserve
exceeded the value recognised for
the
supervisory purposes,
difference was entered as a provision under liabilities so that none
of BayernLB's equity capital was entered on the liabilities side either
in terms of commercial law or for supervisory purposes.

(40) In the course of the procedure, Germany even felt that a further flat-
rate reduction of 25 % should be made to the cash value recognised
by BAKred. In addition to the reasons already mentioned that could
lead to fluctuations in the cash value, it argued that the Land could
have switched its promotion policy from lending to outright grants
for example, thereby reducing the cash value further. In that case the
bank could not have taken up the full amount for its competitive
business,
the
Commission concluded that a drastic reduction in the cash value was
unlikely, given the close cooperation between the Land and the bank.
Against this background it seems justified to take account only of the
actual shortfalls below the recognised cash value.

for safety's sake. After examining this argument,

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would not be happy with a remuneration dependent on the
capital being used. In this regard the Commission agrees
with the BdB's observation that, for the market-economy
investor who runs the risk of 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, 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. So the fact that BayernLB used the
injected capital only once in 1996 and even then only to a
limited extent to cover risk-bearing assets is also irrelevant
to the question of the capital basis being examined here.
The parties themselves acknowledge this point
in the
understanding submitted to the Commission on 24 Sep-
tember 2004.

(128) Moreover, for the purposes of determining the remunera-
tion for the business-expansion function of the capital, the
most important point in time is when the special-purpose
reserve was
recognised by BAKred as core capital.
According to Germany, BayernLB and the complainant, it
was only from that time on that the capital could be used
to cover risk-bearing assets.

(129) However, insofar as the capital had already been shown in
it also had at least a
the balance sheet as own funds,
guarantee function, as explained above in more detail. This
must also be taken into account
in determining the
appropriate remuneration (41).

ii) Remuneration actually paid (elements of remu-

neration)

(130) In addition to the 0,6 % per annum remuneration paid for
capital actually used to cover
the
Commission also acknowledges — contrary to the
provisional view it expressed in its decision to initiate
proceedings — the 0,05 % per annum guarantee fee which
BayernLB had to pay for assuming the Land's default
guarantee.

risk-bearing assets,

(131) With reference to expert reports by the auditors […] dated
5 October 1994 and 30 April 1996, which have been
supplied to the Commission, Germany was able to prove
that, without the default guarantee, the cash value of the
transferred loan claims would have had to have been set at
a lower level, as the fixed capitalisation interest rate of
7,5 % would have been supplemented by a risk premium.
This was also confirmed in a statement by BAFin dated
2 September 2004 which Germany submitted to the
Commission. In the Commission's view, it has therefore
been proven that the guarantee fee is also directly linked to
the business-expansion function of the liable equity capital,
for which remuneration was due, and must therefore be
recognised as a element of remuneration.

(41) In relation to the guarantee function, what matters is not the date
when the balance sheet was established (31 December of the relevant
business year), but the date when the actual transfer was made. It can
be assumed that a bank would have informed its creditors of a capital
injection, at least in the case of a large transaction. The Commission
therefore considers that the guarantee function comes into play as
soon as the balance sheet takes effect.

(132) Since the Commission's decision to initiate proceedings,
Germany has conceded that the other elements mentioned
in that decision, i.e. (1) interest payments by borrowers,
also accruing to the Land,
interest on intermediate
investments abroad and (3) proportional contributions to
administrative costs, should not be regarded as elements of
remuneration. The Commission therefore sees no reason to
depart from the views expressed in its decision to initiate
proceedings:

(2)

remuneration for

(133) Interest payments by borrowers: The arrangement laid down in
Section 2(1) of the transfer agreement, whereby future and
current interest on claims forming part of the transferred
special-purpose reserve accrue to the Land, results from the
fact that the special-purpose reserve is to be kept separate
from the bank's other assets (see Section 2(3) of the transfer
agreement). Future and current interest on claims forming
part of the special-purpose reserve cannot therefore be
the reserve's business-
regarded as
expansion function as equity capital. This Section 2(1)
arrangement is more a consequence of the requirement of
Article 1(2) of the Special-purpose Assets Act that the
transferred housing-promotion assets be used for social
purposes. Under Article 1(2) of that Act, steps must be
taken to ensure that the transferred assets are used to the
same extent as hitherto for the purposes of social-housing
construction. Consequently, future and current interest on
claims forming part of the special-purpose reserve must be
used solely for social-housing construction. The fact that
this interest accrues to the Land is thus merely an
expression of the mandatory social purpose of the assets
and cannot subsequently be reinterpreted as remuneration
payable by BayernLB.

(134) Interest on intermediate investments: The interest payments on
intermediate investments laid down in the fourth and fifth
sentences of Section 2(1) of the transfer agreement cannot
be regarded as remuneration for the business-expansion
function of liable equity capital either. This is because any
returns which accrue to the special-purpose reserve on the
basis of their continuing social purpose are ploughed back
as low-interest loans specifically for social-housing con-
struction in accordance with the Land guidelines and
requirements (42) . As Germany itself states, BayernLB is in
any case entitled only to the capital element of the loan
rights (the securing function of equity capital), while the
utilisation and earnings function of the equity capital will,
by dint of its mandatory social purpose, remain entirely
with the Land (43) . Since these proceedings are concerned
with determining whether an appropriate remuneration has
been paid for the securing function of the equity capital,
any remuneration to be paid for actually using the funds
cannot be counted as part of the remuneration for the
securing function.

(42) Letter from the Federal Government of 3 July 2001, p. 9.
(43) Letter from the Federal Government of 3 July 2001, p. 10.

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(135) Proportional contributions to administrative costs: The con-
tributions to the administrative costs of the transfer payable
to the Land are also nothing more than a further expression
of the principle laid down in Section 2(3) of the transfer
agreement of the separation between the contributed funds
and the bank's other assets. The fact that a portion of the
contributions from borrowers continues to accrue to the
Land is thus an expression of the continued mandatory
special purpose of
the contributed funds and their
associated separation from the bank's other assets. This
cannot be reinterpreted subsequently as remuneration
payable by BayernLB.

e)

Comparison with other equity instruments

(136) As explained above, the starting point for determining the
normal market remuneration in this case is the remunera-
tion that would be demanded by a market-economy
investor providing a bank with equity capital.

