2006/737/EC: Commission Decision of 20 October 2004 on aid from Germany for Westdeutsche Landesbank — Girozentrale (WestLB), now WestLB AG (notified under document number C(2004) 3925)   (Text with EEA relevance)
Date: 2004-10-20
Institutions: European Commission
Subjects: Germany, State aid, bank, capital increase, control of State aid, share

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COMMISSION DECISION

of 20 October 2004

on aid from Germany for Westdeutsche Landesbank — Girozentrale (WestLB), now WestLB AG

(notified under document number C(2004) 3925)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/737/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(3)

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

Whereas:

(1)

(2)

I.

PROCEDURE

1.

ADMINISTRATIVE PROCEDURE

(‘BdB’),

By a complaint dated 23 March 1993, the Bundesverband
deutscher Banken e.V.
representing about 300
privately owned banks in Germany, urged the Commission
to institute proceedings under Article 226 of the EC Treaty
It claimed that the German Banking
against Germany.
Supervisory Authority (Bundesaufsichtsamt für das Kreditwesen
— ‘BAKred’) had infringed Article 4(1) of Council Directive
89/299/EEC when accepting assets of the Wohnungsbau-
förderungsanstalt des Landes North Rhine-Westphalia (‘Wfa’),
which had been merged with Westdeutsche Landesbank
Girozentrale (‘WestLB’), as own funds of the latter.

IV,

By letter dated 31 May 1994, BdB informed Directorate-
General
the asset
responsible for competition, of
transfer, alleging a distortion of competition in favour of
WestLB. On 21 December 1994 it filed a formal complaint
requesting the Commission to initiate proceedings against
Germany under Article 88(2) of the EC Treaty. In February
and March 1995 and in December 1996 ten individual
banks associated themselves with the complaint of their
association.

(5)

By letters dated 12 January, 9 February, 10 November and
13 December 1993 and 16 January 1996, the Commission
asked the German authorities for further information in
order to determine whether the asset transfer constituted
state aid. The German authorities replied by letters dated
9 February and 16 March 1993, 8 March 1994, 12 April
and 26 April 1996 and 14 January 1997. A number of
further letters and documents were submitted by the
different parties. Commission representatives met repre-
sentatives of the German authorities, WestLB and other
Landesbanks as well as of
the complainant at various
meetings during the period 1994-97.

(4) After

information,

this exchange of

the Commission
considered it necessary to initiate proceedings under
Article 88(2) of the EC Treaty. This decision was taken
on 1 October 1997. In it the Commission concluded that
the measure in question probably constituted state aid
within the meaning of Article 87(1) of the EC Treaty and
information to carry out the
that it needed additional
necessary appraisal. This information related mainly to the
measures taken by the Land of North Rhine-Westphalia (the
‘Land’)
to ensure its proper participation in additional
profits which WestLB can generate on the basis of the
capital transferred, the effects of the inadequate liquidity
content of the transferred capital, the effects of the fact that
the Land's influence on WestLB had not increased, the
effects of the preferential nature of the fixed remuneration
and of any other aspect determining the appropriate level of
remuneration, the level of Wfa capital available to underpin
WestLB's commercial business, the value of the amount
exceeding this sum but shown in WestLB's balance sheet,
the tax exemptions, the waiver of liability, the profitability
of WestLB and the alleged synergies.

The Commission decision to initiate the procedure was
published in the Official Journal of the European Commu-
nities (2). The Commission invited interested parties to
received
submit
comments from WestLB (19 May 1998), the Association
Française des Banques (26 May 1998), the British Bankers'
Association (2 June 1998) and BdB (4 June 1998). By letter
of 15 June 1998 it forwarded them to Germany for its

their comments on the measure.

It

(1) OJ C 140, 5.5.1998, p. 9.

(2) See footnote 1.

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reaction, which it duly received by letter of 11 August 1998
after an extension of the deadline.

referred to in Article 1 and unlawfully made available to the
beneficiary.

(6) Meetings

took place with representatives of BdB on
15 January and 16 September 1998 and with representa-
tives of WestLB on 9 September 1998. By letters of
22 September 1998, the Commission departments invited
the German authorities, WestLB and BdB to a joint meeting
on various aspects of the case. BdB provided information by
letter of 30 October 1998. The meeting with the three
parties took place on 10 November 1998. Following that
meeting the Commission departments requested additional
information and documents from the German authorities
and from BdB by letters of 16 November 1998.

(7)

(8)

(9)

By letter dated 14 January 1999, BdB submitted the
information requested after an extension of the deadline.
The German authorities submitted some information by
letters dated 15 January and 7 April 1999 after an extension
of the deadline.

Since the German authorities refused to provide certain
information,
the Commission enjoined Germany by
decision of 3 March 1999, which was sent to Germany
by letter dated 24 March 1999, to submit that information.
Germany complied with this injunction by letter dated
22 April 1999 after an extension of the deadline.

The Commission decided to arrange for an independent
study to be carried out on the appropriate remuneration to
be asked by the Land for the transfer of Wfa to WestLB.
Representatives of the consultancy charged with that task
also attended the meeting with the three parties on
10 November 1998 and submitted the study to the
Commission on 18 June 1999. On 8 July 1999 the
Commission adopted Decision 2000/392/EC on the
measure implemented by Germany for WestLB in question
(the ‘challenged decision’) (1). The decision was notified to
Germany on 4 August 1999. Germany forwarded it to the
Land by letter of 6 August 1999. The Land informed
WestLB by letter of 9 August 1999, which arrived the same
day. Articles 1, 2 and 3 of the Decision read as follows:

‘Article 1

The State aid which the Federal Republic of Germany has
implemented for Westdeutsche Landesbank Girozentrale in
the years 1992 to 1998, amounting to DEM 15 797 million
(EUR 8 077 million), is incompatible with the common
market.

Article 2

(1) Germany shall
discontinue and recover

take

all necessary measures
to
from the beneficiary the aid

(1) OJ L 150, 23.6.2000, p. 1.

(2) Recovery shall be affected in accordance with the
procedures of national law. 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 on the basis of the reference rate
used for calculating the grant equivalent of regional aid.

Article 3

Germany shall inform the Commission, within two months
of notification of this decision, of the measures taken to
comply with it.’

2.

COURT PROCEDURE

(10) On 12 October 1999 WestLB and the Land of North Rhine-
Westphalia challenged this decision before the Court of First
Instance of the European Communities. WestLB, the Land
and Germany as intervening party requested that
the
challenged decision be annulled and that the Commission
bear the procedural costs. In addition, the Land requested
that BdB bear its own costs. The Commission and the BdB
as intervening party requested that both legal challenges be
rejected as unfounded and that the complainants bear the
procedural costs (the BdB here included its own costs).

(11)

In addition, Germany challenged this decision before the
Court of Justice of the European Communities on 8 October
1999, likewise requesting that it be annulled and that the
Commission bear the procedural costs. The challenge was,
however,
the substantially
identical procedure before the Court of First Instance.

suspended on account of

(12) The Court decided on 22 August 2000 to admit Germany
as intervening party supporting the applicants and the BdB
as
intervening party supporting the Commission. By
decision of the Court of 11 July 2001, the two cases were
joined for the purposes of an oral hearing and ruling. The
hearing took place on 5 and 6 June 2002.

(13) On 6 March 2003 the Court of First Instance delivered a
ruling (2) annulling the challenged decision and ordering
the Commission to pay the costs of the applicants and to
bear its own costs and Germany and the BdB to bear their
own costs.

(14) The Court annulled the Commission decision on the
ground of insufficient justification of two points regarding
calculation of the appropriate remuneration. Firstly, the
annulment was based on the reasons stated for
the
remuneration for liquid equity capital as the starting point

(2)

Joined Cases T-228/99 and T-233/99 Westdeutsche Landesbank
Girozentrale and Land Nordrhein-Westfalen v Commission [2003]
ECR II-435.

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for the calculation, for which the Commission had set a rate
of 12 % per annum (after corporation tax and before
investor taxes). Secondly, it was based on the reasons stated
for
for which the
Commission had set a rate of 1,5 % per annum (after
corporation tax and before investor taxes). These points
apart, the Court confirmed in full the Commission decision.

this remuneration,

the top-up for

3.

RESUMED ADMINISTRATIVE PROCEDURE

(15) By letters of 20 and 29 January, 6 February and 28 May 2004,
the Commission asked the German authorities for an update of
the relevant information for this decision. This was provided
on 10 March and 14 June 2004 after an extension of the
deadline and orally discussed on 28 July 2004. A further letter
from the Land of North Rhine-Westphalia was received on
26 August 2004. By letter of 6 October 2004, Germany
provided additional information that had been requested.

(16)

(17)

In July 2004 the complainant BdB, the Land of North Rhine-
Westphalia and WestLB AG reached a preliminary under-
standing on the proper return that was submitted to the
Commission on 19 July and that should, in their view, be used
for the two points criticised by the Court. The definitive
version of this understanding was submitted to the Commis-
sion on 13 October 2004.

In the present new decision, the Commission has rectified in
line with the Court's indications the two points criticised by it
(justification for the basic remuneration and a possible top-up).
These two points apart, it maintains in principle the basic
assessment given by it in the original decision. However, the
Commission has taken into account the results of the talks
between the complainant BdB, the Land of North Rhine-
Westphalia
appropriate
and WestLB AG regarding the
remuneration. For the rest, it has updated as necessary the
decision with respect
to developments since the previous
the
decision regarding the procedure,
undertaking and the calculation of the aid element, including
the fixing of the end of the state aid situation, using the new
data provided by Germany for the years following the original
decision. The Commission has also shortened a few passages
no longer necessary for the new decision.

the description of

II.

1.

DETAILED DESCRIPTION OF THE MEASURE

WESTDEUTSCHE LANDESBANK GIROZENTRALE

(WESTLB)

(18) During the relevant period for this decision,

i.e. from the
injection of Wfa on 31 December 1991 to the splitting up of
WestLB on 1 August 2002, which ended the state aid situation,
WestLB was a public-law institution (Anstalt des öffentlichen
Rechts) under the law of the Land of North Rhine-Westphalia.
On 31 December 1991 its recognised own capital amounted to
DEM 5,1 billion. By law, three functions had been assigned to
WestLB: it acted as central bank for the local savings banks in
North Rhine-Westphalia and, since 17 July 1992, also as the
in the Land of
central

institution for

savings banks

financial

Brandenburg; it was engaged in the issuing of debt instruments
transactions for its public
and the handling of
it operated as a normal
shareholders (state-bank function);
Irrespective of special
commercial bank in its own right.
provisions of
to banking
the Land, WestLB was subject
supervision under the German Banking Law (Kreditwesengesetz).

(19) WestLB was 100 % publicly owned. The largest single stake in
the nominal capital was held by the Land (43,2 %). Other
shareholders were the municipal associations (Landschaftsver-
bände) of Rheinland and Westfalen-Lippe (11,7 % each) as well
as the associations of local public savings banks (Sparkassen-
und Giroverbände) of Rheinland and Westfalen-Lippe (16,7 %
each). This ownership structure remained unchanged through
the relevant period from 31 December 1991 to 1 August
2002.

(20) As a public-law institution, WestLB benefited from two forms
of guarantees from its public owners:
‘institutional
liability’
(Gewährträgerhaftung).
liability’
(Anstaltslast) and ‘guarantor
Anstaltslast means that the owners of WestLB are responsible
for securing the economic basis of the institution and its
function for the entire duration of its existence. This guarantee
does not create a liability on the part of the owners vis-à-vis
the creditors of the bank but only governs the relationship
between the public authorities and the bank. Under the terms
of the Gewährträgerhaftung, the owners meet all the liabilities of
the bank which cannot be satisfied from its assets.
It
establishes a liability on the part of the guarantor vis-à-vis
the creditors of the bank. Both guarantees were limited neither
in time nor in value.

(21) Originally, WestLB was a regional institution that concentrated
on supplementing the activities of local savings banks, which
in turn focused initially on a primarily social
function,
providing financial services in sectors characterised by market
failure. However, savings banks had long since developed into
all-purpose credit
few
decades WestLB developed increasingly into an independent
commercial bank and was a strong competitor on the German
and European banking markets.

institutions. Likewise, over the last

(22) When measured by balance-sheet total, the WestLB group
institutions
ranked among the five largest German credit
during the relevant period.
It offered financial services to
enterprises and public institutions and was an important
player on international capital markets, both for its own
account and as manager of other issuers' debt instruments.
Like many German all-purpose banks, WestLB held stakes in
financial and non-financial enterprises. It also transacted a
substantial part of its business activities outside Germany.

(23) Furthermore, under special

legal provisions, WestLB, unlike
private banks but in the same way as other public credit
institutions, was able, until it was split up in August 2002, to
conduct mortgage banking and building and loan association

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business under one organisational roof along with its other
operations. It ranked therefore, during the relevant period until
it was split up, as one of Germany's most comprehensive all-
purpose banks.

(24) On the other hand, WestLB did not operate a dense network of
retail branches. This market segment was covered by the local
the central
savings banks,
institution.

for which WestLB acted as

(25) WestLB's profitability, measured by pre-tax profits as a
percentage of capital and reserves at group level, did not
exceed 6,6 % on average over the eight years preceding the
transfer of Wfa (1984-91) and showed no clear upward
tendency. This performance was substantially below the
German as well as the European average.

(26) The WestLB group increased its balance-sheet total between
1991, i.e. before the transfer, and the end of 2001, when its
last annual accounts before it was split up were prepared,
from over DEM 270 million to over DEM 840 million, i.e.
by more than 300 %.

(27) By the law of 2 July 2002, the Land of North Rhine-
Westphalia split up WestLB as of 1 August 2002 (with
retroactive effect under the accounting rules to 1 January
2002)
into a public-law parent company, Landesbank
Northrhein-Westfalen, and a private-law subsidiary, WestLB
AG. WestLB AG took over the commercial activities of the
former WestLB, while Landesbank Northrhein-Westfalen
took over its public activities. According to Germany,
WestLB AG is legally identical to WestLB and is to be
considered the debtor for the entire recovery claim (1). Wfa
was incorporated into Landesbank Northrhein-Westfalen at
the time of the split-up and therefore withdrawn from the
commercial activities taken over by WestLB AG. The rules
of Landesbank Northrhein-Westfalen also stipulated that
Wfa's capital cannot be used to underpin the mortgage
bonds business remaining within the Landesbank and that,
in future, a remuneration of 0,6 % per annum was to be
paid to the Land in respect of a possible liability function.

2.

WOHNUNGSBAUFÖRDERUNGSANSTALT (WFA)

(28) Wfa was founded in 1957 and operated until 31 December
1991 as a public-law institution (Anstalt des öffentlichen
Rechts). As such,
it was an independent entity with a
nominal capital of DEM 100 million (EUR 50 million) and
sole
the Land of North Rhine-Westphalia

the

as

(1) Submission by Germany of 10 March 2004, p. 2.

shareholder. Under Section 6(1) of the former North Rhine-
Westphalia Law on the promotion of housing (Wohnungs-
Wohnungsbauförderungsgesetz) (2), Wfa devoted itself exclusively
to the promotion of housing by granting low-interest or non-
interest-bearing loans. On account of its non-profit character, it
was exempt from corporation tax (Körperschaftssteuer), property
tax (Vermögenssteuer) and tax on business capital (Gewerbeka-
pitalsteuer).

(29) As a public-law institution, Wfa was covered by the Land's
‘institutional liability’ (Anstaltslast) and ‘guarantor liability’
(Gewährträgerhaftung) for all its liabilities. These guarantees
remained in place as a result of the transfer.

(30) The largest single source of financing for the housing-
promotion activities was — and still is — the Land Housing
Promotion Fund (Landeswohnungsbauvermögen), which has
been built up from interest income from housing loans
granted by Wfa and annual cash injections from the Land
budget. These resources, earmarked to serve exclusively as
the funding base for housing loans by virtue of Section 16
of the Law on the promotion of housing, accounted for
some 75 % of Wfa's refinancing, i.e. DEM 24 700 million
(EUR 12 600 million) as at 31 December 1991.

(31) Prior

to the transfer, Wfa guaranteed Land liabilities
in
incurred for housing promotion purposes. Each year,
its liabilities, Wfa's
line with the Land's repayments of
guarantee was transformed into reimbursement claims of
the Land against Wfa which reduced the value of the Land
Housing Promotion Fund accordingly. These liabilities of
Wfa would have fallen due only when it no longer needed
its revenues from interest and loan recovery in order to
perform its public
tasks. They amounted to about
DEM 7 400 million (EUR 3 780 million) by the end of
1991 and were not shown directly in the balance sheet but
only ‘below the line’.