(137) It is beyond dispute here that the housing-promotion assets
transferred to BayernLB cannot be compared directly to
other transactions. The transfer might resemble certain
instruments in some respects, but there are also enough
differences compared with each instrument to assign only a
limited value to this comparison. Consequently, as in the
remuneration can be
WestLB case,
transfer with
determined only by comparing the asset
various equity instruments normally found on the markets,
in order to determine by analogy which instrument is most
similar to it und is therefore the benchmark for determining
the remuneration.

appropriate

the

(138) Germany, BayernLB and the complainant all agree that the
housing-promotion assets concentrated in the special-
purpose reserve can be compared only to either share
capital or silent partnership contributions. The special-
purpose reserve was recognised by BAKred as core capital
(‘tier I capital’) and can therefore be compared only with
equity instruments that were recognised as core capital in
Germany in the year of the transfer. Germany states that, in
1994 and 1995, this meant only the share capital of banks
or reserves and silent partnership contributions that met
the special requirements laid down in Article 10(4) of the
German Banking Act (KWG).

(139) 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's assets, which were also
recognised as core capital, and hybrid equity instruments
that were recognised only as additional capital, such as
profit participation certificates and non-voting preference
for determining the
shares, cannot
transferred capital
appropriate
(Decision 2000/392/EC, paragraph 199). Core capital
is
of much greater use to an undertaking because it can be
(such as profit
used to raise additional own funds
participation certificates) up to the same amount in order

remuneration for

serve as a basis

the

to increase the bank's own funds. For the capital provided
to be recognised as original own funds, there must be
greater exposure to risk, which as a general rule is also
reflected in a higher market
such
instruments. Any point of comparison with ‘additional
funds’ that offer only limited scope for use in business
expansion can therefore be ruled out from the outset.

remuneration for

(140) The Commission also considers that the comparison made
by Germany and BayernLB with silent partnerships within
the meaning of Article 10(4) of the Banking Act, i.e. the
silent partnerships of the Bavarian savings banks and other
institutional investors which the bank has obtained since
the beginning of 1991,
for
determining the appropriate remuneration for the special-
purpose reserve. Instead the transfer of the special-purpose
assets is comparable to a share-capital
injection into
BayernLB.

is not a suitable basis

(141) The Commission feels it is significant here that the housing-
promotion assets were transferred not in the form of a
silent partnership contribution but by establishing an
ordinary reserve, even though, at the time both tranches
were transferred, BayernLB had already obtained significant
volumes of silent partnerships and was familiar with that
method of building up equity capital. As evidenced by the
decisions
supplied to the Commission, BAKred too
considered the special-purpose reserve not as a silent
partnership within the meaning of Article 10(4) of the
Banking Act, but as a reserve (‘Rücklage’) within the
meaning of point 5 of the first sentence of Article 10(2) and
the second sentence of Article 10(3) of that Act. These two
factors already suggest that the capital provided was similar
to share capital rather than to a silent partnership.

(142) Although it is also true that the special-purpose assets of
BayernLB have certain features that are somewhat typical of
silent partnerships (44) , the Commission considers that the
risk that the transferred capital would be used, at least in
part, as cover in the event of insolvency or liquidation was
generally no less than would be the case for a share-capital
investment.

(143) The Commission cannot accept Germany's argument that
the risk of loss was lower than that for a share-capital
investment because BayernLB already had substantial own
funds at its disposal before the special-purpose reserve was
transferred and was therefore not at all dependent on that
capital. Admittedly, the special-purpose reserve was actually
used only once to cover risk-bearing assets and then only
for a short time. However, the situation must be viewed as
it appeared at the time and it was impossible to tell
beforehand that the bank would not use the capital. On the
the need to boost Bayerische Landesbank's
contrary,
national and international competitiveness by building up
its equity capital in order to ensure that it could carry on its

(44) For example the agreement on an ‘additional payment claim’ if the
guarantee commission were not paid in a particular business year, as
this would lead to a net loss (see Section 3 of the transfer agreement).

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successful business activities was cited as a reason for the
capital injection in the grounds of the draft Special-purpose
Assets Act, which was eventually adopted by the Bavarian
Parliament. It was also stated in preliminary drafts and in
internal memos of the Bavarian Ministry that the declared
aim of the transfer was to pave the way for an expansion of
business. Moreover, Germany itself has admitted that, when
the first and second instalments were transferred in 1994
and 1995, the definite intention was to use the special-
purpose reserve to cover risk-bearing assets (45) . A market-
economy investor providing capital under these circum-
stances would accordingly have
full
remuneration since he, in the first place, bore the full risk
of loss and, second, the bank was free to use the entire
capital, like any other capital, in its competitive business,
according to its own economic calculations and discretion.

insisted on a

(144) According to Germany and BayernLB,

there was an
the capital
understanding that BayernLB would cover
requirements for expanding its commercial activities largely
by accepting silent partnership contributions from institu-
tional investors. It must be said that this intention was not
specifically expressed either in the relevant clauses of the
transfer agreement or in the Act relating to the transfer.
Consequently, a private investor would not have been
confident that his capital would not be used. The fact that
there was also an understanding that BayernLB would draw
on the special-purpose reserve to cover risk-bearing assets
only after using the other equity capital available does not
stand in the way of the present risk analysis either, if it is
assumed that the intention to use the funds to cover risk-
bearing assets did exist. In the Commission's view, neither
of these two factors prove that the risk of loss in insolvency
or liquidation was qualitatively lower than for share capital.

(145) Germany points out that, pursuant to Section 2 of the
agreement between the Land of Bavaria and the Bavarian
Sparkassenverband of 15 December 1994, the Sparkassen-
verband was required, as second shareholder, to bear half of
any loss suffered by BayernLB in the event of the special-
purpose reserve being depleted or used by BayernLB's
creditors to cover losses. However, this did not eliminate
the risk that at least part of the special-purpose reserve
might be lost in the event of insolvency or liquidation, as it
meant
to be replenished only
proportionally. Moreover, the arrangement between the
shareholders did not reduce the use which BayernLB could
make of
this circumstance cannot
diminish the overall remuneration payable by BayernLB. It
was inconceivable that BayernLB would have paid no more
at all if the Bavarian Sparkassenverband had, for example,
committed itself vis-à-vis the Land of Bavaria to bear the
entire loss. At most the arrangement could have led to the
Land compensating the Sparkassenverband internally for
assuming this additional risk. However, no such agreement

the capital, so that

the reserve was

that

(45) Letter from Germany of 3 July 2001, p. 11.

was concluded and the matter is irrelevant for the purposes
of this proceeding.

(146) Nor is the Commission convinced by the argument that in
this case the special-purpose reserve made up around 8 %
of total capital at the time of the transfer and that the risk
of
loss was therefore considerably smaller than in the
WestLB case, where Wfa's assets accounted for nearly 50 %
of the bank's equity capital. In the WestLB case the large
volume of capital injected was an indication of its similarity
with share capital but not the only decisive factor in
adopting that comparison. After taking a comprehensive
view of
the Commission also came to the
conclusion in its WestLB decision that the similarity of the
transaction in question to a share-capital
investment
outweighed other considerations

the case,

(147) Given the above views, notably regarding an analysis of the
risk incurred by an investor in carrying out the transaction
at issue, the Commission concludes that the starting point
the
for calculating the appropriate remuneration for
transfer of the housing-promotion assets is the remunera-
tion for the share capital made available to BayernLB. In the
understanding submitted to the Commission on 24 Sep-
tember 2004, the parties also adopted the share-capital
approach as a basis for the proposed remuneration.

f)

Liquidity costs

(148) The arguments of Germany and BayernLB regarding the
liquidity costs can in principle be accepted. 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 (46)
. Since the housing-
promotion assets do not provide BayernLB with initial
liquidity because they and all the income from them remain
earmarked by law for housing promotion, BayernLB 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 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) (47) . Because of these extra costs, which
do not arise in the case of normal equity capital, the
appropriate remuneration must be reduced accordingly. A
market-economy investor could not expect to be remun-
erated in the same way as for a cash injection.

(46) 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.

(47) 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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(149) However, the Commission does not believe that the entire
refinancing interest rate has to be taken into account.
Refinancing costs constitute operating expenses and there-
fore reduce taxable income. This means that the bank's net
result is not reduced by the amount of additional interest
expenses incurred. These expenses are offset in part by
reduced corporation tax. Only the net costs should be taken
into account as an additional burden on BayernLB because
of
transferred. The
Commission therefore accepts that BayernLB incurs addi-
tional ‘liquidity costs’ to the extent of ‘refinancing costs
minus tax.’ (48)

the special nature of

the capital

(150) The Commission likewise cannot accept Germany's argu-
ment that a private investor would have been unable to
deduct net refinancing costs alone because the capital
transferred to BayernLB accounted for only 8 % of own
resources, and not almost 50 % as in the WestLB case. This
argument is not convincing. The only decisive factor is the
fact that BayernLB could have offset the refinancing costs as
tax and thus obtained an
operating expenses against
advantage which, from the point of view of the EU state aid
rules, has to be taken into consideration irrespective of the
volume of the capital made available.

g) Appropriate

remuneration for

the amount of

DEM 1 197 million

(151) There are no doubt different ways of calculating the
appropriate remuneration for the amount of DEM 1 197
million. However, as will be shown, all the methods for
calculating the remuneration for capital made available
follow the same basic principles. Taking these basic
principles, the Commission here does the calculation in
two steps: first, it determines the minimum remuneration
that an investor would expect
for a (hypothetical)
investment in the capital of BayernLB. It then examines
whether, in view of the particularities of the transaction at
issue, the market would have agreed on a premium or a
discount, and if so, whether it can produce a sufficiently
robust quantification of that amount.

level, the investor incorporates all available firm-related and
market-related information into his calculation. He bases
himself on historical average rates, which, generally
speaking, are also a point of reference for a firm's future
efficiency, and inter alia on an analysis of the company's
business model for the investment period in question, the
strategy and quality of management or
the relative
prospects for the sector in question..

(153) A market-economy investor will undertake an investment
only if it produces a higher return or a lower risk than the
next-best alternative use of his capital. Similarly, he will not
invest in a company whose expected return is lower than
the average return expected for other companies with a
similar risk profile. It can be assumed in the present case
that
to the assumed
investment project that promise a higher expected return
with the same risk.

there are sufficient alternatives

(154) Various methods exist

for determining the minimum
appropriate remuneration. They range from differing
variants of the financing approach to the CAPM method.
it makes sense to
In describing the various approaches,
distinguish between two components, viz. a risk-free return
and a project-specific risk premium:

minimum appropriate return on a risky investment
=
risk-free base rate + risk premium for the risky investment.

Consequently, the minimum appropriate remuneration for
a risky investment can be described as the sum of the risk-
free rate of return and the additional risk premium for
assuming the investment-specific risk.

i)

Determination of a likely minimum remuneration
for an investment in the capital of BayernLB

(152) The expected return on an investment and the investment
risk are key determinants in the decision of a market-
economy investor to invest. In order to determine their

(48) As confirmed by the European Court of First Instance in WestLB,

paragraphs 321-331 (see footnote 4).