3.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS

DIRECTIVE AND THE SOLVENCY RATIO DIRECTIVE

(32) Under Council Directive 89/647/EEC on a solvency ratio
for credit institutions (3) (‘Solvency Ratio Directive’) and
under the Own Funds Directive, banks must have own

(2) Wohnungsbauförderungsgesetz, in the version published on 30 Septem-
ber 1979 (Official Gazette of North Rhine-Westphalia, p. 630).

(3) OJ L 386, 30.12.1989, p. 14 (as

repealed and replaced by

Directive 2000/12/EC (OJ L 126, 26.5.2000)).

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funds equivalent to at least 8 % (1) of their risk-adjusted
assets and risk-bearing off-balance-sheet transactions (2).
These Directives necessitated amendments to the German
Banking Law which took effect on 1 January 1992. The new
requirements entered into force on 30 June 1993 (3). Until
that date German credit institutions were obliged to have
own funds equivalent
risk-adjusted
assets (4).

to 5,6 % of

their

(33) As for the new threshold of at least 8 %, half of these own
(Basiseigenmittel),
funds have to be ‘original own funds’
which consist of capital
items available to a credit
institution for unrestricted and immediate use to cover
losses as soon as they occur. Original own funds are
therefore of crucial importance for the level of a bank's total
own funds for prudential purposes since other own funds
of
(ergänzende
Eigenmittel), are accepted only up to the amount of original
own funds to underpin the risk-bearing business of a bank.

lower quality, or ‘additional own funds’

(34) Furthermore, the amount of own funds limits a bank's
exposure to large risks. At the time of Wfa's transfer, the
German Banking Law (Section 13) stipulated that no single
loan granted may exceed 50 % of a bank's own funds and
that the total of such loans exceeding 15 % of own funds
may not be higher than eight times the bank's own funds.
An amendment of the German Banking Law in 1994 to
bring it into line with Council Directive 92/121/EEC (5)
reduced the maximum loan to 25 % of a bank's own funds
and stipulated that the sum of single loans exceeding 10 %
of a bank's own funds may not be higher than eight times
the total of own funds (6).

(35) Moreover, Article 12 of the Second Council Directive 89/
646/EEC of 15 December 1989 on the coordination of
laws, regulations and administrative provisions relating to
the taking up and pursuit of
the business of credit
institutions (7)
limits the size of qualifying holdings in
other credit and financial
institutions. Furthermore, a
special provision in the German Banking Law (Section 12),
not based on Community legislation but found in other
Member States,
long-term
investments,
including holdings in non-financial enter-
prises, to the total amount of the bank's own funds.

limits the total amount of

(36) German banks had to adapt to the new capital requirements
by 30 June 1993. The own funds cushion of many

(1) The capital requirements must be met by credit institutions on a
consolidated, a subconsolidated and an unconsolidated basis.

(2) The term ‘risk-adjusted assets’
bearing and risk-adjusted items.
In fact, the new capital requirements should already have entered
into force on 1 January 1993 but were implemented late in
Germany.

is used below to describe all risk-

(3)

(4) However, this figure was based on a definition of own funds that was

narrower than the one set out in the Own Funds Directive.

(5) Council Directive 92/121/EEC of 21 December 1992 on the
large exposures of credit institutions

monitoring and control of
(OJ L 29, 5.2.1993, p. 1).
It should, however, be pointed out that not only the thresholds were
changed but also the definitions of ‘own funds’ and ‘risk-adjusted
assets’.

(6)

(7) OJ L 386, 30.12.1989, p. 1.

Landesbanks, including WestLB, was already comparatively
weak before transposal of the Solvency Ratio Directive into
German law. According to test calculations made by
Deutsche Bundesbank in December 1991 on the basis of
the provisions of the Directives, the Landesbanks had an
average solvency ratio of 6,3 %, compared with the 8 %
required from 30 June 1993 (8). Therefore, there was an
absolute need for these institutions to raise new capital in
order to avoid restrictions on their business expansion and
indeed to maintain their current level of activities. If a bank
cannot demonstrate the necessary level of own funds, it will
be ordered by the supervisory authorities to take immediate
action to comply with the solvency rules either by raising
additional capital or by reducing risk-adjusted assets.

(37) Private banks had to satisfy additional demand for own
funds on the capital markets. Public banks could not move
in the same direction since public shareholders decided not
to privatise (even in part) their credit institutions. Yet, the
generally tight budgetary situation meant that the public
shareholders could not undertake cash injections of
capital (9). Instead, other solutions were found to provide
additional capital. In the case of WestLB, the Land decided
to transfer Wfa to WestLB in order to strengthen the latter's
own funds base. Similar transactions were carried out by
some other Länder in favour of their respective Land-
esbanks.

4.

THE TRANSFER AND ITS EFFECTS

a)

THE TRANSFER

(38) On 18 December 1991 the Parliament of North Rhine-
Westphalia passed the Law governing the promotion of
housing (Gesetz zur Regelung der Wohnungsbauförderung) (10),
Article 1 of which ordered the transfer of Wfa to WestLB.
The transfer became effective on 1 January 1992.

(39) According to the grounds of the Law, the primary reason
for the transfer was to increase WestLB's own funds in
order to enable it
to comply with the stricter capital
requirements entering into force on 30 June 1993. By way
of the transfer, this could be done without any financial
burden falling on the Land's budget. Combining the
housing promotion activities of Wfa with those of WestLB
was to have the secondary effect of increasing efficiency.

(40) As part of the transfer, the Land waived Wfa's guarantee of
about DEM 7 400 million (EUR 3 780 million)
for
liabilities of the Land in connection with funds raised for
housing promotion (see Section II, point 2).

(8) Deutsche Bundesbank, Monthly Report, May 1993, p. 49.
(9) See, for example, Document 11/2329 of the Parliament of North

Rhine-Westphalia.

(10) Gesetz zur Regelung der Wohnungsbauförderung of 18 December 1991
(Official Gazette of the Land of North Rhine-Westphalia, No 61,
30 December 1991, p. 561).

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(41) WestLB became the universal legal successor to Wfa (except for
Wfa's liability vis-à-vis the Land for debts entered into by the
Land for reasons of housing promotion, which was waived
prior to the transfer). Wfa became an organisationally and
economically independent public-law institution without legal
capacity within WestLB. Wfa's nominal capital and reserves
must be shown in WestLB's balance sheet as a special reserve
(Sonderrücklage). The Land continues
to guarantee Wfa's
liabilities under the Anstaltslast and Gewährträgerhaftung.

(45) Although Wfa lost its legal independence by becoming a
housing promotion division of WestLB and was integrated
into WestLB's accounts, it was not integrated operationally
into WestLB. Wfa remained a distinct entity within WestLB
under the name Wohnungsbauförderungsanstalt Nordrhein-
Westfalen — Anstalt der Westdeutschen Landesbank Girozen-
trale. This new housing promotion division of WestLB is
included in WestLB's accounts but also publishes separate
ones. WestLB's existing housing promotion department
was merged with Wfa.

(42) The assets transferred, i.e. nominal capital, capital reserves, the
Land Housing Promotion Fund and other claims of Wfa, as
well as any future return flows from housing loans remained
earmarked for housing promotion under Article 2, Section 16
(2) of the Law even after their transfer to WestLB. The same
provision established that the assets transferred serve at the
same time as liable equity capital within the meaning of the
German Banking Law (and hence the Own Funds Directive),
on the basis of which a bank's solvency ratio is calculated.
Therefore, they also underpin WestLB's competitive business.

(46) Wfa's transferred capital, reserves, assets and future profits
are still earmarked for housing promotion and must
therefore be administered separately from WestLB's other
commercial activities. This separation is, at the same time, a
prerequisite for continuing recognition of
the housing
promotion activities as non-profit-making under German
tax legislation. Since the German authorities assumed that
the integrated Wfa did indeed remain a non-profit-making
entity, the tax exemptions mentioned in Section II, point 2
above were not abolished.

‘institutional

that WestLB owners'

(43) On the occasion of the transfer, WestLB's owners amended the
covering agreement (Mantelvertrag) and agreed that the assets
earmarked for housing promotion must always be preserved,
even if WestLB suffered losses that absorbed the original
capital. Internally, Wfa's capital should be subordinate in its
liability only to WestLB's remaining equity. It was clarified in
the agreement
liability’
(Anstaltslast) also covered Wfa's special reserve. If WestLB were
to be wound up, the Land would have a priority claim on
Wfa's capital. It was also stated in the agreement that the
increase in WestLB's equity base through the integration of
Wfa constituted an act in money's worth (geldwerte Leistung) by
the Land and that the annual remuneration for this act should
be agreed on by the owners once the first financial results for
the years from 1992 onwards were available (1). This was done
in a protocol note
covering agreement dated
11 November 1993. Notwithstanding the internal agreement
to guarantee Wfa's assets and the internal subordination of
Wfa's capital, no distinction is made in WestLB's external
relationships between Wfa's housing promotion activities and
its function as a provider of own funds to WestLB. The
transferred assets are fully and instantaneously available to
WestLB to cover losses or, in the event of bankruptcy, to cover
creditors' claims.

to the

(44) The management contract regarding the Law governing the
promotion of housing (Geschäftsbesorgungsvertrag
zum
Wohnungsbauförderungsgesetz) concluded between the Land
and WestLB lays down that WestLB will use the special
reserve to underpin its own business activities only in so far
as fulfilment of Wfa's legally binding tasks is guaranteed.

(1) According to Germany, the expression ‘act in money's worth’ used

there is in fact imprecise and was clarified later.

(47) WestLB's competitors also opposed the merger of

the
monopoly-like Wfa and WestLB because they feared that
WestLB would be able to take advantage of information
gathered in the housing promotion field to acquire new
customers for its commercial business. The competent
authorities have undertaken to ensure that distortions of
competition are not caused by such proximity, in particular
by separating the housing promotion division from the
commercial divisions of WestLB in terms of personnel,
information, etc (2).

(48) With the splitting up of WestLB on 1 August 2002 (with
retroactive effect under the accounting rules to 1 January
2002) under a law of the Land of North Rhine-Westphalia
of 2 July 2002, Wfa was allocated to Landesbank
Northrhein-Westfalen and thus withdrawn from the
commercial activities grouped together in WestLB AG.

b)

VALUE OF WFA

(49) As at 31 December 1991, the nominal value of Wfa's capital
transferred to WestLB was about DEM 24 900 million
(EUR 12 730 million), of which nearly DEM 24 700 million
(EUR 12 680 million) was accounted for by the Land
Housing Promotion Fund. These resources
served to
finance housing promotion loans, which are either non-
interest-bearing or low-interest loans and often have long
grace periods. Therefore,
in order to establish its actual
value, the nominal capital had to be heavily discounted.

(2) Section 13 of the Law concerning the asset transfer stipulates that
the housing promotion division must carry out its tasks in a manner
that is neutral in its effect on competition. The actual measures to be
taken to this end are laid down in an agreement between WestLB and
the Land authorities.

L 307/28

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Official Journal of the European Union

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(50) On 1 January 1992 WestLB commissioned a valuation of
Wfa which was delivered on 30 April 1992. It should be
noted that this valuation was carried out only after the Land
had decided on the transfer of Wfa.

secondly,

(51) As to the valuation method, the auditor stated that, because
of the continuing obligation to reinvest all future income of
in low-interest or non-interest-bearing housing
Wfa
promotion loans, the institution would in fact have no
capitalised earnings value. However, this obligation would
cease in the event of the realisation of Wfa. The advantage
of Wfa for WestLB was said to consist, firstly, in the increase
in own funds and the resulting ability to expand business
standing
and,
following the considerable strengthening of
its equity
capital. Since WestLB received no advantage from Wfa's
regular activities, the latter's value had to be established as
the possible proceeds in the event of its sale — without the
reinvestment obligations that exist only in the internal
relationship. The assets had to be valued at an amount
which would result in a normal return, i.e. they had to be
discounted to a value which could serve as a basis for
considering their nominal return flows as a normal market
return.

in the increase in its credit

(52) The auditors revalued various items of Wfa's assets and
liabilities — the housing loans were adjusted from
DEM 30 700 million (EUR 15 700 million) to DEM 13 500
(EUR 6 900 million), i.e. by 56 % — and arrived at a net
asset value for Wfa of DEM 5 900 million (EUR 3 020
million). This corresponds to an overall discount of 76 %
when compared with Wfa's nominal net asset value of
DEM 24 900 million (EUR 12 700 million) at that time.
Following this revaluation, the amount of DEM 5 900
million (EUR 3 020 million) was entered in WestLB's
accounts as a special capital reserve for housing promotion
(Sonderrücklage Wohnungsbauförderungsanstalt).

(53) After being asked by WestLB to accept the amount of
DEM 5 900 million (EUR 3 020 million) as WestLB's
original own funds, BAKred commissioned another audit-
ing firm to carry out a valuation. This valuation was
delivered on 30 September 1992. The valuation for BAKred
examined the plausibility of the one made for WestLB and
accepted its methodological approach. However, mainly
because of the choice of a different discount rate and
differing treatment of possible redemptions before maturity
(Vorfälligkeitstilgungen), the valuation for BAKred arrived at a
net asset value for Wfa ranging from DEM 4 000 million
(EUR 2 050 million) to DEM 5 400 million (EUR 2 760
million).

(54) On the basis of this valuation, BAKred finally accepted on
30 December 1992 DEM 4 000 million (EUR 2 050 million)
as WestLB's original own funds within the meaning of the
the amount shown in
German Banking Law. Neither
WestLB's balance sheet — DEM 5 900 million (EUR 3 020

million) — nor the amount accepted as original own funds
has been changed since then.

(55) Both valuations of the assets transferred were based on the
situation after the waiver of Wfa's liability vis-à-vis the
Land, which they valued at around DEM 7 300 million
(EUR 3 730 million).

c)

EFFECTS OF WFA'S TRANSFER ON WESTLB

(56) On 31 December 1991 WestLB had recognised own funds
of DEM 5 100 million (EUR 2 600 million), of which
DEM 500 million (EUR 260 million) in profit participation
certificates (Genußrechte). The bank's solvency ratio was
around 6,1 % on the basis of the provisions of the German
Banking Law before its adaptation to the Community
Banking Directives,
i.e. 0,5 percentage point above the
minimum level stipulated by that Law.

(57) As a result of the acceptance of Wfa's capital as own funds
of WestLB by BAKred, WestLB's total own funds were
boosted to DEM 9 100 million (EUR 4 650 million), an
increase of 79 %. Taking into account an allocation of
DEM 100 million (EUR 50 million) to reserves from profits,
WestLB's own funds amounted to DEM 9 200 million
(EUR 4 700 million)
at 31 December 1992. This
corresponded to a solvency ratio of 8,7 %, including Wfa's
capital and risk-adjusted assets.

(58) Table 1: Capital requirements and own funds of WestLB and

Wfa (based on data provided by the German authorities)

(at 31 December)

1991

1992

(DEM million)

Risk-adjusted assets of WestLB (without
Wfa)

83 000

91 209

Risk-adjusted assets of Wfa

13 497

14 398

Risk-adjusted assets of WestLB (with Wfa) (*)

105 607

Required own funds of WestLB (**) (= a)

4 611

5 867

Required own funds of WestLB without
Wfa (**) (= b)

5 067

WestLB own funds (= c)

5 090

9 190

WestLB own funds without Wfa (= d)

5 190

Utilisation rate of WestLB own funds (= a/c)

91 %

64 %

Utilisation rate of WestLB own funds with-
out Wfa (= b/d)

98 %

(*) The transfer of Wfa took effect on 1 January 1992.
(**) Based on the 5,6 % requirement in force at that time.

(59) This solvency ratio of 8,7 % included an increase in
WestLB's risk-adjusted assets unrelated to housing promo-

7.11.2006

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Official Journal of the European Union

L 307/29

tion of some DEM 8 200 million (EUR 4 190 million), or
9,9 %, in 1992. If this increase had taken place without the
transfer of Wfa, WestLB's solvency ratio would have fallen
to 5,7 % by 31 December 1992, i.e. to a level very close to
the minimum requirement of 5,6 %.

(60) Whereas all of Wfa's capital

is tied up in its housing
promotion activities, only some of its own funds within the
meaning of the solvency rules are needed to underpin its
risk-adjusted assets. According to information provided by
the German authorities, DEM 1 500 million (EUR 770 mil-
lion) was needed for this purpose at the time when the new
capital requirements entered into force. This means that the
remaining DEM 2 500 million (EUR 1 280 million) could
be used by WestLB at that time as own funds to underpin
its competitive business.

(61) On 31 December 1991 the solvency ratio of the WestLB
group was 5,8 %,
i.e. 0,2 percentage point above the
minimum. One year later, after the Wfa's capital had been
accepted by BAKred, the ratio was about 8,1 %, including
Wfa's risk-adjusted assets. If the asset transfer had not taken
place and the group had increased its non-housing-related
risk-bearing assets as it actually did, the group's solvency

ratio would have fallen to 5,3 %, or 0,3 percentage point
below the minimum level required at the time.

the new provisions, was 9 %,

(62) On 30 June 1993, when the German credit institutions had to
comply with the new capital requirements set by the Own
Funds Directive and the Solvency Ratio Directive, the group's
solvency ratio (including Wfa's capital requirements), calcu-
lated on the basis of
i.e.
1 percentage point above the minimum level. (The original
own funds accounted for 6,3 percentage points, additional
own funds for 2,7 percentage points.) Excluding Wfa's capital
contribution and its risk-adjusted assets, the group would have
had a solvency ratio of about 7,2 % as at 30 June 1993. The
ratio of 9 % was achieved by raising more additional own
funds in the form of subordinated loans amounting to some
DEM 2 900 million (EUR 1 480 million) in early 1993. Over
the whole of 1993 WestLB raised DEM 3 100 million
(EUR 1 590 million) of additional own funds, bringing the
total own funds of the group within the meaning of the
German Banking Law to DEM 12 900 million (EUR 6 600
million) by the end of that year. The solvency ratios had fallen
slightly by the end of 1993, compared with 30 June.

(63) Table 2: Capital requirements and own funds of the WestLB group (based on data provided by the German authorities)

Average amounts

1992 (*)

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002 (#)

(DEM million)

Total assets

271 707 332 616 378 573 428 622 470 789 603 797 693 026 750 558 782 410 844 743

519 470

Risk-adjusted assets

126 071 120 658 151 482 156 470 173 858 204 157 259 237

[...] (+)

[...]

[...]

[...]

Required original own
funds (= a)

Required total own
funds (= b)

4 758

4 827

6 060

6 259

6 954

8 167

10 370

[...]

[...]

[...]

[...]

9 351

9 653

12 119

12 517

13 908

16 333

20 739

[...]

[...]

[...]

[...]

Original own funds (= c)

5 117

8 818

9 502

9 769

9 805

10 358

11 378

[...]

Additional own funds

500

2 495

4 513

4 946

5 270

7 094

10 170

[...]

Total own funds (= d)

5 617

11 313

14 015

14 715

15 075

17 452

21 548

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Utilisation rate of origi-
nal own funds (= a/c)

Utilisation rate of total
own funds (= b/d)

93 %

55 %

64 %

64 %

71 %

79 %

91 %

[...]

[...]

[...]

[...]

166 %

85 %

86 %

85 %

92 %

94 %

96 %

[...]

[...]

[...]

[...]

(*) Anomalies in this year should be attributed to the change in the method of showing Wfa's assets in the balance sheet, to changes in the definition of own funds and

in the solvency ratios, and to the timing of the acceptance of Wfa's capital by BAKred.
Figures relate to WestLB AG, into which the commercial activities of former Westdeutsche Landesbank Girozentrale were regrouped in 2002.

(#)

(+) Confidential information is indicated below by [...].

L 307/30

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Official Journal of the European Union

7.11.2006

(64)

In absolute figures, the original own funds of DEM 4 000
million (EUR 2 050 million) increased by DEM 72 000
million (EUR 36 800 million) the theoretical capacity to
extend business volume with 100 % risk-adjusted assets
under the former German Banking Law (5,6 % minimum
solvency ratio). On the basis of the minimum solvency ratio
of 8 %, applicable since 30 June 1993, the relevant figure
would be DEM 50 000 million (EUR 25 600 million).
Assuming that DEM 2 500 million (EUR 1 280 million) of
Wfa's
to the WestLB group's
its 100 % risk-adjusted lending
competitive business
capacity was
by DEM 31 300 million
(EUR 16 000 million).

capital was

increased

available

(65) However, since a bank's assets are normally not 100 % risk-
adjusted, the actual credit volume capacity was increased by
a greater amount. At the end of 1993 the WestLB group's
risk-adjusted assets (including Wfa's business) amounted to
DEM 148 600 million (EUR 76 000 million). The balance-
sheet total came to DEM 332 600 million (EUR 170 100
million). This indicates an average risk weighting of
45 % (1). Given a constant risk structure, the DEM 2 500
million (EUR 1 280 million) of original own funds
available permitted a total expansion (or coverage of
existing business) of
about DEM 69 400 million
(EUR 35 500 million) on the basis of the 8 % threshold
laid down in the EC Banking Directives. Since the increase
in original own funds allowed WestLB to raise further
additional own funds (up to an amount equal
to the
original own funds),
lending capacity was
indirectly increased even further.

its actual

(66) Several conclusions can be drawn. Firstly, without a capital
increase, WestLB would have had difficulties remaining
above the minimum solvency ratio under the German
Banking Law before its adaptation to the EC Banking
Directives. Secondly, without Wfa's transfer, the WestLB
group would have satisfied the minimum solvency ratio
under the Solvency Ratio Directive only by reducing its
risk-adjusted assets or by mobilising other sources of own
funds (e.g. disclosure of hidden reserves). The raising of
additional own funds could have provided only temporary
relief because the level of such funds is limited by the
amount of original own funds available. Thirdly, the capital
increase, together with the fresh additional own funds
raised in 1993, exceeded the amount needed by the group
to meet the stricter capital requirements of the revised
German Banking Law.

(67) As regards the supervisory restrictions on individual large
loans, the 50 % threshold stipulated by the former German
Banking Law was equivalent to about DEM 2 500 million
(EUR 1 280 million) before the acceptance of Wfa's capital.
After acceptance of Wfa's capital and a DEM 100 million
(EUR 50 million) allocation to reserves from profits, the
threshold rose to nearly DEM 4 600 million (EUR 2 350
million). The 15 % threshold stipulated for large loans,

(1) This calculation leaves out of consideration the risk-bearing, off-

balance-sheet transactions.

which in total may not be higher than eight times the
bank's own funds, was equivalent to about DEM 760 million
(EUR 390 million) at 31 March 1992. One year later, i.e.
after the acceptance of Wfa's capital, the threshold had risen
to nearly DEM 1 400 million (EUR 720 million). WestLB's
capacity to grant such large loans was increased by
DEM 32 000 million (EUR 16 400 million) (i.e. eight times
the increase of own funds) as a result of the transfer of
Wfa (2).

d)

REMUNERATION FOR THE TRANSFER OF WFA

(68) The transfer of Wfa did not lead to a change in the
ownership structure of WestLB. Therefore, the Land is not
remunerated for the capital provided, either by way of a
higher share in dividends paid or by way of a higher share
in the capital gains of the holdings in WestLB.

(69) The agreement governing the relationship between the
owners of WestLB (Mantelvertrag) was amended on the
transfer of Wfa. Under Section 5(2) of that agreement, the
owners agree that the enlargement of WestLB's capital basis
by the Land constitutes a financial advantage for them. The
level of remuneration for the capital provided was to be
fixed after WestLB's first financial results for 1992 were
known, i.e. a short time after the transfer. The grounds for
the law on the transfer contain similar wording as regards
the value of the transfer and the remuneration.

(70) The remuneration for the capital provided was finally fixed
at an annual rate of 0,6 %. It must be paid by WestLB from
profits after tax, giving a pre-tax burden of around 1,1 %
for WestLB (3). It is payable only if profits are made.

(71) The basis for this remuneration is the capital of Wfa
i.e.
recognised by BAKred as original own funds,
DEM 4 000 million (EUR 2 050 million). The remuneration
is paid only on the part of this capital not needed by Wfa to
underpin its housing promotion activities. This part,
available for WestLB to underpin its commercial business,
amounted to DEM 2 500 million (EUR 1 280 million) after
the new capital requirements entered into force and has
been increasing since then (4).

(2)

It should be borne in mind that, under the new rules, not only the
ratios changed but also the definitions of ‘own funds’ and ‘risk-
adjusted assets’.

(3) According to a study submitted by Germany on the remuneration
paid by WestLB, the corporation tax rate was 46 % until 1993 and
42 % thereafter. To this must be added a solidarity surcharge rate of
3,75 % in 1992, 0 % in 1993 and 7,5 % thereafter.

(4) For the sake of clarity, where the amount on which the remuneration
is to be paid is discussed, reference is always made to the situation at
the end of 1993,
the split between DEM 1 500 million
(EUR 770 million) and DEM 2 500 million (EUR 1 280 million),
irrespective of the fact that the division between the capital tied up in
Wfa business and the amount available for WestLB changes.

i.e.

7.11.2006

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Official Journal of the European Union

L 307/31

(72) Table 3: Special capital reserve for housing promotion and own fund requirements needs of Wfa (based on data provided by the

German authorities).

(DEM million)

(At 31 December)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

Special reserve for hous-
ing promotion

Of which accepted as
original own funds

Needed
housing
for
promotion loans of Wfa

5 900

5 900

5 900

5 900

5 900

5 900

5 900

5 900

5 900

5 900

5 900

4 000

4 000

4 000

4 000

4 000

4 000

4 000

4 000

4 000

4 000

4 000

1 668

1 490

1 181

952

892

888

887

[...]

Available for WestLB

13 (*)

2 510

2 819

3 048

3 108

3 112

3 113

[...]

[...]

[...]

[...]

[...]

[...]

[...] (#)

(*)

(#)

Since BAKred accepted Wfa's capital only on 30 December 1992, the capital share of DEM 2 322 000 million (EUR 1 200 million) was available for WestLB in 1992
for two days only. This results in an average available capital for WestLB of DEM 13 million (EUR 7 million) for that year.
Since Wfa's capital could be used for underpinning commercial activities only until 1 August 2002 as a result of the split-up of WestLB, the difference of [...] between
the total amount of recognised original own funds of [...] and the amount of DEM 632 million tied up by Wfa needs to be multiplied by a factor of 7/12. This gives
the amount of [...] as the average capital available for the commercial activities of WestLB.

III.

COMMENTS FROM INTERESTED PARTIES

1.

COMPLAINT AND OBSERVATIONS BY BDB

financial results had been consistently poor for years and
there were no signs of a considerable improvement, i.e. no
indications that a higher return could be expected in the
future.

(73) BdB submits that the application of the ‘market-economy
investor principle’ is not limited to enterprises which are
loss-making or in need of financial restructuring. Such an
investor is guided not by the question of whether the
enterprise in question is profitable at all but rather by
whether the profitability corresponds to the market rate. If
capital injections by the public authorities were examined
loss-making enterprises, this would
only in the case of
discriminate against private enterprises and thus infringe
Article 86(1) of the EC Treaty.

(74)

It also submits that Article 295 of the EC Treaty cannot be
used to exempt
the transfer of Wfa's assets from the
competition rules, arguing that the article in question may
well protect the freedom of the Land to create such a special
asset but, as soon as it is transferred to a commercial
enterprise, the competition rules must be applied.

a)

APPROPRIATE REMUNERATION FOR THE CAPITAL

(75) BdB argued that, like any other original own funds, the
recognised original own funds of DEM 4 000 million
(EUR 2 050 million) can be used to underpin business and,
at the same time, to raise additional own funds for solvency
reasons. Thus, by way of the transfer, the Land enabled
WestLB, which was operating at the very edge of its equity
base, to avoid reducing its business activities and even to
expand those business activities open to risk. Furthermore,
the amount by which the own funds exceed actual
requirements also influences the funding costs on the
financial markets. According to BdB, a market-economy
investor would not inject capital into his company if its

i)

Level of the remuneration

(76) BdB stressed that WestLB was in urgent need of original
own funds and that the transfer of Wfa nearly doubled
WestLB's original own funds from DEM 4 700 million
(EUR 2 400 million) to DEM 8 700 million (EUR 4 450
million). No private investor would have brought such a
huge amount of equity capital into WestLB, given its weak
financial performance at that time. In return for providing
capital under such conditions, a private investor would
have demanded a premium of at least 0,5 percentage point
on top of the normal return on equity capital. BdB quoted
WestLB's profitability as an average of 5,6 % before tax for
the ten years prior to the transfer. This compared with
profitability figures for large private German banks of
between 12,4 % and 18,6 %, with an average of 16,8 %
(before tax) for the same period. Other Landesbanks are
said to have generated profits of between 9 % and 11 %.
BdB submitted a calculation of the return on equity of
German banks made on its behalf by an external
consultancy.

(77) As

regards

the appropriate method of calculating a
comparison of returns on equity, BdB submitted that
historical return rates should be calculated as an arithmetic
average, not as a compound annual growth rate. The latter
method implies that the investor reinvests dividends and
takes the additional income from these reinvestments into
account for the calculation. However, the way in which

L 307/32

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Official Journal of the European Union

7.11.2006

influence the original
dividends are reinvested cannot
investment decision but has to be considered as a new,
separate decision. A method based on an arithmetic average
should therefore be used.

(78)

If, however, the compound annual growth rate method is
used, the average return of some large German private
banks for the period from 1982 to 1992 comes to 12,54 %
after taxes. In calculating this figure, BdB took into account
all possible holding periods for investments and sales
between 1982 and 1992 in order to avoid any possible bias
as a result of taking only one base year, if share prices were
unusually high or low in that year. Applying many holding
periods simultaneously is said to smoothen the effect of
stockmarket fluctuations. BdB submitted that the corre-
sponding figures given by WestLB were too low because
income from the sale of subscription rights was not taken
into account.

(79) As regards the capital asset pricing model, which is used in
the central study provided by WestLB to justify the
remuneration of 0,6 %, BdB submitted its own external
study, which arrives at returns on equity of 12,21 % (on the
basis of the normal risk premium on the German market
for the period 1982-91) and 14,51 % (on the basis of a
higher expected risk premium), these figures being higher
than the ones provided by WestLB. The difference could be
attributed to two facts. Firstly, BdB applied a higher risk
premium for
equity (3,16 % and 5 % respectively).
for credit
it applied a higher beta factor
Secondly,
institutions (1,25). The risk-free basic rate used is the same
as
calculation. Considering the various
methods of calculating return on equity, BdB finally quoted
a range of 14 % to 16 % as a normal return on equity.

in WestLB's

(80) BdB further stated that a private minority shareholder
would not inject additional capital without requesting an
increase of his share in the company. Only with such an
increase could he duly participate in the profit of, and
exercise greater influence on, the company.

(81) BdB also stressed that the agreement between WestLB's
shareholders whereby Wfa's capital should be subordinate
in its liability only to the other equity of WestLB had, in
fact, no real effect because the Land, by virtue of
its
institutional liability (Anstaltslast), had to step in if WestLB
were in difficulties. In fact, as owner of WestLB, the Land
now guaranteed not only WestLB's entire liabilities but also
Wfa's equity that it itself injected, without receiving any
remuneration. That means that any reduction in the risk
attaching to the transferred capital would merely be the
result of an increased risk for the Land as a WestLB
shareholder. Thus, the risk profile of Wfa is no different
from that of normal equity.

(82) As regards the comparison with equity instruments on the
financial market submitted by Germany and WestLB, BdB

stressed that profit participation certificates (Genußrechte)
and cumulative perpetual stocks could not be compared to
Wfa's capital. Firstly, they were not accepted as original own
funds. (Cumulative perpetual stocks were not even accepted
as additional own funds in Germany.) Because it qualifies as
original own funds, Wfa's capital allowed WestLB to
increase further its own funds by raising additional own
funds. Secondly, the instruments referred to were limited in
time and profit participation certificates lost their addi-
tional own funds character two years before maturity. Wfa's
capital was, however, at WestLB's disposal for an unlimited
period. Thirdly, such instruments normally provided only a
limited part of a bank's own funds and required a
considerable share of original own funds. Fourthly, capital
markets instruments could be traded on the markets, which
meant that an investor could terminate his investment
whenever he wished. The Land does not have this
opportunity. In return for accepting such a lack of trading
possibilities, a private investor would demand a premium of
at least 0,5 percentage point on his normal return.

(83) BdB also provided the Commission with data on the equity
components and solvency ratios of some large German
private banks from 1990 onwards. These data show that, at
the beginning of the 1990s, no hybrid original own funds
instruments were in fact available to (or at least used by)
German banks. It also transpires from that information that
these credit institutions generally had solvency ratios well
above the minimum requirements of 4 % for original own
funds and 8 % for total own funds.