(155) The basis for any determination of return is thus the
existence of a default-risk-free form of investment with an
assumed risk-free return. The expected return on fixed-
interest government
is normally used in
securities
determining the risk-free basic rate (or, as the case may
be, an index based on such securities), but these represent
investment with a comparably low risk. The
forms of
to
various methods differ, however, when it comes
determining the risk premium:

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the historic capital costs

— Financing approach: an investor's expected return on
capital represents, from the point of view of the bank
using the capital, future financing costs. Under this
approach,
incurred by
comparable banks are first of all determined. The
arithmetic average of the historic capital costs is then
compared with the future expected equity capital costs
and hence with the
expected return
requirement.

investor's

— Financing approach with Compound Annual Growth Rate:
at the heart of this approach stands the use of the
geometric rather than the arithmetic mean value
(Compound Annual Growth Rate).

— Capital Asset Pricing Model (CAPM): the CAPM is the
best-known and most
frequently tested model of
modern financial economics, by which the return
expected by an investor can be determined using the
following equation:

minimum return on capital
=
risk-free base rate + (market risk premium × beta)

(31 December 1994) and 6,10 % (31 December 1995).
Determination of these interest rates was based on the
assumption that BayernLB's special-purpose assets were to
be made available on a permanent basis. The parties thus
decided not to use a risk-free rate obtaining on the market
at the time of the capital injection for a fixed investment
period (e.g. 10-year return on government bonds), since
such an approach would disregard the reinvestment risk, i.
e. the risk that it would not be possible to invest again at
the level of the risk-free interest rate once the investment
period had expired. In the view of the parties, a total return
index was the best way of taking the investment risk into
account. They opted, therefore, for the REX10 Performance
Index of Deutsche Börse AG, which tracks the performance
of an investment in Federal loans over a period of exactly
ten years. The index series used in the present case contains
the relevant end-of-year results of the REX10 Performance
Index since 1970. The parties thus calculated the return per
annum that reflects the trend as tracked by the REX10
Performance Index in the period 1970-94/1970-95 and, in
this way, arrived at the risk-free basic interest rates of
7,50 % and 6,10 % referred to above.

The risk premium for the equity investment is obtained by
multiplying the risk premium of the market by the beta
factor (market risk premium × beta). The beta factor is used
to quantify the risk of a company relative to the overall risk
of all companies.

(159) Since BayernLB's capital injection was made available on a
permanent basis, the method of determining the risk-free
basic interest rates appears appropriate in this specific case.
Moreover, the REX10 Performance Index is a generally
recognised source of data. The risk-free basic interest rates
calculated thus appear appropriate here.

(156) The CAPM is the predominant method of calculating
investment returns in the case of large listed companies.
However, since BayernLB is not a listed company, it is not
possible directly to infer its beta value. The CAPM can be
used only on the basis of an estimate of the beta factor.

(157) In its comments of 29 July 2003, the BdB, using the CAPM,
concluded that the minimum remuneration to be expected
for an investment in the share capital of BayernLB at the
time when the building-loan claims were transferred was
13,34 % per annum at 31 December 1994 and 12,87 % per
annum at 31 December 1995. Germany raised objections
in principle to the use of the CAPM. It also argued that the
BdB started from a high beta value and was incorrect in its
calculation of the risk-free base rate, and that the market-
risk premium of 4,6 % was too high. Had the BdB applied
the CAPM correctly, it would have arrived at a much lower
minimum remuneration for a hypothetical investment in
the share capital of BayernLB. In their understanding on the
normal market
the Land of Bavaria,
BayernLB and the BdB concluded that the appropriate
minimum remuneration was 9,87 % for the first instalment
and 8,00 % for the second instalment.

remuneration,

(158) In their calculations, the parties based themselves on the
CAPM and applied risk-free basic interest rates of 7,50 %

(160) The beta factors of 0,593 (at 31 December 1994) and
0,475 (at 31 December 1995) were estimated on the basis
of a report by […] on adjusted beta factors for all listed
credit institutions in Germany. In the light of the report —
which is available to the Commission — and of BayernLB's
business profile, these beta factors are to be regarded as
appropriate

i.e.

long-term market-risk premium,

(161) The Commission also regards the market-risk premium of
4,0 % as acceptable. Already in the WestLB case, the so-
called general
the
difference between the long-term average return on a
normal share portfolio and that on government bonds, was
applied on several occasions. In the corresponding reports
relating to the procedure, a range of some 3 % to 5 % was
applied, depending on the method,
the period under
examination and the basic relevant data. A report prepared
for BdB calculated figures of 3,16 % and 5 %. Another
report on WestLB drawn up in the first procedure produced
figures of 4,5 % and 5 %, while Lehman Brothers, also for
WestLB, calculated a figure of 4 %. Against this background,
the Commission has no reason to depart from the market-
risk premium used in the understanding. On the basis of

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the CAPM, the Commission considers there to be no doubt
that the minimum remuneration determined by the parties
can be regarded as appropriate

(162) The Commission has no reason to believe that

the
minimum remuneration determined by the parties for a
hypothetical share-capital investment cannot pass a market
test. Accordingly,
it sets as the appropriate minimum
remuneration (after corporation tax and before investor
tax) a figure of 9,87 % per annum for the first instalment
and 8,00 % per annum for the second instalment.

ii) Return discount for lack of liquidity

(163) Germany stated that BayernLB's actual refinancing costs
came to 7,71 % in the second half of 1994, when the first
instalment was transferred, and 6,78 % in the second half
of 1995, when the second instalment was transferred. In
the understanding the parties used a long-term risk-free
base rate of 7,50 % at 31 December 1994 and 6,10 % at
31 December 1995 as minimum gross refinancing costs.
They also agreed to assume a flat 50 % tax rate (49) . On this
basis, they arrived at a net refinancing rate of 3,75 % for the
first instalment and 3,05 % for the second instalment and
hence a corresponding deduction for liquidity.