(84) BdB also commented on the covering agreement between
the
shareholders of WestLB, which stipulated that,
internally, Wfa's capital was subordinate in its liability only
to the other liable equity capital. Since the expression ‘other
liable equity capital’ also covered additional own funds
instruments like profit participation certificates and sub-
ordinated loans and was therefore detrimental to their
position, it argued that the agreement was a ‘contract at the
expense of third parties’ (Vertrag zu Lasten Dritter) and thus
void. Therefore, the risk profile of Wfa's special reserve was
therefore said to be higher than that of profit participation
certificates and subordinated loans.

to use Wfa's capital

(85) For all these reasons, BdB assumed that the remuneration of
0,6 % paid by WestLB did not constitute a market rate.
Taking into account WestLB's need to raise liquid funds in
in full and the lack of
order
participation in the accumulated reserves because the
Land's share in WestLB did not increase, BdB suggested a
rate within the range of 14 % to 17 % as correct
remuneration. This rate was to be paid on the total
accepted amount of DEM 4 000 million (EUR 2 050 mil-
lion).

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Official Journal of the European Union

L 307/33

ii)

Liquidity costs

(86)

In its complaint BdB accepted the ‘liquidity costs’ so that a
reduction of about 7 percentage points should be applied
when calculating the appropriate remuneration for the
capital. However, it claimed that, because the equity also
served to underpin off-balance-sheet business not requiring
liquid funds, this figure of 7 percentage points should, in
fact, be lower.

(87)

In its observations on the Commission decision to initiate
the procedure laid down in Article 88(2) of the EC Treaty,
BdB argues that ‘liquidity costs’ should not be taken into
account in calculating the appropriate return on Wfa's
capital. These costs are said to have already been taken into
account when discounting Wfa's assets to the value of
DEM 5 900 million (EUR 3 020 million). Moreover, several
banking activities, e.g. guarantees, do not need any liquidity
at all. Therefore, if any costs at all are taken into account,
then it should only be a small margin of 2,7 percentage
points in order to offset the fact that the Wfa assets are
locked up in unprofitable business. BdB submitted an
outside expert's opinion on this point.

for

rates

structure,

the actual

in the different years

(88) The BdB further mentioned that the 7,5 % for refinancing
costs claimed by WestLB was questioned as being too high
in any case. On the basis of an analysis of the average
market
the various
refinancing instruments and in accordance with WestLB's
rate for WestLB's
balance-sheet
refinancing on the markets was said to be an average of
between 6,07 % and 6,54 % for the years 1992-96. BdB
also provided the Commission with figures
the
refinancing costs of some large German private banks at
the time of the transfer, which were considerably lower
than the 7,5 % claimed by WestLB as appropriate
refinancing costs at an earlier stage of
the procedure.
Moreover, according to BdB, a distinction had to be drawn
between figures before tax and figures after tax. Refinancing
costs reduced the taxable profit. So, if any refinancing costs
are taken into account, only rates applied after tax should
be considered.

for

accepted original own funds but at the total equity shown
in the balance sheet, as the latter formed the basis for
commercial estimates of what was available to cover losses.
This amount therefore increased WestLB's credit standing,
and a remuneration comparable to a guarantee premium
should be paid for it.

iv)

Synergy effects

(90) According to BdB, the claimed synergy effects did not
constitute the real reason for the transfer. This was said to
be apparent from the fact that the law on the transfer
justified the measure on the grounds of
the need to
strengthen WestLB's competitive position and from the
agreement that a remuneration should be paid for the act in
money's worth.

(91) Furthermore, BdB questioned how synergy effects could be
achieved while Wfa's and WestLB's commercial businesses
are separated from each other in economic, organisational
and personnel terms, as provided for in the relevant legal
provisions. If synergies did emerge in Wfa's activities, they
would reduce the costs of housing promotion but could not
be regarded as remuneration for the Land from WestLB.

b)

TAX ASPECTS

(92) BdB pointed out that Wfa remained exempt from property
tax, tax on business capital and corporation tax even after
the transfer. Tax exemptions for public-law credit institu-
tions were justified only as long as these institutions were
engaged exclusively in promotional activities and thus did
not operate in competition with private taxable institutions.

(93) According to BdB, a normal bank increasing its capital
would each year have to pay on this additional capital 0,6 %
property tax and 0,8 % tax on business capital. WestLB was
therefore in a favourable position compared with other
banks. The exemption from corporation tax was said to
benefit WestLB indirectly. The waiver of
tax income
constituted state aid within the meaning of Article 87(1)
of the EC Treaty.

iii) Capital basis for the calculation of the remuneration

c) WAIVER OF LIABILITY

(89) As already mentioned, BdB suggested that the appropriate
remuneration should be paid on the total accepted amount
of DEM 4 000 million (EUR 2 050 million). However, it
claimed in its observations that not only this amount,
recognised by BAKred as original own funds, but also the
excess amount of DEM 1 900 million (EUR 970 million),
which cannot be used to underpin business but
is
nevertheless shown as equity in the balance sheet, benefited
WestLB. Rating agencies and investors did not look at the

(94) Prior to the transfer, Wfa was released from liabilities of
DEM 7 300 million (EUR 3 730 million) vis-à-vis the Land,
which waived them without asking for any consideration
for this either from Wfa or from WestLB. A market-
economy investor would have asked for a consideration for
such a waiver. The waiver was also a decisive prerequisite
for the acceptance by BAKred of DEM 4 000 million
(EUR 2 050 million) of capital. WestLB therefore profited
directly from the waiver.

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2.

OBSERVATIONS FROM OTHER INTERESTED PARTIES

(95) Besides WestLB and BdB,

two other interested parties
commented on the Commission decision to initiate the
procedure laid down in Article 88(2) of the EC Treaty.

a)

ASSOCIATION FRANÇAISE DES BANQUES

(96) The Association Française des Banques states that the transfer
of own funds to WestLB, for which only an insignificant
remuneration was sought, and the continuing guarantee for
the bank from the Land lead to distortions of competition
detrimental to French credit institutions. Since WestLB's
owners demanded a return on their capital that was clearly
below the normal level, WestLB could offer its services at
below cost
(‘dumping’). As it benefits from guarantor
liability, WestLB has a triple-A rating which allows it to
refinance on the markets on very favourable terms.

(97) These advantages place French banks operating in Germany
at a disadvantage. At the same time, WestLB can, under
these special conditions, develop its business in France,
especially in the sector of municipal finance. Competition
within the banking sector is distorted in Germany, France
and other Member States.

b)

BRITISH BANKERS' ASSOCIATION

(98) The British Bankers' Association argues that WestLB is an
active
competitor against non-German banks within
Germany and across the European market. Therefore, any
aid granted to WestLB has a distorting effect on trade within
the Community. The Commission is called upon to uphold
the principles of the single market and not to exempt
publicly owned banks from the competition rules of the
Treaty.

3.

OBSERVATIONS FROM WESTLB

(99) Following publication of

the Commission decision to
initiate the procedure laid down in Article 88(2) of the
EC Treaty, WestLB submitted as its position a copy of
Germany's observations on the same question and declared
itself fully in agreement with that statement. Thus, the
arguments of Germany generally reflect the position of
WestLB, which is therefore presented only briefly.

(101) WestLB submits that, given Wfa's special purpose, its assets
are not comparable to normal
funds. The transfer to
WestLB of Wfa's otherwise unusable assets represents the
most commercially sensible use of these assets. By means of
the transfer the Land has optimised the use of
funds
earmarked for housing promotion. A private owner would
have acted in the same way.

(102) According to WestLB, an increase in the Land's participa-
tion following the transfer would be not only unnecessary
but also incompatible with the particular risk profile of
Wfa's capital. Given the lack of liquidity, the transfer cannot
injections. Other equity
be compared to other capital
instruments on the market do not carry voting rights
either.

(103) It is claimed that, since the remuneration received by the
Land was a reasonable price, there was no need to ask for
any increase in WestLB's profitability. Furthermore, it was
not apparent why a market-economy investor would
require a certain target profit if he invested in a profitable
company. Since WestLB had made a profit in the past, there
was also no need to establish any restructuring plan. Such a
required by the Court only in cases of
plan was
restructuring aid for loss-making enterprises.

b)

APPROPRIATE REMUNERATION FOR THE CAPITAL

(104) According to WestLB, the remuneration paid for the capital
in question is appropriate.
In support of this opinion,
WestLB submitted a report from an investment bank which
had been commissioned by WestLB to assess
the
remuneration. The expert report compares the risk profile
of Wfa's capital with that of other equity instruments on
the capital markets and, on the basis of this comparison,
identifies a rate within the range of 0,9 % to 1,4 % as
appropriate remuneration for Wfa's capital. This compared
with costs of about 1,1 % (before tax) for WestLB for the
use of Wfa's capital. WestLB stresses that, in order to be
used in full, the capital requires additional refinancing costs,
which are given in different documents in the range of
7,5 % to 9,3 %.

a)

GENERAL OBSERVATIONS ON THE TRANSFER

(100) According to WestLB,

the market-economy investor
principle is not applicable to investments in economically
sound and profitable enterprises. This is said to be
confirmed by the Court, which had in the past applied
this principle only in cases where, at the time of the
investment decision, the enterprise in question had already
been operating at a significant loss for a considerable time
and was active in a sector characterised by structural
overcapacity. It is claimed that there is no basis in case law
for applying the principle to sound and profitable
enterprises.

(105) WestLB also submits that the figures presented by BdB on
the return on equity of German banks are not correct for
several reasons. On account of specific stock exchange
developments, the investment period used by BdB for the
calculation led to particularly high returns. The arithmetic
average used by BdB did not provide correct results as the
compound annual growth rate method should be used for
such calculations. BdB included in its calculations invest-
ment periods which were not relevant for an investment
decision in 1992 and, because it took into account all
possible holding periods, it counted individual years several
times over. The banks used by BdB for computing an
average rate of return on equity for large German banks

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could not be compared to WestLB because of differing core
businesses. According to WestLB, the average return on
equity of 16,6 % presented by BdB falls to 5,8 % after
adjustment for all these factors.

by WestLB. Furthermore, the tax exemptions for Wfa do
not include elements of state aid for WestLB because they
did not affect the commercial business of the bank.

c)

SYNERGY EFFECTS

(106) According to WestLB, the integration of Wfa into WestLB
led to considerable cost savings for Wfa. In the first two
years Wfa's staff of 588 (personnel within the ‘old’ Wfa as
well as in the housing promotion division of WestLB, the
costs of which had to be borne by Wfa before the transfer)
was reduced by 53. In the early years the transfer led to
annual savings of DEM 13 million (EUR 7 million) for Wfa
as a result of synergies. The reduction in staff numbers
should continue and annual savings were expected to
increase to around DEM 25 million (EUR 13 million) from
1997 onwards. These amounts were said to benefit
exclusively the housing promotion business of the Land.
Another document refers to a synergy effect of at least
DEM 35 million (EUR 18 million) annually.

(107) Furthermore, in the course of the merger, changing the
cost WestLB
pension scheme
DEM 33 million (EUR 17 million)
in payments to the
pension institution of the Federation and the Länder. The
payments would reduce Wfa's subsequent expenses.

employees

for Wfa

d)

TAX EXEMPTIONS

(108) According to WestLB, the exemption of Wfa from certain
taxes is in line with the system of German tax law, under
which the taxes in question do not apply to institutions that
serve public purposes and do not compete with other, tax-
paying institutions. WestLB itself is liable in full to all these
taxes and does not derive any benefit from the exemption
of Wfa. It is also pointed out that property tax has not been
levied since 1 January 1997 and tax on business capital not
since 1 January 1998.

e) WAIVER OF LIABILITY

(109) As WestLB points out,

the waiver of

the liabilities in
question was made before the transfer and subsequent
valuation of Wfa's assets. The value of DEM 4 000 million
(EUR 2 050 million) therefore reflects the situation without
liabilities. Since the remuneration is based on this value,
WestLB does not receive any advantage from the waiver.

IV.

COMMENTS FROM GERMANY

(110) Germany submitted that the transaction does not include
any elements of state aid for WestLB within the meaning of
the EC Treaty. The Land of North Rhine-Westphalia
received an appropriate remuneration which corresponded
to the terms of
the market. Nor did the transaction
constitute state aid for the other shareholders of WestLB as
the preservation of the shareholder structure after Wfa's
transfer was justified by the appropriate remuneration paid

(111) In Germany's opinion, the Commission may examine the
case only on the basis of the circumstances obtaining at the
time of the investment, i.e. at the end of 1991. Only these
circumstances could have been the basis for the Land's
investment decision. Subsequent questions and develop-
ments such as the acceptance of own funds by BAKred or
the annual valuation and integration of Wfa's assets and
liabilities into WestLB's accounts fell outside the scope of
the Commission's investigation.

(112) According to Germany, the ideas on integrating Wfa into
WestLB dated back to the 1970s and the 1980s and were
prompted by the view that housing promotion could be
made more efficient. Before the transfer, the procedure for
receiving a housing loan was very complicated as both Wfa
and WestLB were involved alongside the relevant public
authorities. Within WestLB, a special housing promotion
department was set up, with the costs being borne by Wfa.
This structure led to duplication of posts and files and other
inefficiencies. Since the transfer, the beneficiaries of housing
loans have had to deal with only one party and not two.

(113) Germany states further that WestLB could also have met
the new solvency criteria by raising additional own funds
but that, with a view to securing the long-term functioning
of the bank, it seemed reasonable to increase the original
own funds. All this shows that the prime reason for the
transfer was not to increase WestLB's equity but to achieve
potential synergy effects and improve housing promotion
procedures. The change in solvency rules merely triggered
the process.

(114) The legislative initiative in question already laid down that
the resources of the Land Housing Promotion Fund would
have to remain earmarked, that its substance would have to
be secured and that the instruments for housing promotion
would have to be maintained. In accordance with these
principles, Wfa must be managed by WestLB as an
organisationally and economically independent
entity
which draws up its own annual accounts. In the event of
WestLB being wound up, the Land has a preferential claim
on Wfa's net assets. All of Wfa's income is still given over to
housing promotion. Only that part of Wfa's own funds
which it does not itself need to underpin its assets can be
used by WestLB for solvency purposes. The Land retains a
special influence over Wfa by way of specific supervisory,
information and cooperation rights.

(115) Externally,

liability in respect of

the special reserve is
unlimited. In the event of WestLB's liquidation or bank-
ruptcy, creditors would have direct access to it. Losses could

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also be offset against the special reserve without limitations.
Internally, however, WestLB's owners have laid down other
arrangements regarding the order in which liable capital is
called on, with Wfa's capital being ranked after
the
remaining equity capital of WestLB. Since this internal
agreement does not affect external legal liability, BAKred
accepted the special
reserve as original own funds
amounting to DEM 4 000 million (EUR 2 050 million)
on 30 December 1992.

transfer constitutes the commercially most sensible and
efficient utilisation of Wfa's capital. The Land has optimised
the value of Wfa's assets by the transfer. If Wfa is compared
to a private, non-profit-making entity (e.g. a foundation),
the private owner of such an entity would have acted in the
same way in order to put the assets, which cannot be used
for any other purpose, to a commercial use.

1.

MARKET-ECONOMY INVESTOR PRINCIPLE

(116) Germany notes that the Land was in no way obliged to
consider privatisation as an alternative to the transfer.
Privatisation would have allowed WestLB to approach the
capital markets in order to raise the necessary equity. The
Land was not obliged to open up WestLB for private
investors. Such an argument would infringe Article 295 of
the EC Treaty.

that

(117) An increase in the total return on WestLB's equity is said to
be unnecessary because measures to increase the return are
required only if the State invests in loss-making companies.
Germany claims
the Court applied the market-
economy investor principle in the past only to state
interventions
and sectors
in loss-making companies
suffering from structural overcapacity. It cannot be inferred
from the case law that the Commission may examine state
investments in sound and profitable public enterprises in
order to determine whether they generate at
least an
average return. The State may take into account long-term
and strategic considerations and enjoys a certain latitude for
entrepreneurial decisions and, within those confines, the
Commission is not allowed to vet such decisions. Therefore,
the Commission may not request a certain minimum return
as long as it can be assumed that the enterprises in question
will not be loss-making in the long run. The concept of
average returns necessarily implies that the profitability of
many enterprises is below the average in their industry.
Furthermore, it is not clear which enterprises and which
periods of time should be used as a basis for computing
average returns. The State is not obliged to be guided only
by profitability considerations when taking entrepreneurial
decisions. Even a private investor might take other aspects
into account. It is part of the entrepreneurial freedom to
continue to operate enterprises with a below-average return
and to inject additional capital into them. The limit for the
State is reached only when such behaviour can no longer be
economically justified by the private-investor test.