(164) In view of that understanding and the fact that the amounts
in question still fall below the range previously cited by
Germany, the Commission sees no reason to regard them
as inappropriate and consequently uses these amounts as a
basis for determining the aid element.

iii) Return premium on account of the particularities

of the transfer

It must

(165) In practice, when remuneration is determined, atypical
circumstances which depart from a normal investment in
the share capital of the company concerned generally give
rise to discounts or premiums.
therefore be
examined whether the particularities, and especially the
specific risk profile of the transfer of capital, constitute
grounds for adjusting the above-determined minimum
remuneration of 9,87 per annum (first instalment) and
8,00 % per annum (second instalment) which a private
investor would expect for a (hypothetical) investment in the
capital of BayernLB and whether the Commission can
that
produce a methodically robust quantification of
adjustment. In this connection, three aspects should be
considered: first, the failure to issue new shares in the
company with associated voting rights;
the
exceptional volume of the asset transfer; and third, the
non-marketability of the assets.

second,

(49) According to documents submitted by the German Government, the
corporation tax rate was 42 % in 1995 and 1996. To this must be
added the solidarity surcharge of 7,5 % (making 49,5 % in total). The
overall tax rate came down to 47,5 % in 1998. Only as of 2001 did it
fall to 30,5 %.

(166) The transfer did not provide the Land with any additional
voting rights. Nor was this disadvantage offset by a
comparable investment by the other
shareholder. By
forgoing voting rights, an investor renounces a say in
decisions taken by the bank's board. To compensate for this
acceptance of a higher risk of loss without a corresponding
increase in influence over the company, a market-economy
investor would demand a higher remuneration (even if the
potential risk were cushioned by internal agreements with
the other shareholders). On the basis of
the higher
remuneration for preference shares compared with ordin-
ary shares, the Commission considers a premium of at least
0,3 % per annum (after corporation tax) to be appropriate.
The parties to the understanding also regard a premium of
0,3 % as appropriate to take account of the failure to issue
new voting rights.

(167) The Commission does not consider that a premium should
be applied in this case on account of the volume of assets
transferred and its effect on BayernLB from the point of
view of the Solvency Directive. As a result of the transfer of
special-purpose assets, BayernLB's core capital increased by
only 8 %, whereas in some of the other Landesbank cases
mentioned, the core capital doubled. Furthermore, in the
light of
the exceptional capital requirements of credit
institutions in the EU laid down by the Solvency Directive, a
capital injection of some DEM 1 197 million in one of the
largest German all-purpose banks must not be regarded as
completely alien to any normal business decision. The
Commission deems it unlikely that a market-economy
investor would have demanded a special premium for an
injection of capital as large in relative and absolute terms as
in this case. Consequently, it is not imposing a premium
linked to the volume of the asset transfer, something which
works in BayernLB's favour. The understanding between the
parties also assumes that no premium should be applied on
account of the high volume of assets transferred.

(168) Lastly, attention must be drawn to the non-marketability of
the assets, i.e. the impossibility of withdrawing the invested
capital at any time from the company. Normally, an
investor can sell an equity instrument on the market to
third parties, thereby terminating his investment. A normal
transfer of capital takes place as follows: the investor brings
in assets (either in cash or in kind), which are entered on
the assets side of the balance sheet. As a rule, these are
matched on the liabilities side by a tradable interest
registered in the name of the investor, taking the form, in
the case of a limited company for example, of shares. The
investor can sell these shares to a third party. He cannot
withdraw the assets he originally brought in, as these now

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form part of the company's liable equity capital and are no
longer at his disposal. But by selling the shares — at the
prevailing exchange price — he can realise their economic
counter value. His assets have thereby become marketable.
the special circumstances surrounding the
Because of
this option was not
transfer of special-purpose assets,
available to the Land. However, the Commission does not
see any reason for a further premium. Although the Land
was unable to realise the economic counter value by
trading freely in the investment, it was and is able at any
time to withdraw the special-purpose assets from BayernLB
by law and achieve possibly higher returns by reinvesting
them in other institutions. Here too the understanding
between the BdB, the Land and BayernLB assumes that no
premium should be applied on account of the lack of
marketability.

(169) Overall, the Commission therefore considers a premium of
0,3 % per annum (after corporation tax and before investor
tax) to be appropriate for forgoing additional voting rights.

iv) No reduction in remuneration on account of the

agreement on a fixed amount

(170) In the case of shares, the remuneration depends directly on
the performance of the company and is expressed mainly in
the form of dividends and a share in the increased value of
the company (e.g. expressed by share price increases). The
Land receives a fixed remuneration the level of which
should reflect
these two aspects of remuneration for
‘normal’ equity injections. It could be argued that the fact
that the Land receives a fixed remuneration instead of one
directly linked to BayernLB's performance constitutes an
advantage which justifies a reduction in the rate of the
remuneration. Whether such a fixed rate actually constitu-
tes an advantage as compared with a variable, profit-linked
rate depends on the company's performance in the future.
If
the performance declines, a fixed rate benefits the
investor, but if it improves it places him at a disadvantage.
However, actual developments cannot subsequently be used
to assess the investment decision. The fixed nature of the
rate accordingly does not benefit the investor in a way that
he would have agreed to a lowering of the remuneration. In
aggregate,
the rate of
remuneration should not be reduced for this reason.

the Commission believes

that

v)

Total remuneration

(171) On the basis of all these considerations and in agreement
the Land of Bavaria and
with the complainant BdB,
BayernLB, the Commission concludes that an appropriate
remuneration for the first instalment of
in
question would be 6,42 % per annum (after corporation tax
and before investor tax), namely a 9,87 % normal return on
the
the investment, plus a premium of 0,3 % for
particularities of the transaction and minus 3,75 % on

the capital

the

financing costs

resulting from the
account of
transferred assets' lack of liquidity for BayernLB. For the
second instalment,
the Commission concludes that an
appropriate remuneration would be 5,25 % per annum
(after corporation tax and before investor tax), namely a
8 % normal return plus a premium of 0,3 % and minus
3,05 % on account of the transferred assets' lack of liquidity
for BayernLB.

vi) Determination of the minimum remuneration for
the capital of DEM 1 197 million up to the time
when it was recognised by BAKred