(118) However, the transaction can also be justified on the basis
of the market-economy investor principle as a measure
which would also have been taken by a private owner. By
virtue of being earmarked for a special purpose, the capital
cannot be compared to a normal equity injection and the

(119) According to Germany, the public purpose of Wfa's assets
constitutes a task of general economic interest which, under
Article 295 of the EC Treaty, is not subject to Commission
supervision. The Member States are free to create such
special-purpose assets.

liquidity,

(120) Germany submitted that the way in which an adequate
remuneration is paid was of no relevance under the state
aid rules. Since the Land received an adequate remunera-
tion, an increase in its participation in WestLB was neither
necessary nor justified and would, in fact, have provided
the Land with an additional economic advantage without
additional consideration. Nor would such a redistribution
of shares correspond to the special nature of Wfa's assets
(lack of
internal subordinate liability). Equity
instruments on the capital markets which are comparable
to Wfa's assets do not carry voting rights either. Since the
agreed remuneration is adequate,
the other owners of
WestLB would receive no additional income which they
would not receive under normal market-economy condi-
tions and WestLB's attractiveness for other investors is,
therefore, not increased. Moreover, because the shareholder
structure of WestLB is
fixed and no new (private)
shareholders are possible, a remuneration which was
hypothetically too low would, in fact, have no influence
on possible private investors. Even if the other shareholders
received an advantage, any effect on the savings banks
would be too small to be perceptible.

(121) Since the Land receives a fixed and adequate remuneration
and since WestLB was and still is a profit-making enterprise
which can undoubtedly pay the agreed remuneration, the
actual level of WestLB's total return on capital is, in fact, of
no relevance and there was no need for the Land to ask for
an increase in the bank's profitability.

2.

APPROPRIATE REMUNERATION FOR THE CAPITAL

(122) Germany submitted that WestLB paid an appropriate
remuneration for the transferred assets. The fact that a
remuneration would have to be paid by WestLB for the
capital provided had always been regarded by the Land as a
prerequisite for the transfer. The level of and basis for
assessing such remuneration was intensively discussed
between the parties involved. Since it was not yet clear in
1991 what amount would be accepted by BAKred as
original own funds, a remuneration was fixed only in

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principle, but not in detail, at the time of the transfer. The
actual level of 0,6 % was fixed in 1993 after negotiations
with the other owners of WestLB (1). Germany did not
provide the Commission with any documents explaining
how this figure was determined. Instead, it argued that the
decisive factor from a state aid point of view was not the
considerations on which the rate was based but only the
result, which was said to be appropriate. The fixed
remuneration was to be paid from distributable profits, i.

e. before any dividends were paid. If, owing to a lack of
profits, the remuneration was not paid in any one year,
there was no right to recovery payments in future years (2).
The figure of 0,6 % corresponds to pre-tax costs of about
1,1 % for WestLB.

(123) The following table shows the payments made by WestLB

to the Land as remuneration for the capital transferred:

(124) Table 4: Remuneration paid by WestLB for the transfer of Wfa (data provided by Germany)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(DEM million)

Remuneration (before tax)

0,0

27,9

30,8

33,4

33,9

34,0

34,0

[...]

33,1

0,0

0,0

0,0

0,0

0,0

0,0

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Payment for pension enti-
tlement of Wfa staff

Total remuneration paid to
the Land

33,1

27,9

30,8

33,4

33,9

34,0

34,0

[...]

[...]

[...]

[...]

(125) Germany presented studies by an external consultancy that
had been commissioned by WestLB to assess what would
have been an adequate remuneration in 1991 for a capital
investment with the same risk profile as Wfa's assets. These
expert opinions examined the external and internal risk
exposure of the capital and the conditions governing the
remuneration payments, comparing these features to those
of various equity instruments found on the international
capital markets in order to determine an appropriate
remuneration. This
explained in the
comparison is
following section. The studies arrive at a spread of between
0,9 % and 1,4 % as an appropriate remuneration. Since the
pre-tax costs for WestLB of the remuneration of 0,6 %
amount to 1,1 %, this rate is regarded as being adequate. In
addition to this direct remuneration, the synergy effects
arising from the transfer have to be taken into account.

studies describe various features (3) of several equity capital
instruments on the market
(ordinary shares, dormant
holdings, profit participation certificates, perpetual pre-
ferred shares, trust preferred securities and subordinated
bonds) and compare them to Wfa's capital. According to
the studies, Wfa's capital can best be compared to profit
participating certificates, perpetual preferred stock and
dormant holdings (4). Of the instruments mentioned above,
trust preferred securities and perpetual preferred shares are
not accepted in Germany. According to the studies, at the
end of 1991 the following capital instruments qualifying as
original own funds were available in Germany: ordinary
shares, preferred shares
and dormant
holdings (Stille Beteiligungen).

(Vorzugsaktien)

a)

COMPARISON WITH OTHER EQUITY INSTRUMENTS

(126) The studies state that the return on an equity instrument is
determined by its risk profile. The higher the risk, the
higher the risk premium, i.e. the interest spread that has to
be paid over secure government bonds. In analysing the
risk profile,
three elements are therefore particularly
important: the arrangements for current interest payments,
the investor's position in the event of current losses and his
position in the event of liquidation or bankruptcy. The

(1) The 0,6 % rate was laid down in a protocol notice to the covering

agreement dated 11 November 1993.

(2) Germany has explained that there was an agreement between the
owners that such recovery payments should take place but that there
was no corresponding legal obligation on WestLB.

(127) The studies stress that Wfa's assets would be available for
WestLB's creditors in the event of WestLB's bankruptcy
(liability function — Haftungsfunktion). At the same time,
WestLB can offset losses without limitations against Wfa's
special reserve (loss compensation function — Verlustaus-
gleichsfunktion). The internal agreements and the earmarking

the instrument by banking regulators,

(3) The following features are described: country of issue and of issuer,
treatment of
its typical
maturity, treatment in the event of bankruptcy/liquidation and for
loss absorption, whether it is callable, whether it is possible to defer
interest/dividend payments and whether a cumulative deferral
is
possible.

(4) Wfa's capital is compared in one version only to profit participation
certificates and perpetual preferred stock and in another to all three
instruments.

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of Wfa's assets are of no relevance in this connection.
However, internally the special reserve is subordinate in its
liability to the other equity of WestLB and this internal
situation would be decisive for the decision of an investor.

(128) As regards the loss compensation function, Wfa's special
reserve can be compared to perpetual preferred shares.
However, since it would be used, in parallel with profit
participation certificates (which are additional own funds),
only once WestLB's other original own funds had been
the profit participation
exhausted and, since some of
certificates would already have been used in parallel, it is
less risky than the profit participation certificates. The same
applies to dormant holdings.

(129) As regards the liability function, the special reserve would
be used after the other original own funds but before
dormant holdings, profit participation certificates and
other additional own funds. Wfa's
reserve is
therefore said to present a higher level of risk than profit
participation certificates and dormant holdings. Once
again, it can be compared in terms of its risk to perpetual
preferred shares. However, according to the studies, because
of
the extremely low probability of a bankruptcy of
WestLB, this risk can in fact be disregarded and an investor
would heavily discount the corresponding risk costs.

special

(130) In the case of Wfa's capital, interest payments would be
made from distributable profit and have priority over
dividends. If the profit is not sufficient, no remuneration is
paid. This arrangement corresponds in principle to that for
perpetual preferred stock. Profit participation certificates
are less risky because missed interest payments would be
deferred on a cumulative basis and paid in later years. For
silent dormant holdings too, cumulative repayments are
possible. In the case of Wfa's capital, the risk of non-
payment is limited to the risk premium (because of the
‘liquidity costs’; see below) whereas, in the case of the other
two instruments, the full coupon (i.e. risk-free return plus
is at risk. Therefore, as regards interest
risk margin)
payments, the risk attaching to Wfa's capital
is slightly
lower then that attaching to the other three instruments.

(131) The studies conclude that the risk premium for Wfa's
special reserve should be below that for profit participation
certificates and dormant holdings as well as below that for
perpetual preferred shares. A historical margin before tax of
between 1,0 % and 1,2 % is quoted for profit participation
certificates, one of between 1,1 % and 1,5 % for dormant
holidays and one of between 1,5 % and 2,0 % for perpetual

preferred shares (1). For Wfa's special reserve a remunera-
tion of 1,1 % is calculated for the years 1993 to 1996 (2).
For 1992 a rate of 255 % is quoted (3). Synergy effects
should also be taken into account. The studies conclude
that the remuneration paid by WestLB was too high in
1992 and appropriate for the years 1993 to 1996.

b)

LIQUIDITY COSTS

(132) According to Germany, a cash injection increases own
funds and provides liquidity. This liquidity can be reinvested
and earn interest, for which the investor would demand a
remuneration. The transfer increases WestLB's own funds
but does not provide liquidity. Wfa's liquidity is locked up
in the housing promotion business. Unlike with a cash
injection, WestLB cannot reinvest the liquidity but has to
raise liquidity on the capital market to achieve the same
result. This results in additional interest expenses. Because
of this lack of liquidity, the Land can, as shown by the
expert opinions provided, demand a remuneration corre-
sponding only to the risk margin,
the difference
between the total return on an investment and the return
on a corresponding government bond.

i.e.

(133) Furthermore,

it is stated that practically all risk-related,
assets-side banking business requires some liquidity, e.g.
swap contracts, forward contracts and derivatives. Only
guarantees and sureties do not require liquidity, but the
corresponding transactions are not shown in the credit
institution's balance sheet.

(134) The relevant refinancing costs which have to be taken into
account should be based on the return on long-term (i.e.
ten-year)
risk-free German Government bonds. The
secondary-market rate for such bonds at the end of 1991
was 8,26 %. The actual average refinancing costs of WestLB
in November 1991 stood at 9,28 %.

c)

CAPITAL BASIS FOR THE CALCULATION OF THE
REMUNERATION

(135) Germany takes the view that, according to a protocol note
to the covering agreement, the remuneration has to be paid
on the annual average portion of Wfa's special reserve used
by WestLB to underpin its own business. The first payment
was to be made in 1993. However, in reality WestLB pays
the remuneration not on the amount used but on the
amount usable,
i.e. not needed to underpin Wfa's own
business.

(1) Data from the US and British markets were used for perpetual
preferred shares because these instruments are not available in
Germany.

(2) This is based on the rate of 0,6 %, a corporation tax rate of 46 %
until 1993 and 42 % thereafter, plus a solidarity surcharge rate of
3,75 % in 1992, 0 % in 1993 and 7,5 % thereafter.

(3) This is based, firstly, on the fact that the special reserve was accepted
by BAKred only on 30 December 1992, resulting in a figure for
usable capital (for calculation purposes) of only DEM 2 million
(EUR 1 million) and, secondly, on the payment in 1992 by WestLB of
DEM 33 million (EUR 17 million) for future pension entitlements of
Wfa staff, which is taken as remuneration paid by WestLB to the
Land in that year.

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million (EUR 970 million)

(136) The remainder of the capital, i.e. the part needed for Wfa's
own business plus
the sum of DEM 1 900 million
(EUR 970 million) entered as equity in WestLB's balance
sheet but not accepted by BAKred, is of no economic use to
WestLB because it cannot be used to underpin additional
risk-bearing assets. The balance-sheet entry of DEM 1 900
is simply the result of a
difference in valuation. Since rating agencies and experi-
enced investors look only at the accepted amount, the
DEM 1 900 million (EUR 970 million) is of no economic
relevance for WestLB. No private investor could demand
remuneration for it on the market because the bank would
always have alternative possibilities to raise equity capital
on the market that would be accepted as original own
funds (e.g. normal cash injection).

(137) According to Germany, Wfa's assets and liabilities would be
newly discounted each year in order to be entered in
WestLB's balance
their actual value. Since
repayments and interest would be granted again as new
long-term, lower-interest housing loans, it is possible that
the nominal amount of Wfa's assets would increase while
the discounted value and the risk-adjusted amount would
decrease.

sheet at

d)

SYNERGY EFFECTS

(138) According to Germany, the Land expected synergies from
the transfer amounting to more than DEM 30 million
(EUR 15 million) annually in the longer term. These were
to come from a simplification of housing promotion
procedure, e.g. the elimination of duplication, easier and
faster communication, and less need for coordination.
Since the transfer, Wfa needs fewer staff and saves on
compensation payments for work carried out in the past by
WestLB's housing promotion department for Wfa. It is
claimed that the Land's expectations were indeed fulfilled
and that, from a management point of view, the merger of
Wfa with WestLB was the only way to achieve these
synergy effects. Furthermore, the way in which synergies
are achieved falls within the economic freedom of the Land,
as protected by Article 295 of the EC Treaty.

(139) Germany points out that in 1992 WestLB paid DEM 33 mil-
lion (EUR 17 million) to cover existing and future pension
entitlements of Wfa employees, which reduced the future
costs of Wfa. These payments are depreciated in WestLB's
accounts over a period of 15 years by DEM 1,6 million
(EUR 0,8 million) annually.

3.

TAX EXEMPTIONS

(140) The exemption of Wfa from property tax (Vermögenssteuer),
tax on business capital (Gewerbekapitalsteuer) and corpora-
tion tax (Körperschaftssteuer) is provided for in the German
tax system. Wfa and other public-law entities are exempt
because they do not compete with taxable financial

institutions but are used by the State to pursue certain
objectives. Because of the tax savings, the State has to
provide fewer funds for Wfa's activities. WestLB is fully
taxed on its income (and thus also on the commercial
activities underpinned by Wfa's capital) and does not
receive any financial advantage from Wfa's exemptions
because the amount accepted as original own funds is not
increased as a result. Even if the tax exemptions were to
lead to an increase in accepted capital, WestLB would not
benefit as
it would then have to pay an adequate
remuneration on any additional amount.

(141) As regards property tax and tax on business capital, an asset
can be subject to such taxation only once and is taxed
where it is used directly. Since Wfa's assets are exempt
regarding their primary use,
i.e. the housing promotion
business, they cannot be subject to taxation when put to an
additional, secondary use. This would be contrary to the
system underlying German tax law. The same applies to the
integration of a private tax-exempt entity into a private
bank. Since these exemptions do not provide WestLB with
an unpaid-for advantage, they do not constitute state aid.
Furthermore, tax on business capital and property tax have
not been levied since 1997 and 1998 respectively as the
Federal Constitutional Court ruled that they were anti-
constitutional.

4.

WAIVER OF LIABILITY

(142) According to Germany, the waiver of liability serves to
avoid a situation where the Land Housing Promotion Fund
is constantly reduced because of the liability created each
year. The waiver does not reduce the Land's assets because,
in the event of Wfa's liquidation, the Housing Promotion
Fund would be correspondingly higher. Since the liability of
Wfa which has been waived would only have become due
in the case of such liquidation, the waiver does not change
the economic position of the Land. In fact, the Land is only
waiving a liability against itself.

(143) The waiver was taken into account in the valuation of Wfa's
equity capital by BAKred and, on this basis, WestLB was
paying an adequate remuneration. The waiver therefore
produces no financial benefit for WestLB.

5.

OBSERVATIONS ON THE COMMENTS FROM

INTERESTED PARTIES

(144) As to the comments from the two bankers' associations
Germany remarks that the general accusations made are
not substantiated by facts or any actual cases of complaints
of credit institutions concerning the way in which WestLB
operates on the markets. The questions regarding Anstalt-
slast and Gewährträgerhaftung raised in one of
the two
observations are in no way linked to the present case and
should be regarded separately.

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(145) As to the comments from BdB, Germany stresses that the
transfer of Wfa was no ad hoc solution but the result of
long-term strategic considerations, especially the increase in
Wfa's efficiency. The case law of the Court contains no
ruling whereby investment by the State in a sound and
profitable enterprise has been regarded as state aid. The
case referred to by BdB concerns enterprises which were
loss-making. Since WestLB has been a profitable enterprise
since its formation, the market-economy investor principle
is not applicable. Germany believes that this is confirmed
by the case law of the Court, where that principle has never
been applied to sound and profitable enterprises. Moreover,
a private investor not only looks at the return but takes
other, strategic considerations into account. In the case of
rescue and restructuring aid, other considerations have to
be weighed up than in the case of a capital injection into a
profitable enterprise. Investments by the State cannot be
assessed simply by looking at the average return in a sector.
Otherwise, state investment in a bank with a below-average
return would constitute state aid even though at the same
time private investors were,
investing in that
enterprise. An investor is guided by prospects rather than
sectoral averages.

in fact,

(146) The state aid rules allowed an examination only of the
terms of the asset transfer, not of the particularities of Wfa's
assets, which are protected by Article 295 of the EC Treaty.
Since the special character of Wfa's assets is protected by
that Article, the capital transferred must not be compared
to a normal
injection. A private-law
foundation could be used in the same way as Wfa without
any effect on the use of its revenues for its special purpose.

liquid capital

(147) Regarding the risk profile of Wfa's capital, a distinction
must be drawn between the role of the Land as an owner of
WestLB and as an investor in Wfa's special reserve. As an
investor in Wfa, the Land bears a lower risk because of the
internal subordination agreement between the shareholders
of WestLB. The risk borne by the Land as an investor in
Wfa is limited to the assets transferred and is not higher, as
claimed by the BdB.

Furthermore, the five German private banks taken into
consideration cannot be compared to WestLB because of
their differing business emphasis. Taking banks which are
comparable, the return on equity falls to 5,8 %. Further-
more, the study for BdB is said to use an unrepresentative
reference period, viz. 1982-92, which includes two market
rallies. Shortening the reference period would thus further
lower the return figures.

(149) As to the liquidity aspect, Germany rejects BdB's argument
that, on account of a lack of liquidity, no refinancing costs
would arise because the discounting of Wfa's assets already
took that liquidity cost into account. It states that this
discount is in no way connected to the liquidity aspect but
is the result of the low-interest or non-interest-bearing
character of Wfa's assets and liabilities. It also rejects BdB's
argument that, if any refinancing costs are accepted, only a
small rate of 2,7 % before tax is justified. The expert
opinion submitted by BdB in this connection is said to be
wrong because it confuses in an inadmissible manner the
revenues of the bank with the revenues of an external
investor. Furthermore, the study of BdB compares gross
revenues whereas net revenues should be compared. The
German Government submitted its own study produced by
an outside consultancy.

(150) The synergies were said to arise only within Wfa, and not
within WestLB, as the duplication of work and existence of
parallel departments could be eliminated (transfer of the
former housing division of WestLB). These effects were,
therefore, independent of the economic, organisational and
personnel separation between Wfa and WestLB. They led to
a reduction in the capital grants by the Land to Wfa and
were the direct result of the transfer of Wfa to WestLB.

(151) The difference between Wfa's special reserve shown in the
balance sheet and the amount accepted by BAKred was
clearly communicated to third parties. According to
Germany, creditors do not assign a liability function to
the part not accepted for solvency purposes. Since only the
part which can be used by WestLB to underpin its business
is of economic use to the bank, the Land cannot ask for
remuneration in respect of the excess amount.

(148) Germany submits that the return calculations provided by
BdB (and taken from an outside expert's opinion) are
incorrect and supports this view by reference to a study
commissioned by WestLB. According to this study, the
main errors are a wrong calculation method (arithmetic
average instead of compound annual growth rate) and the
use of irrelevant investment periods. After adjustment for
these errors, the return of 16,86 % before tax for large
in Germany comes down to 7,0 %.
private banks

(152) The waiver of the liability was taken into account in the
valuation of Wfa's assets by BAKred, and it is on this basis
that WestLB pays the remuneration. Furthermore,
the
overall economic position of the Land is not affected by the
waiver and the tax exemption does not yield any benefit for
WestLB.

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V.

UNDERSTANDING BETWEEN BDB, THE LAND OF
NORTH RHINE-WESTPHALIA AND WESTLB

(160) Both parties agree that, with the parent-subsidiary model
taking effect on 1 January 2002, the aid situation arising
from the transfer of Wfa's capital has ceased.

(153) On 13 October 2004 the complainant BdB, the Land of
North Rhine-Westphalia and WestLB AG submitted to the
Commission an understanding on the state aid procedure
in the WestLB case. Irrespective of their basic interpreta-
tions of the legal situation, which remained unchanged, the
parties
they
to the understanding agreed on what
themselves regarded as suitable parameters for determining
an appropriate remuneration and on the appropriate
remuneration itself. The parties asked the Commission to
take account of this understanding in its decision.

(154) Applying the capital asset pricing model

(CAPM),

the
parties first determined the minimum expected remunera-
tion for a hypothetical own-capital investment in WestLB at
the relevant transfer date. On this basis, the appropriate
minimum remuneration for
the part of Wfa's capital
recognised by BAKred as core capital and not used by Wfa
to underpin its housing promotion activities
should
amount to 10,19 %.

(155) In calculating this figure, the risk-free long-term interest
rates computed by the Landesbanks on the basis of the
REX10 Performance Index of the Deutsche Börse AG and
the beta factors estimated on the basis of a KPMG study of
26 May 2004 commissioned by the Landesbanks were
used. In practical terms, this resulted for WestLB in a risk-
free interest rate of 7,15 % at the time of the transfer. On
the basis of the KPMG study, a beta factor of 0,76 was
determined for the time of the transfer. A market-risk
premium of 4 % was determined across the board.

(156) The initial interest rate of 10,16 % (1 January 1991) was
calculated as follows: risk-free interest rate of 7,15 % +
(general market-risk premium of 4,0 % × beta of 0,76).

(157) A deduction was then made to take account of the lack of
liquidity of the special fund. For this, the risk-free interest
rate of 7,15 % was applied generally as gross refinancing
costs. To determine the key net refinancing costs, the
overall tax rate for WestLB is fixed at 50 %, resulting in a
deduction for lack of liquidity of 3,57 %.

(158) Lastly, a premium of 0,3 % is added because no new voting

rights were granted.

VI.

ASSESSMENT OF THE MEASURE

(161) The first step in appraising the measure under the state aid
rules of the EC Treaty is to assess whether it constitutes
state aid within the meaning of Article 87(1) of
the
EC Treaty.

1.

STATE RESOURCES AND FAVOURABLE TREATMENT

OF A CERTAIN UNDERTAKING

(162) Wfa was a public-law institution owned entirely by the
Land of North Rhine-Westphalia and with the task of
promoting housing by granting low-interest or non-
interest-bearing loans. The Land guaranteed its
total
liabilities under Anstaltslast and Gewährträgerhaftung. Wfa's
main source of financing, the Land Housing Promotion
Fund, had been created by annual cash injections from the
Land budget and by interest income from housing loans.

(163) If state assets of this kind, which have a commercial value,
are transferred to an enterprise without sufficient remu-
neration being paid, it is clear that state resources within
the meaning of Article 87(1) of the EC Treaty are involved.

(164) In order to verify whether the transfer of state resources to
a public enterprise favours the latter and is therefore liable
to constitute state aid within the meaning of Article 87(1)
of the EC Treaty, the Commission applies the market-
economy investor principle. This principle has been
accepted (and developed) by the Court in a number of
decisions. The assessment under that principle will be made
in Section 3 below. If state aid is involved, WestLB, i.e. an
undertaking within the meaning of Article 87(1) of the
EC Treaty, will clearly have been favoured.

2.

DISTORTION OF COMPETITION AND EFFECT ON

TRADE BETWEEN MEMBER STATES

(165) 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 on
financial services markets.

(159) This produces overall an appropriate remuneration of
6,92 % (after tax) for the part of Wfa's capital which was
recognised by BAKred as core capital and was not used by
Wfa to underpin its own housing promotion activities.

(166) In its 1997 annual report, WestLB defines itself as a
universally and internationally active commercial bank, as a

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central bank for the savings banks and as the bank for the
Land and the municipalities. It describes itself as a European
banking group in the wholesale banking sector with
activities in the important financial and economic centres
around the world. Its presence abroad is concentrated in
Europe, where it has subsidiaries, branches and representa-
tive offices in all major countries. WestLB is present in over
35 countries worldwide.

normal market economy conditions’ (2).
In particular, a
financial measure must be considered unacceptable to a
market-economy investor if the financial position of the
company is such that a normal return (in the form of
dividends and capital gains) cannot be expected within a
reasonable period of time (3).

(167) Despite its name, tradition and legally stipulated tasks,
WestLB is not at all a local or regional bank. Its presence in
Europe and on international markets has already been
described in Section II, point 1. In 1997 the group's foreign
business contributed 48 % of non-consolidated revenues.
According to the 1997 annual report, the bank's growth in
that year can be attributed mainly to the expansion of its
foreign business.

(168) These facts clearly show that WestLB 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. This has been
confirmed by the observations of the bankers' associations
of two Member States. It is clear, therefore, that aid given to
WestLB distorts competition and affects trade between
Member States.

(169) It should also be recalled that there is a very close link
between the equity of a credit institution and its banking
activities. Only on the basis of sufficient accepted equity
capital can a bank operate and expand its commercial
operations. Since the state measure provided WestLB with
it directly
such equity capital
influenced the bank's business possibilities.

for solvency purposes,

3.

MARKET-ECONOMY INVESTOR PRINCIPLE

(170) In deciding whether elements of state aid are involved in a
financial measure taken by a public owner of an enterprise,
the Commission applies the market-economy investor
principle. This principle has been applied by the Commis-
sion in many cases and has been accepted and developed by
the Court in several decisions (1). It allows the Commission
to bear in mind the specific circumstances of each case, e.g.
to take into account certain strategies of a holding
company or group of companies or to distinguish between
the short- and long-term interests of an investor. The
market-economy investor principle will also be applied in
the case at hand.

(171) According to the principle, no state aid is involved if 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

(172) The Commission has, of course, to base its appraisal of a
case on the data available to the investor at the time he took
his decision on the financial measure in question. The
transfer of Wfa was decided in 1991 by the relevant public
bodies. The Commission has,
to assess the
transaction on the basis of the data available and economic
and market circumstances obtaining at that time. The data
in this decision that relate to later years are used only to
show the effects of the transfer on WestLB's situation and in
no way to justify or question the transaction with the
benefit of hindsight.

therefore,

(173) Germany reminded the Commission to examine the case
purely on the basis of the situation at the time of the
transfer decision, i.e. the end of 1991, and not to take later
developments into account. Such a view might imply that
the Commission could not take into account either the fact
that only DEM 4 000 million (EUR 2 050 million) of
original own funds instead of the requested DEM 5 900
million (EUR 3 020 million) were accepted by BAKred or
the fact that a remuneration of 0,6 % was agreed in 1993.
However, at the time of the transfer, although the value of
Wfa agreed on by the Land and WestLB was DEM 5 900
million (EUR 3 020 million), no level of remuneration was
fixed. The Commission therefore considers it appropriate,
when assessing the operation, also to take into account the
situation prevailing when the parties finally fixed the
remuneration.

(174) The Commission does not agree with Germany and WestLB
that the market-economy investor principle is not applic-
able to sound and profitable undertakings and that this is
supported by the case law. The fact that the principle has, in
the past, been applied mainly to firms in difficulties in no
way restricts its application to this category of firm.

(175) Restructuring aid for firms may be granted only in cases
where a restructuring plan restores the firm's viability, i.e.
leads to a ‘normal’ rate of return that allows the aided firm
to continue by its own efforts, because this ‘normal’ market

(2) 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, point 11). While this
communication deals explicitly with the manufacturing sector, the
principle can undoubtedly be applied in the same way to all other
sectors. As regards financial services, this has been confirmed by a
number of Commission decisions, e.g. Crédit Lyonnais (OJ L 221,
8.8.1998, p. 28) and GAN (OJ L 78, 16.3.1998, p. 1).

(1) See, for example, Cases C-303/88 Italy v Commission [1991] ECR I-

(3) Public authorities' holdings in company capital — The Commission's

1433 and C-305/89 Italy v Commission [1991] ECR I-1603.

position, Bull. EC 9-1984, pp. 93 and 94.

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rate of return is acceptable to a market-economy investor.
In cases where such matters have been brought before the
Court, it has never called into question the fact that the
Commission required not only a break-even situation or a
token return but also a full ‘normal’ market rate.

(176) There is no provision to the effect that, if a company makes
a profit, this rules out a priori the possibility that the
provision of capital contains elements of state aid. Even if a
company is profitable, a market-economy investor might
refrain from injecting (further) capital if he could not expect
an appropriate return on his capital contribution (in the
form of dividends and an increase in the value of the
investment). Should the company not show the appropriate
expected return at the time of the investment, a market-
economy investor would call for measures to increase the
return. Therefore, the market-economy investor principle is
applicable in the same way to all public enterprises,
whether profitable or loss-making.

(177) The adequacy of the likely return on capital depends in turn
on what a market-economy investor can expect
from
similar investments with a similar exposure to risk. It is
evident
that a constantly underperforming enterprise
showing no signs of recovery is not viable in the long
term. New investors would decline to meet the company's
demand for further capital and existing investors would
eventually disinvest, even accepting a loss, if necessary, in
order
to more profitable
in a communication to the Member
investments. Thus,
States on the application of the state aid rules to public
undertakings, the Commission stated that, when compar-
ing the actions of the State with those of a market-economy
‘in particular when a company is not making a
investor,
the
loss’,
company at the time an additional capital
injection is
proposed (1).

it would evaluate the financial situation of

to reallocate their capital

(179) It is clearly not the Commission's task to initiate procedures
systematically and immediately if a public enterprise shows
below-average profitability. Even private firms may, from
time to time, have lower-than-average profitability. (The
existence of an average logically implies deviations in both
directions.) However, in such circumstances a normal firm
operating on the market would try to increase its
profitability and carry out restructuring and other measures
in order to prevent this situation from becoming chronic.
Market investors would expect appropriate measures to be
taken in this respect.

(180) Furthermore, as already indicated above, a distinction must
be drawn between existing and new investments because
the starting points for the investment decision in question
are different, but not the basic principles. In the case of an
existing investment, the investor might be more willing to
accept a lower (or even negative) return in the short run if
he expects the situation to improve. Certainly, an investor
might also increase his investment in a firm with low
profitability. However, he would not do so unless he
expected an improvement in the situation and a reasonable
return in the long term. If, on the other hand, he expects
the combination of risk and return to be poorer than in
comparable
terminating his
investment. In the case of a new investment, the investor
may be less willing to accept lower profitability from the
very outset (2). However, as already stated, the principles are
the same in all decision-making situations:
the return
expected in the long run from the investment (taking into
account the risk and other factors) must at least be equal to
that from comparable investments. Otherwise, the com-
pany will not be able to find the necessary funds and will
therefore not be viable in the long run.

firms, he will

consider

in principle,

(181) According to WestLB, the question of whether the bank
generated average profits in the years before the transfer
remain unanswered if a fixed and
can,
appropriate remuneration is agreed and if profitability is
sufficient to maintain this remuneration in the long run.
This view can be accepted in principle. However it should
also be borne in mind that viability in the long run depends
on the company achieving an average rate of return on its
equity capital.

(178) It should also be borne in mind that ‘sound and profitable
firms’ cannot be equated with firms which do not make a
loss. A firm which generates only small profits or generates
neither profits nor losses cannot in fact be regarded as
sound and profitable. It is certainly difficult to determine
‘average profitability’ as this is dependent on a number of
factors, i.e. the level of risk in the industry in which the firm
operates. However,
firms which, over a certain period,
generated a profit lower than that generated by firms with a
similar risk structure would, as mentioned, be eliminated
from the market in the long run. The position taken by
Germany and WestLB would lead to a situation where the
State could invest in firms operating with an annual profit
of EUR 1, regardless of the state aid rules in the EC Treaty.

(1) OJ C 307, 13.11.1993, p. 3, point 37.

(182) With respect

to the probable behaviour of a market-
economy investor, it is of no relevance that other banks
also had to raise additional capital as a consequence of the
stricter rules of the Solvency Ratio Directive. The Directive
does not impose any obligation on banks to raise additional
capital. It merely stipulates a minimum ratio of capital to
risk-adjusted assets, i.e. it establishes a legal presumption of

(2)

It cannot be said that investments are made only in profitable
companies on the market. High-risk investments e.g. in innovative or
new technology companies, are quite common. However, in these
cases too the investor invests his capital on the expectation that the
start-up losses and the risks can subsequently be offset by high
profits. Even in the case of such investments, the benchmark is the
expected long-term return.

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what is necessary for a bank's viability. In other words, a
market-economy investor might have urged his bank to
restructure its risks in order to comply with the new
solvency rules instead of increasing the bank's capital. Such
step would directly reduce the bank's volume of business
and hence its market presence.

the bank to meet

(183) If a public shareholder decides that a capital injection is an
the capital
appropriate way for
requirements,
the particular
the question is whether
circumstances under which the capital is provided would
be acceptable for a market-economy investor. If a capital
measure is needed to meet the solvency requirements, a
market-economy investor might be willing to carry out this
measure in order to preserve the value of investments
already made. But he would insist on receiving an
appropriate return on the newly injected capital. It is likely
that a market-economy investor would expect a higher
return on a capital investment in a bank whose capital
resources are depleted and which is in urgent need of new
capital because this circumstance exposes him to higher
risk.