(172) As already mentioned,

the special-purpose reserve of
DEM 1 197 million was already of material value to
BayernLB before it was recognised by BAKred as core
capital within the meaning of the Banking Act (KWG), since
the two instalments were recorded as equity capital in the
balance sheet as from their transfer. Its economic function
may in this respect be compared to that of a guarantee. A
market-economy investor would demand an appropriate
remuneration in return for exposing himself to a risk of this
sort.

for

starting-point

remuneration for

(173) Germany considers that 0,3 % per annum before tax is an
the
appropriate
guarantee function in BayernLB's favour, in line with the
Commission's approach in the WestLB case (50) . However,
it argues that the grounds given in the WestLB decision for
increasing the initial rate do not apply in the present case.
In that decision, the (pre-tax) rate of 0,3 % per annum was
increased by a premium of a further 0,3 % % per annum
because (a) bank guarantees are normally associated with
certain transactions and limited in time (which was not the
amount of DEM
case with WestLB),
3 400 million made available to WestLB exceeded what
is normally covered by such bank guarantees.

and (b)

the

(174) On account of the fundamental comparability of WestLB
and BayernLB and for want of other points of reference, the
Commission assumes that this rate corresponds to the
market remuneration which also BayernLB would have had
to pay in the mid 1990s for a bank guarantee in its favour.
Moreover, the Commission agrees with Germany that the
amount of capital transferred to BayernLB was significantly
less than in the WestLB case and that, accordingly, the
second reason stated in the WestLB decision does not apply
here. Admittedly, the guarantee function was not limited in
time or tied to a specific transaction in BayernLB's case
there was a de facto time
either. On the other hand,
limitation since the total amount could be used for business
expansion once BAKred had recognised it as core capital.
As a result, a separate guarantee commission no longer
needed to be paid. The remuneration for the guarantee

(50) Decision 2000/392/EC.

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function was part of the remuneration for the business-
expansion function. The fact of the sole guarantee function
was,
restricted from the outset, and this
distinguishes the BayernLB case from the WestLB case.

therefore,

Accordingly, the Commission considers that, in the case of
BayernLB as opposed to WestLB, a premium is not justified
and so sets a rate of 0,3 % per annum (before tax) as an
appropriate remuneration for the guarantee function of the
capital from the time of its inclusion in the balance sheet on
31 December 1994 and 31 December 1995 until
its
recognition by BAKred (51) . Assuming a corporation tax
rate of some 50 % at that time (52) , an after-tax assessment
gives a rate of 0,15 % per annum. This after-tax rate of
0,15 % was applied by the parties in calculating the aid
element in the table attached to the understanding.

(178) The Commission agrees with Germany that a fee of 0,3 %
per annum after tax can be regarded as a reasonable rate. It
also takes 0,3 % per annum before tax as an appropriate
initial rate for the transaction at hand, since that rate was
used as a basis for the WestLB decision and in the present
case for the appropriate remuneration for the injected
capital up to its recognition by BAKred as core capital, and
the Commission sees no reason why it should have changed
in the intervening years. Nor has Germany put forward any
information to the contrary. Moreover, applying the
WestLB method, a premium of at least 0,15 % per annum
before tax is justified,
is at
BayernLB's disposal for guarantee purposes for an unlimited
period (53) . However, account must also be taken of the
fact that corporate tax rates in 2004 are much lower than
in the 1990s (54) . In the light of tax considerations, the
Commission concludes that the agreed remuneration of
0,3 % after tax is appropriate.

if only because the capital

h) Amendment of the articles of association on 5 March

2004

(175) Germany argued that an amendment had been made to
Bayerische Landesbank's articles of association with effect
from 5 March 2004 and that, under the new Section 2a, the
special-purpose assets transferred to the bank on 31 Decem-
ber 1994 and 31 December 1995 no longer serve to
underpin its competitive business, notwithstanding their
function as liable equity capital.

(179) In the Commission's view, it has thus been demonstrated
that, with the introduction of new rules on the special-
purpose assets remaining in the bank, the state aid under
investigation ended on 5 March 2004, the date on which
the amended articles of association entered into force, and
that, consequently, the remuneration it regards as appro-
priate — 6,42 % per annum after tax (first instalment) and
5,25 % after tax (second instalment) — need be paid only
up to that date.

(176) Since the entry into force of this provision, the bank has
been prohibited from using the special-purpose capital to
underpin risk assets from its competitive business. Conse-
quently, the special-purpose assets may not be used to
expand business, and the capital now serves only as a
guarantee.

(177) According to the information provided by Germany and
the agreement between the Land of Bavaria and BayernLB
submitted to the Commission, the guarantee function is
paid for by a guarantee commission (Haftungsprovision) of
0,3 % per annum after tax. Germany argues, with reference
to the remuneration for a comparable transaction, that this
is a normal market remuneration which BayernLB would
have had to pay on the market for a bank guarantee in its
favour. Germany has stated that in the BayernLB case the
remuneration for the special-purpose assets was treated for
tax purposes as use of profits and could therefore not be
deducted as operating expenditure. As a result,
the
remuneration is payable after tax.

(51) As already explained above, the key point in time for the guarantee
function is not when the balance sheet was established (31 December
of the business year concerned), but the date of the transfer (see
footnote 41).
(52) See footnote 49.

i)

Aid element

(180) On the basis of the above calculations, the Commission
concludes that the remuneration payable by BayernLB for
the special-purpose assets, the cash value of which was
recognised by BAKred as core capital, was 6,42 % per
annum for the first instalment (31 December 1994) and
5,25 % per annum for the second instalment (31 December
1995), due from the end of the month in which the
amounts were recognised by BAKred (for the amount of
DEM 655 million from 31 May 1996 onwards and for the
full amount of DEM 1 197 million from 31 December
1996). For 1998 and 1999, when the cash value actually fell
below the amount recognised by BAKred because of
fluctuations, only the lower cash value is used as basis for
the calculation.

(53) The Commission is aware that the amount of the capital available for
guarantee purposes, which was cited in the WestLB decision as
further grounds for an increase, is lower in the BayernLB case and
hence of less importance here.