(184) In the light of the market-economy investor principle, the
key question is whether such an investor would have
that had the specific
supplied WestLB with capital
characteristics of Wfa's assets and under
the same
conditions, especially in view of the probable return on
the investment. This question will be examined below.

a)

ARTICLE 295 OF THE EC TREATY

(185) Germany argues that the Land of North Rhine-Westphalia
was not obliged to consider privatising WestLB in order to
increase the latter's equity, that the Land was, in principle,
free to transfer Wfa to WestLB in order to achieve synergies
and that the Land was not obliged under Community law
to consider
the transfer of Wfa to a private credit
institution. This argument can be accepted. Germany also
claims that Wfa's public remit constitutes a task of general
economic interest and that Wfa is, therefore, not subject to
supervision by the Commission under Article 295.

(186) As long as public entities carry out only public tasks and do
not compete with commercial enterprises, the competition
rules do not apply to them. The situation changes when
there are implications for competition. Article 86(2) of the
EC Treaty deals with situations where it might be necessary
to deviate from the competition rules in order to ensure the
provision of services of general economic interest. It is
discussed at point V.6. On the other hand, Article 295 of
the EC Treaty protects the national systems of property
ownership but this cannot justify any infringement of the
Treaty's competition rules.

It

for

the only possible profitable use of these resources was to
transfer them to a similar public-law entity. Thus, the
transfer represented the most commercially sensible use of
the assets in question.
is therefore argued that any
remuneration for the transfer, i.e. any additional return on
Wfa's capital, is sufficient to justify the transfer in view of
the market-economy investor principle. This argument
cannot be accepted. It may be true that Wfa's transfer to
WestLB, which subsequently allowed WestLB to use part of
Wfa's capital
the most
commercially sensible use. Member States are free to use
public funds for public sovereign purposes, demanding no
or low profits in return. The Commission does not question
the right of the Member States to create special-purpose
funds in order to fulfil tasks of general economic interest.
However, as soon as such public funds and assets are used
for commercial competitive activities, normal market-
economy rules have to be applied. This means that, as
soon as the State decides to assign public-purpose assets
(also) to a commercial use, it should seek a remuneration
corresponding to market terms.

solvency purposes, was

b)

SPECIFIC NATURE OF THE MEASURE

(188) In carrying out the above transfer operation in response to
WestLB's need to expand its original own funds, the Land
authorities chose a method of increasing capital that had
very special features. The general idea was to merge a non-
profit credit institution pursuing a particular task (Wfa)
with a normal commercial bank operating under condi-
tions of competition, with the aim of utilising surplus
capital (from the point of view of the solvency rules) within
the non-profit institution for the purposes of the entity
the assets
exposed to competition. At
transferred remained earmarked for their original purpose.
Consequently, the approach of an ‘entity within an entity’
was chosen, with Wfa's assets forming an independent and
‘closed’ circuit in which profits generated by Wfa accrue to
and are retained by that institution only.

the same time,

(189) The Commission is not aware of any precedents for a
capital increase involving such an ‘imperfect’ merger in so
far as this might be relevant from a state aid viewpoint. In
its opinion, however, if a construction like the one at issue
is chosen by a Member State, a thorough analysis of its
financial and economic impact on the competitive part of
the entity is imperative so as to ensure that non-transparent
mechanisms are not used to circumvent the EC Treaty's
state aid rules. It is necessary to assess to what extent the
integration carried out is economically advantageous to the
competitive divisions of WestLB despite the creation of
‘closed circuits’.

(187) The German authorities and WestLB claim that, because of
the constraints imposed by the special purpose assigned to
Wfa's assets, as laid down by the Housing Promotion Law,

(190) It should be pointed out here that the complexity of the
case and the lack of directly comparable transactions on the
free market make this judgement a rather difficult one.
Therefore, the Commission devoted a considerable amount

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of time to gathering information and analysing the case.
Furthermore, it arranged for an outside expert to deliver an
opinion on the transaction and on the remuneration that
can be regarded as corresponding to market terms. Only on
the data available and after a careful
the basis of all
the Commission finally drawn its
examination has
conclusions and come to the present decision.

c)

NO CHANGE IN OWNERSHIP STRUCTURE

(191) When injecting equity capital

into a bank, a market-
economy investor demands an appropriate share in the
bank's profits. One way of ensuring such participation is via
a corresponding change in the structure of ownership,
giving him an appropriate share in the bank's dividends and
in a possible increase in its disclosed and non-disclosed
value as a result of
its enhanced earning capacities.
Therefore, one way of ensuring an adequate return on the
capital provided would have been to increase the Land's
participation in WestLB accordingly, provided that
the
bank's overall profitability corresponds to the normal rate
of return that a market-economy investor would expect
investment. This would have avoided the
from his
discussion of whether the 0,6 % rate of remuneration is
appropriate. However, this course was not taken by the
Land.

(192) According to the German authorities, a redistribution of
shares in WestLB was not possible owing to the specific
character of the transaction, especially the closed-circuit
arrangement and the Land's prerogative
(only valid
internally) as regards the net assets of Wfa in the event of
the liquidation of WestLB, which was agreed on by
WestLB's shareholders.

(193) In this case, however, the Land should have demanded
appropriate remuneration for the transfer in another form,
in accordance with the market-economy investor principle.
Otherwise, if the Land forgoes a remuneration which the
market normally demands, it is not behaving like a market-
economy investor and is thereby granting an advantage to
WestLB which constitutes state aid.

d)

CAPITAL BASIS FOR THE CALCULATION OF THE
REMUNERATION

(194) Germany and WestLB submit that only the part of the
accepted original own funds which can be used by WestLB
to underpin its commercial business has an economic value
for the bank, with the result that a remuneration can be
demanded by the Land in respect of this part only. BdB
claims that the whole amount of DEM 5 900 million
(EUR 3 020 million) is at risk and therefore a remuneration
should be paid on that amount. The level of
this
remuneration should be different for the accepted original
own funds of DEM 4 000 million (EUR 2 050 million) and
the remaining amount of DEM 1 900 million (EUR 970 mil-
lion).

(195) The Commission's consultants based their assessment on
the assumption that, at the time of the transfer, the value of
Wfa was established by the Land and WestLB at DEM 5 900
million (EUR 3 020 million) and that a market-economy

investor would therefore, in principle, seek a remuneration
in respect of that figure, regardless of any later develop-
ments such as the acceptance of the capital (or only part of
it) as original own funds by BAKred. The only decisive
factor for the fixing of a remuneration for a capital
investment is the circumstances obtaining at the time of the
investment decision, and not subsequent events. However,
the Commission's consultants also accept that the transac-
tion would have taken a different course if normal
commercial practice had been followed.

(196) In the Commission's view, the sequence of steps in which
the transfer was carried out could, in fact, point to an equal
remuneration for the whole capital shown in WestLB's
balance sheet. The transfer was first decided and carried
out, and then BAKred was requested to accept Wfa's special
reserve as original own funds and the remuneration was
fixed only close on two years after the transfer decision.
However, under normal market conditions no bank would
have agreed to include Wfa in its balance sheet for the sum
of DEM 5 900 million (EUR 3 020 million) and to pay a
uniform remuneration on that amount before first checking
whether that amount would also be accepted as original
own funds by the supervisory authority. Furthermore, as is
also stressed by the Commission's outside experts, a
rational investor would certainly not behave in this way,
i.e. consent to a substantial capital injection without first
agreeing on an appropriate remuneration mechanism.
However, in the Commission's view, the sequence of events
can be explained by the special circumstances of the case.
The Land had long-term financial relations with the bank
and was its main owner. There were only a small number of
shareholders (all of them public), which means in practice
less need for transparency and openness compared with a
company that has a large number of (‘outside’) shareholders
or
special
circumstances made it possible to decide on the transfer
while leaving the decision on the final remuneration open
until it was established that Wfa's capital could actually be
used for commercial banking purposes.

stock exchange. These

listed on the

is

(197) For the purpose of establishing an appropriate remunera-
tion, a distinction should be made between the different
parts of Wfa's special reserve according to their use to
WestLB. An amount of DEM 5 900 million (EUR 3 020
million) was entered as equity on WestLB's balance sheet.
An amount of DEM 4 000 million (EUR 2 050 million) was
accepted by BAKred as original own funds. Of
these
amounts only DEM 2 500 million (EUR 1 280 million)
allows WestLB to expand its activities and should be the
primary basis of a remuneration for
the Land. The
remaining DEM 1 500 million (EUR 770 million) of the
accepted original own funds are shown in the balance sheet
but are needed to underpin Wfa's housing promotion
business. An amount of DEM 1 900 million (EUR 970 mil-
lion) is shown in the balance sheet but not accepted as own
funds for solvency purposes. Therefore, the amount shown
in WestLB's balance sheet but not usable by WestLB to
expand its commercial business totals DEM 3 400 million
(EUR 1 740 million).

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If

(198) However, equity is necessary not only for supervisory
reasons. The amount of equity shown in the balance sheet
is also 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. Contrary to the arguments of
Germany and WestLB, creditors and rating agencies look
not only at accepted own funds but also at the overall
economic and financial situation of the bank. Accepted
own funds form only part of such an analysis of the bank's
credit
standing. The amount of DEM 5 900 million
(EUR 3 020 million) has been established by the Land
and WestLB as a probable value which could be achieved in
the event of Wfa being sold to a third party.
this
assessment had not been reasonable, WestLB's auditors
would not have allowed it to stand in the balance sheet. The
amount of DEM 4 000 million (EUR 2 050 million)
accepted by BAKred reflects the supervisory body's very
cautious approach to its valuation. It should be borne in
mind that the valuation made for BAKred also gives a
spread of between DEM 4 000 million (EUR 2 050 million)
and DEM 5 400 million (EUR 2 760 million). Therefore,
the total amount of DEM 5 900 million (EUR 3 020 million)
would be viewed by a potential creditor as security for his
monies and would increase the credit standing of WestLB.
transfer on the bank's
the
This positive
creditworthiness was also stated in the valuation of Wfa
made for WestLB in 1992. Since the amount of DEM 3 400
million (EUR 1 740 million) cannot be used to expand
business but improves the bank's appearance in the eyes of
creditors, its economic function may be compared in that
respect to at least that of a guarantee, even if shown as
equity in the balance sheet.

effect of

(199) Since,

therefore,

the amount of DEM 3 400 million
(EUR 1 740 million) is also of economic use to WestLB, a
market-economy investor would have asked for a remu-
neration to be paid on it. Certainly,
this
remuneration will be lower than that for the DEM 2 500
million (EUR 1 280 million), which is of greater use to
WestLB since it can also be used under the solvency rules as
own funds to expand its commercial business.

the level of

e)

APPROPRIATE REMUNERATION FOR THE CAPITAL

(200) Investments of differing economic quality require differing
returns. In analysing an investment's acceptability to an
investor acting under normal market conditions,
is
important therefore to bear in mind the special economic
nature of the financial measure in question and the value of
the capital provided for WestLB.

it

(201) The complainant originally claimed that the transaction at
issue constituted a state guarantee by the Land of North
Rhine-Westphalia for WestLB's debt. But WestLB shows the
assets transferred as equity capital in their accounts and
BAKred accepted an amount of DEM 4 000 million

(EUR 2 050 million) as original own funds within the
meaning of the Own Funds Directive, of which DEM 2 500
million (EUR 1 280 million) can be used by WestLB to
underpin its commercial business. Consequently, a coher-
the financial measure in the light of
ent appraisal of
the EC Treaty calls for its principal
Article 87(1) of
classification as a capital injection and for payment of an
appropriate remuneration. The very same financial measure
cannot be regarded as a capital injection under banking
supervisory rules and as a guarantee under the EC Treaty's
state aid rules. This principal classification does not,
however, rule out the possibility that the Commission
might, because of its particularities, liken part of that equity
which cannot be used by WestLB in the same way as
the purpose of
‘normal’ equity to a guarantee for
calculating an appropriate remuneration.

i)

Comparison with other equity instruments

(202) Germany claims that, since no direct comparison with
other transactions is possible, the appropriate remunera-
tion for the capital provided should be established by
comparing the transfer with various equity instruments on
the markets. To this end, it submitted outside studies the
findings of which are given above and which conclude that
Wfa's capital can best be likened to profit participation
certificates, perpetual preferred stock and dormant hold-
ings.

(203) In the Commission's opinion, it is, in fact, difficult to liken
Wfa's transfer to any instrument available on the market at
that time because of its special nature. 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.
Furthermore, the studies submitted by Germany are not
really comprehensive because they leave out
several
relevant instruments such as non-voting shares.

(204) It should be borne in mind that the instruments used for
the comparison by Germany normally provide a bank with
only a very limited part of own funds. They are additional
instruments, supplementing the ‘basic equity capital’, which
consists mainly of share capital and open reserves. By
contrast, Wfa's capital boosted WestLB's own funds for
solvency purposes from DEM 5 090 million (EUR 2 600
million) to DEM 9 090 million (EUR 4 650 million), i.e. by
80 %. Taking into account only the increase of DEM 2 500
million (EUR 1 280 million) usable by WestLB to underpin
its commercial business, this still represents an increase of
50 %. Hybrid instruments were usually issued up to a
maximum of 20 %. It would not have been possible to
increase WestLB's capital in the same way — and on a
permanent basis — by one of
the instruments com-
pared (1).

that

(1) This point is also stressed by the Commission's outside experts, who
criticise the fact
submitted by the German
the studies
Government omit any reference to the size of the transaction and
compare the transfer to what are — in terms of size — marginal
instruments. According to those experts, Wfa's capital should
therefore be compared instead to original own funds instruments
like non-voting shares.

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(205) It should also be noted that rating agencies pressed for
some sort of ‘voluntary restriction’ to be applied regarding
the share of equity from hybrid instruments, which they
monitored closely.

(206) In this connection, it should be stressed that the relatively
wide range of hybrid equity instruments now available to
credit institutions in several countries for use as original
own funds and additional own funds did not exist in
Germany back in 1991, when the transfer of Wfa was
decided, or in 1993, when WestLB had to comply with
new, stricter capital requirements. Some of these instru-
ments were developed in the meantime, while others
already existed but were not accepted in Germany.
In
practice, the main instruments which were available and
used were profit participation certificates and subordinated
loans (both of which are additional own funds, the latter
being accepted only since 1993).
inap-
to such hybrid
propriate to compare Wfa's capital
instruments, most of which have been developed in the
meantime and some of which are available only in other
countries. Germany itself also (indirectly) rejects such a
comparison, claiming that the Commission must examine
the case on the basis of the facts available at the time of the
decision at the end of 1991.

It is therefore,

(207) Germany's studies claim that, in the case of WestLB, the
likelihood of bankruptcy is so low that it could, in fact, be
practically disregarded. However,
if this argument were
followed strictly, it would mean that an investor should not
require any top-up on the rate of return on risk-free
government bonds when investing in companies consid-
ered as safe investments. This certainly does not corre-
spond to market
risk of
bankruptcy might be low in the case of a particular
investment, it is taken into account by a market-economy
investor, who will demand a significant top-up for such
investment in banks, as in the case of any other ‘safe’ equity
investment.

reality. Even though the

(208) As to the two instruments which, as the closest bench-
marks, play the central role in the comparison undertaken
by Germany, namely perpetual preferred shares and profit
participation certificates, a number of specific points
should be stressed. Perpetual preferred shares constitute
original own funds (core capital) in some countries but are
still not accepted in Germany. Profit participation certifi-
cates constitute only additional own funds, whereas Wfa's
capital qualifies as original own funds. The latter
is
therefore of much greater use to WestLB because it can
be used to raise additional own funds (such as profit
participation certificates) up to the same amount in order

to increase the bank's own funds. Moreover, if profitable
years
followed loss-making ones, profit participation
certificates would be replenished before Wfa's capital. In
addition, Wfa's capital is available to WestLB without any
time limitation, while profit participation certificates are
usually issued for a period of ten years. It is also worth
recalling the enormous, atypical size of the capital injection
and that the ranking in the event of losses must be seen in
this context. Since the share of Wfa's capital is rather large,
it will be used relatively quickly when major losses occur.