(54) According to documents submitted by the German Government, the
corporation tax rate was 42 % in 1995 and 1996. To this must be
added the solidarity surcharge of 7,5 % (making 49,5 % in total). The
overall tax rate came down to 47,5 % in 1998. As of 2001 it fell to
only 30,5 %.

L 307/104

EN

Official Journal of the European Union

7.11.2006

(181) This payment should have been made from the time of
recognition by BAKred until the end of the state aid on
5 March 2004.

(182) In addition, the Commission regards as a normal market
remuneration the figure of 0,15 % per annum after tax for
the amount of
the special-purpose reserve which was
already shown as equity capital in the balance sheet but had
not yet been accepted by BAKred as original own funds, i.e.
over DEM 655 million up to recognition of
the first
instalment on 8 May 1996 and over DEM 542 million up
to recognition of the second instalment on 20 December
1996.

(183) BayernLB currently pays a remuneration of 0,6 % per
annum (after tax) — and this only on the amount actually
used to cover risk-bearing assets. This remuneration was
paid in 1996 in a single instalment of DEM 7 000. The
Commission also accepts the guarantee fee (Bürgschaftsge-
bühr) paid by BayernLB as additional remuneration for the
Land (see paragraph 131 above).

(184) The aid element can be calculated as the difference between
the actual payments and the payments which would
the
correspond to market conditions. The aid was at
beneficiary's disposal
from the date on which the
remuneration payable would have been due. In accordance
with the transfer agreements, that corresponds to the date
when the balance sheet was established for the relevant
business year.

(185) Figure 2: Calculation of the aid element

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

1st instalment

1 Available for guarantee purposes (from-to):

01.01.-31.12. 01.01.-31.05.

2 Available for guarantee purposes (DEM):

655 000 000 655 000 000

3 Available for business-expansion purposes (from-

01.06.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12.

01.01.-05.03.

to):

4 Available for business-expansion purposes

655 000 000 655 000 000

[...]

[...] 655 000 000 655 000 000 655 000 000 655 000 000

655 000 000

(DEM):

2nd instalment

5 Available for guarantee purposes (from-to):

01.01.-31.12.

6 Available for guarantee purposes (DEM):

542 000 000

7 Available for business-expansion purposes (from-

01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12. 01.01.-31.12.

01.01.-05.03.

to):

8 Available for business-expansion purposes

542 000 000

[...]

[...] 542 000 000 542 000 000 542 000 000 542 000 000

542 000 000

(DEM):

Calculation of the aid element

9 Remuneration of 0,15 % after taxes for 2. (DEM)

982 500

408 033

10 Remuneration of 6,42 % after taxes for 4. (DEM)

24 587 197

42 051 000

Subtotal: remuneration for 1st instalment (DEM)

982 500

24 995 230

42 051 000

[...]

[...]

[...]

42 051 000

42 051 000

42 051 000

42 051 000

7 468 074

[...]

42 051 000

42 051 000

42 051 000

42 051 000

7 468 074

11 Remuneration of 0,15 % after taxes for 6. (DEM)

813 000

.

.

7
1
1
2
0
0
6

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n

U
n
o
n

i

L

3
0
7
/
1
0
5

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

12 Remuneration of 5,25 % after taxes for 8. (DEM)

28 455 000

Subtotal: remuneration for 2nd instalment (DEM)

0

813 000

28 455 000

13 Total remuneration (DEM)

982 500

25 808 230

70 506 000

14 Remuneration already paid (DEM)

1 722 080

2 249 846

2 217 376

of which: Bürgschaftsgebühr (guarantee fee) * (after
taxes) in DEM

of which: Haftungsprovision (guarantee commis-
sion)(after taxes) in DEM

1 722 080

2 242 846

2 217 376

7 000

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

28 455 000

28 455 000

28 455 000

28 455 000

5 053 484

28 455 000

28 455 000

28 455 000

28 455 000

5 053 484

70 506 000

70 506 000

70 506 000

70 506 000

12 521 557

[...]

[...]

[...]

[...]

[...]

[...]

[…]

[...]

15 Aid element (13 — 14) — DEM

- 739 580

23 558 383

68 288 624

[...]

[...]

[...]

[...]

[...]

[...]

[...]

16 Total aid elements — DEM

Total aid elements — equivalent in EUR

Since 1 January 1999, marks have been converted into euros at a rate of EUR1 = DEM 1,95583. The figures in DEM must be converted accordingly.

The fall in cash value in 1998 and 1999 was taken into account in both instalments by applying a flat rate amount in proportion to the cash value.

509 453 993

260 479 690

L

3
0
7
/
1
0
6

E
N

O

f
f
i
c
i
a
l

J
o
u
r
n
a
l

o
f

t
h
e

E
u
r
o
p
e
a
n

U
n
o
n

i

.

.

7
1
1
2
0
0
6

7.11.2006

EN

Official Journal of the European Union

L 307/107

1.3. DISTORTION OF COMPETITION AND EFFECT ON TRADE

BETWEEN MEMBER STATES

(186) As a result of the liberalisation of financial services and the
financial markets, banking within the
integration of
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.

(187) The beneficiary, BayernLB, carries on regional and interna-
It regards itself as a universal
tional banking business.
commercial bank, a central bank for savings banks and the
bank of the Land and its municipalities. Despite its name,
tradition and legally stipulated tasks, BayernLB is much
more than a mere local or regional bank.

(188) These facts clearly show that BayernLB 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.

(189) It should also be pointed out that there is a very close
relationship between a credit institution's equity capital and
its banking activities.
It is only when it has sufficient
recognised equity capital that a bank can do business and
expand its commercial activities. Since BayernLB was
provided with such capital for solvency purposes as a
result of the state measure, this had a direct impact on the
bank's business opportunities.

(190) It is clear, therefore, that aid given to BayernLB distorts
competition and affects trade between Member States.

1.4. RESULT

(191) On the basis of all these considerations, it can be stated that
all the criteria laid down in Article 87(1) of the EC Treaty
are met. The difference between the agreed remuneration of
0,6 % per annum and the guarantee fee of 0,05 % per
annum on the one hand and, on the other, the appropriate
remuneration of 6,42 % per annum (first instalment) and
5,25 % per annum (second instalment) (in both cases after
corporation tax and before investor tax) for the transferred
capital that could be used by BayernLB up to 5 March 2004
to underpin its commercial business, plus 0,15 % per
annum (after corporation tax and before investor tax) for
the part of the capital that was similar to a guarantee
constitutes state aid within the meaning of Article 87(1) of
the EC Treaty.

2.

COMPATIBILITY WITH THE COMMON MARKET

(192) An assessment must also be made as to whether that aid
can be considered compatible with the common market.

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
economic disadvantages caused by the division of Germany.

exceptional occurrences or

compensate

for

(193) 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
areas — neither
certain economic
Article 87(3)(a) nor (c) of the EC Treaty, as regards the
latter's regional aspects,
is applicable. Nor does the aid
promote the execution of an important project of common
European interest.
It is not aimed either at promoting
culture or heritage conservation.

(194) Since the economic survival of BayernLB was not at stake
when the measure took place, there is no need to consider
whether the collapse of a single large credit institution like
BayernLB 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.

(195) 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. BayernLB
was not an undertaking in difficulty whose viability had to
be restored with the support of state aid.

(196) Article 86(2) of the EC Treaty, which allows exemptions
from the state aid rules of
the Treaty under certain
conditions, is in principle also applicable to the financial
services sector. This has been confirmed by the Commis-
sion in its report on services of general economic interest in
the banking sector (55) . However, the formal conditions are
not met in this case: the tasks which BayernLB 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 in order to
enable BayernLB to comply with the new own funds
requirements and with no regard to any services of general
economic interest. Accordingly, this exemption clause does
not apply either in the case at hand.

(197) 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.

(55) 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.

L 307/108

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Official Journal of the European Union

7.11.2006

3.

NO EXISTING AID

HAS ADOPTED THIS DECISION:

(198) Contrary to what was argued by Germany, the capital
injection cannot be regarded as being covered by the
existing state aid scheme for ‘institutional responsibility’
(Anstaltslast) and ‘guarantor liability’ (Gewährträgerhaftung),
but must be regarded instead as new aid.

(199) 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
from the outset. The capital injection is not intended to
satisfy the Landesbank's creditors and the bank's assets have
not been exhausted.

(200) Nor does Anstaltslast apply. Anstaltslast

requires

lack of sufficient

Indeed, according to the legislation,

the
guarantor, the Land of Bavaria, to provide BayernLB with
the resources it needs to function properly for as long as
the Land decides to maintain it in existence. However, at the
time of the capital injection, BayernLB was far from being
in a situation where it was no longer able to operate
properly for
resources. The capital
injection was not needed in order to keep the Landesbank
the
in operation.
injection was made to enable the Landesbank ‘to continue
its successful business activities’ in the light of the tighter
rules on core capital and equity ratios introduced on
30 June 1993. This conscious economic calculation by the
Land as (joint) owner also enabled the Landesbank to seize
future market opportunities in its competitive business.
The ‘emergency provision’ of institutional liability is not
applicable to such a normal economic decision by the Land.
Since no other existing aid scheme under Articles 87(1) and
88(1) of the EC Treaty is applicable, the capital injection
ranks as new aid within the meaning of Article 88(3) of the
EC Treaty and must be investigated accordingly.

X.

CONCLUSION

(201) The Commission finds

the Federal Republic of
that
Germany has unlawfully implemented the aid in question
contrary to Article 88(3) of the Treaty.

(202) The aid cannot be regarded as compatible under either
Article 87(2) or (3) or under any other provision of the
Treaty. The aid is therefore declared incompatible with the
common market and must be discontinued, and the aid
element of the measure illegally put into effect must be
recovered by the German Government,

Article 1

The state aid which Germany has implemented for Bayerische
Landesbank — Girozentrale, amounting to EUR 260 479 690 in
the period from 31 December 1994 to 5 March 2004 is
incompatible with the common market.

Article 2

Germany shall take all necessary measures to discontinue and
recover from the beneficiary the aid referred to in Article 1 and
unlawfully made available to it.

Article 3

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

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

Interest shall be calculated in accordance with the provisions of
Chapter V of Commission Regulation (EC) No 794/2004 (56).

Article 4

Germany shall inform the Commission, within two months of
notification of this Decision, of the measures which were taken
and which it intends to take in order to meet the commitments
described in this Decision.

Article 5

This Decision is addressed to the Federal Republic of Germany.

Brussels, 20 October 2004.

For the Commission

Mario MONTI

Member of the Commission

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

7.11.2006

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Official Journal of the European Union

L 307/109

INFORMATION REGARDING THE IMPLEMENTATION OF THE COMMISSION DECISION

ANNEX

1.

Calculation of the amount to be recovered

1.1.

Please provide the following details regarding the amount of unlawful state aid that has been put at the disposal of the
recipient:

Date(s) of payment (°)

Amount of aid (*)

Currency

Identity of recipient

(°) Date or dates on which the aid or individual instalments of aid were put at the disposal of the recipient; if the measure consists of

several instalments and reimbursements, use separate rows.

(*) Amount of aid put at the disposal of the recipient, in gross grant equivalent.

Comments:

1.2. Please explain in detail how the interest payable on the amount to be recovered will be calculated.

2.

Recovery measures planned or already taken

2.1. Please describe in detail what measures have been taken and what measures are planned to bring about the immediate
and effective recovery of the aid. Please also explain which alternative measures are available in national legislation to
bring about recovery of the aid. Where relevant, please indicate the legal basis for the measures taken or planned.

2.2. By what date will the recovery of the aid be completed?

3.

Recovery already effected

3.1. Please provide the following details of aid that has been recovered from the recipient:

Date(s) (°)

Amount of aid repaid

Currency

Identity of recipient

(°) Date or dates on which the aid was repaid.

3.2. Please attach supporting documents for the repayments shown in the table at point 3.1.