(209) For all these reasons, the Commission is of the opinion
that, because of
the
comparison with hybrid equity instruments submitted by
Germany is not a suitable way to determine the appropriate
remuneration to be paid for Wfa's capital (1).

the peculiarities of Wfa's capital,

(210) As to the relationship between Wfa's capital and other
equity instruments, BdB claims that
the subordination
agreement in the covering agreement between WestLB's
shareholders is void because it encroaches on the rights of
third parties by laying down that, in the event of losses at
WestLB, Wfa's special reserve can be used only subordinate
to WestLB's other equity capital. However, the argument by
Germany and WestLB can be followed, namely that this
agreement covers only the relationship between Wfa's
special reserve and the other original own funds provided
by shareholders,
in practice nominal capital and
reserves, but that there was no intention to make Wfa's
capital subordinate to additional own funds like profit
participation certificates and subordinated loans.

i.e.

ii)

Liquidity costs

(211) The arguments of Germany and WestLB on the liquidity
costs can,
in principle, be accepted. A ‘normal’ capital
injection into a bank provides 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) of the
capital provided, 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
the bank (e.g.
interest paid minus other

costs of

(1) The external study carried out for the Commission supports this
view and comments on various individual assessments in the study
submitted by Germany. For example, it sheds a different light on the
‘coupon effect’ by stating that, in the event of ongoing losses or
liquidation, the whole capital and not only part of it would be lost.
The study also points to two subjective elements of the studies
submitted by Germany: market data are said to be used selectively
in some places, they are simply replaced by data from the
and,
authors' own experience, without this being stated explicitly.

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administration) gives the profit on the equity (1). Since
Wfa's capital does not provide WestLB with initial liquidity
because the assets transferred and all the income of Wfa
remain earmarked by law for housing promotion, WestLB
faces additional funding costs equal to the amount of the
capital if it is to raise the necessary funds on the financial
markets in order to take full advantage of the business
opportunities 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) (2).
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 remunerated in the same way as for
a cash injection.

(212) However, in the Commission's view and contrary to the
opinion of WestLB and Germany, the entire refinancing
interest rate does not have 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 WestLB because of
the special nature of the capital transferred. Overall, the
Commission accepts therefore that WestLB incurs addi-
tional ‘liquidity costs’ to the extent of ‘refinancing costs
minus tax’.

iii) Appropriate

remuneration for

the amount of

DEM 2 500 million (EUR 1 280 million)

(213) There are no doubt different ways of calculating the
appropriate remuneration for the amount of DEM 2 500
million made available. However, as will be shown, all the
methods for calculating the remuneration for capital made
available apply the same basic principles. Taking these basic
principles, the Commission here carries out the calculation
in two stages: first, it determines the minimum remunera-
tion that an investor would expect for a (hypothetical)
investment in WestLB's capital. 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
it can produce a sufficiently robust
quantification of that amount.

so, whether

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

(214) The expected return on an investment and the risk
attaching to the investment are essential determinants of

(1) 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.

(2) 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).

the decision to invest on the part of a market-economy
investor.
In order to determine the level of these two
elements, the investor takes into consideration all available
company and market information. He here bases himself
on historical average returns, which generally also give him
an idea of what the company's future performance is likely
to be, as well as — among other things — on the analysis
of the company's business model for the period of the
investment, the strategy and quality of its management, and
the prospects for the economic sector concerned.

invest only if
return or a lower

the
(215) A market-economy investor will
investment permits a higher
risk
compared with the next-best alternative use of the capital.
Accordingly, an investor will not invest in a company
whose expected returns are lower than the average expected
returns of other companies with a similar risk profile. In
such a case,
it can be assumed that there are sufficient
alternatives to the alleged investment that promise a higher
expected return with the same risk profile.

(216) There are various methods for determining the appropriate
minimum remuneration, ranging from different versions of
the financing approach to the CAPM method. For the
purpose of illustrating the different approaches, it makes
sense to differentiate between two components: a risk-free
return and a project-specific risk premium:

appropriate minimum return on a risky investment

=

risk-free basic rate + risk premium for the risky investment

The appropriate minimum return on a risky investment is
therefore the sum of the risk-free rate of return and the
additional risk premium for assuming the investment risk.

(217) Accordingly, the basis for any determination of return is the
existence of a default-risk-free form of investment with an
assumed risk-free return. The expected return on fixed-rate
securities issued by the State is normally used to determine
the risk-free basic rate (or an index based on such securities)
since those constitute a similarly low-risk form of
investment. The risk premium, however,
is determined
differently depending on the method used:

— Financing approach: from the point of view of the bank
using the capital, an investor's expected return on
capital represents future financing costs. Under this

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the historical capital costs incurred by
approach,
comparable banks are first determined. The arithmetic
average of the historical capital costs is then compared
with the future expected equity capital costs and thus
with the investor's requirement as to the expected
return.

— Financing approach with the 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 formula:

minimum return on capital

=

risk-free basic rate + (market risk premium × beta)

The risk premium for the equity investment is obtained by
multiplying the risk premium on 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.

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

(219) The Commission possesses six expert reports in which the
risk premium and the minimum return on capital were
them
calculated using different approaches, with all of
calculating the risk premium for the transfer of Wfa's
capital
to WestLB not directly but on the basis of a
(hypothetical) investment in WestLB's capital.

— Ernst&Young studies of 11 September 1995 and
28 August 1997: In the Ernst&Young studies (1995),
which apply the financing approach, the actual capital
costs stemming from changes in last-trading-day
prices (gains and losses) and dividends paid (dividend
returns) are determined for the period 1982-92. The
arithmetic average of the historical capital costs is
then compared to the investor's requirement as to the
expected return.

of the Securities Market Line Model at a minimum
return of 10 %-11 % for an investment akin to a share
capital investment in WestLB at the relevant time.

— BdB study of 14 January 1999:

the geometric mean values of

In line with the
financing approach, BdB determined, using the
compound annual growth rate and the data pool of
Ernst&Young,
the
capital costs of the four leading German commercial
banks (Deutsche Bank, Dresdner Bank, Commerzbank
and Bayerische Vereinsbank)
conceivable
investment periods between 1982 and 1992. The
average capital costs of
(12,54 %)
correspond to the investor's expected return.

these banks

for all

— Lehman Brothers study of 8 July 1997 commissioned by
WestLB, expert opinion of Professor Schulte-Mattler of
14 January 1999 commissioned by BdB, and First
Consulting study of 18 June 1999 carried out on behalf
of the Commission: These consultants, who all apply
the CAPM,
first determined a general market-risk
premium for the German share market at the end of
1991. They arrived on average at a premium of 4 %-
5 % (Lehman Brothers 4 %, Professor Schulte-Mattler
5 % and First Consulting 4 %-5 %). In their under-
standing submitted to the Commission on 13 October
2004, the Land of North Rhine-Westphalia, WestLB
and the complainant BdB took as the basis a market-
risk premium of 4 %. The consultants then estimated
the beta value, i.e. the individual risk premium for
WestLB. Using this value,
the general market-risk
premium was adjusted for WestLB. Since WestLB was
not a listed company at the end of 1991, its beta value
could not be statistically estimated. For this reason,
the consultants assumed that WestLB's beta value was
the same as
for comparable listed banks.
Professor Schulte-Mattler determined, using Deutsche
Bundesbank data, a beta factor for commercial banks
in Germany at the end of 1991 of 1,25 (on the basis
of annual data) and of 1,1 (on the basis of monthly
data). By contrast, the consultant commissioned by
WestLB, Lehman Brothers, took as a basis the betas
not of all German credit
IKB
Deutsche Industriebank and BHF-Bank, which was
0,765. Lehman Brothers thus arrived at altogether
lower risk premium for WestLB. The complainant too
accepted in the understanding submitted on 13 Octo-
ber 2004 a beta value of 0,76 as still appropriate and
thus arrived at a minimum remuneration of 10,19 %,
which differed from the figure given in its statement of
14 January 1999.

institutions but of

that

— The study by Associés en Finance (October 1999), which
had been commissioned by BdB, arrived on the basis

(220) The following table summarises the findings of

these
studies. If the methods mentioned above for deriving the

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expected return on a risky investment are applied, the
following minimum returns on an investment in the share
capital of WestLB are obtained:

(221) The studies and opinions submitted come to the conclusion
that a minimum return for a (hypothetical) investment in the
share capital of WestLB at the relevant time ranges from 10 %
to 13 % (1). Only two studies arrive at a much higher figure. In
the discussions between the complainant BdB, the Land of
North Rhine-Westphalia and WestLB in July 2004, the parties
agreed on a rate of 10,19 % as the appropriate remuneration.
This figure falls within the market range just
identified.
Deviating from its first WestLB decision in 1999, which set a
minimum of 12 %, the Commission has therefore decided to
use the rate of 10,19 % per annum as the appropriate market
remuneration for an investment in the share capital of WestLB
at 31 December 1991. As a result, the Commission determines
a rate of 10,19 % per annum (after corporation tax and before
investor tax) as the appropriate minimum remuneration for
the transfer of Wfa's capital.

Return discount on account of lack of liquidity

(222) During the proceedings, WestLB first claimed that

its
refinancing costs on the basis of its financial structure at the
time of the transfer were 9,2 %. Subsequently, refinancing
rates of 7,0 % and 7,5 % were suggested in several documents
and at several meetings by WestLB and Germany (2). In the
understanding, the parties agreed, on the basis of the long-
term risk-free basic interest
rate at 31 December 1991
determined by them, to use a rate of 7,15 %. They also
agreed to apply an overall tax rate of 50 %. Accordingly, the
parties arrived at a net refinancing rate of 3,57 % for the part
of Wfa's capital available to underpin commercial business,
resulting in a liquidity discount.

(1) The chosen minimum remuneration is also supported by statements and
studies on actual and expected returns on equity made by investment
banks and consultancy firms. Salomon Brothers puts the equity return
for most European banks at between 10 % and 14 %, Merryl Lynch
estimates a figure of some 11,8 % for different German banks and
WestLB Panmure gives a figure of between 11,8 % and 12,3 %.
In the decision to initiate proceedings under Article 88(2) of
the
EC Treaty, the Commission, on the basis of information provided at the
time by WestLB, indicated a provisional rate of 7 %.

(2)

for not

(223) Since the figures mentioned are still within the range
indicated by Germany, the Commission does not see any
grounds
regarding them as appropriate and
therefore bases its calculation of the aid element on them.
Although the Commission had, in its first WestLB decision,
accepted as the minimum gross refinancing costs the long-
term, risk-free interest rate for 10-year Federal Government
bonds, which stood at 8,26 % at the end of 1991, this rate
is a balance-sheet date that ignores the fact that Wfa's assets
were to be at the disposal of WestLB on a long-term basis.
In their discussions about the long-term, risk-free basic
interest rate, the parties thus abandoned the use of a risk-
free return observable on the market at the time of the
investment in favour of a fixed investment period, the
reasoning being that such an approach would take no
account of the reinvestment risk, i.e. the risk of not being
able to invest at the same risk-free interest rate after the
investment period had expired. The parties consider that
the investment risk is best taken into account using a total
return index. They have therefore used the REX10
Performance Index of Deutsche Börse AG, which shows
the performance of an investment
in 10-year Federal
Government bonds. The index series used contains the
year-end value of the REX 10 Performance Index as of
1970. The parties have then determined the per annum
return reflecting the trend as it is depicted in the period
1970-91 and, in this way, arrived at the aforementioned
risk-free basic interest rates of 7,15 % (31 December 1991).

(224) Since the investment in WestLB was indeed to be made
available on a permanent basis,
it seems fitting in this
special case to apply this method of determining the risk-
free basic interest rates. In addition, the REX 10 Perfor-
mance Index used is a generally recognised data source. The
risk-free basic interest rates determined thus seem appro-
priate.

(225) The Commission has therefore decided in this case to take
as a basis the long-term, risk-free interest rate of 7,15 % at
31 December 1991 determined by the parties as the
minimum gross refinancing costs. Assuming an overall tax
rate of 50 % (3) at the time of the investment, it arrives at a
net refinancing rate and thus at a liquidity discount of
3,75 % per annum for Wfa's capital that was available for
underpinning commercial business.

Return premium on account of the particularities of
Wfa's transfer

(226) In practice, when remuneration is determined, atypical
circumstances which depart from a normal investment in
the share capital of the company concerned generally give
therefore be
rise to discounts or premiums.

It must

(3) According to documents provided by the German Government, the
corporate income tax rate was 42 % in 1995 and 1996, with a
solidarity surcharge of 7,5 %, i.e. 49,5 % in total. The overall rate
dropped to 47,5 % in 1998. It is only since 2001 that the overall tax
rate has been 30,5 %.

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examined whether the particularities, and especially the
specific risk profile of
the transfer of Wfa's capital,
constitute grounds for adjusting the minimum remunera-
tion of 10,19 % — determined above — which a private
investor would expect for a (hypothetical) investment in the
the Commission can
capital of WestLB and whether
produce a methodically robust quantification of
that
adjustment. In this connection, three aspects should be
considered: first, the non-issuance of new shares in the
company with the associated voting rights; second, the
exceptional volume of the asset transfer; and, third, the
non-marketability of the assets.

(227) The Land did not obtain any additional voting rights
through the transfer. By forgoing voting rights, an investor
renounces a say in decisions taken by the bank's board. If
the Land's voting rights had been increased, it would have
possessed more than 70 % of those rights, moving from
being a minority (with 42 % of shares) to a majority
shareholder. 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). This is clearly so in the case of non-voting
preference shares. A higher remuneration is demanded as
well as preferential ranking for forgoing voting rights. On
the basis of the higher remuneration for preference shares
compared with ordinary shares and in agreement with the
complainant BdB, the Land of North Rhine-Westphalia and
their discussions in July 2004,
WestLB, which, after
consider a rate of 0,3 % per annum (after
tax) as
appropriate remuneration, the Commission considers a
premium of at least 0,3 % per annum (after corporation
tax) to be appropriate.

core

capital doubled without

(228) The size of the amount transferred and its effect on WestLB
from the point of view of the Solvency Directive have
already been mentioned. Through the transfer of Wfa's
capital, WestLB's
any
acquisition or administration costs. In the present case,
however, the large volume of Wfa's capital was viewed as
an indication — albeit not sufficient on its own — that the
transfer was akin to an injection of share capital. To that
extent, applying a top-up (premium)
in respect of the
volume of Wfa's transfer would inadmissibly allow for this
aspect twice over. Thus, in the present case and departing
from its position as expressed in the first WestLB decision,
the Commission rejects the idea of a premium for the
volume of Wfa's capital.

(229) 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. To be
more precise, 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
and 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 form part of the net worth of the
company and are no longer at his disposal. But by selling
the shares he can realise their economic countervalue. His
assets have thereby become marketable. Because of the
special circumstances surrounding the transfer of Wfa's
assets, this option was not available to the Land. Never-
theless, departing from the first WestLB decision,
the
Commission does not see any grounds for a further top-up.
Although the Land did not have the possibility of trading
the assets freely and receiving the economic countervalue,
it always had the possibility, at
in principle, of
withdrawing Wfa's capital
from WestLB by law and
reinvesting in other institutions offering higher returns.

least

(230) Overall, the Commission considers a premium of at least
0,3 % per annum (after tax) to be appropriate for forgoing
additional voting rights (1).

No reduction in the remuneration on account of the
agreement of a fixed amount

(231) 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
these two aspects of remuneration for
should reflect
‘normal’ equity injections. It could be argued that the fact
that the Land receives a fixed remuneration instead of one
directly linked to WestLB'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 deteriorates, a fixed rate benefits the
investor but, if it improves, it places him at a disadvantage.
However, actual developments cannot subsequently be used

(1) The study from First Consulting quoted in footnote 49 of the first
WestLB decision had taken a flat-rate top-up of 1 %-2 % for the
various above-mentioned aspects. It had, however, not acknowledged
that the volume should have been taken into consideration when
determining what was akin to share capital.
In so far as the
fungibility aspect is concerned, First Consulting had, in the view of
the Commission, not recognised that the asset was not sellable but
that, by law, it was possible to withdraw it from WestLB and reinvest
it elsewhere.

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to assess the investment decision. It should also be borne in
mind that, in the event of losses, no remuneration is paid at
all and a decision on cumulative recovery payments is a
matter for WestLB. The fixed nature of the rate accordingly
does not benefit the investor in such a way that he would
In
have agreed to a reduction in the remuneration.
aggregate,
the rate of
remuneration should not be reduced for this reason.

the Commission believes

that

(232) It should also be mentioned that the remuneration of
equity injected is normally a matter to be agreed between
in the case at
the company and the investor. However,
hand, the level of the remuneration to be paid by WestLB
was obviously agreed on between the shareholders of
WestLB, which seems unusual. It should not depend on
what the other shareholders are willing to accept but on the
risk for the Land and the usability for WestLB. Germany
moreover did not provide any documents about these
negotiations on the remuneration and the way in which it
was calculated. It is certainly right in claiming that only the
result, i.e. the level of the remuneration, is decisive for the
Commission's assessment under the state aid rules and not
the way in which this result was achieved. However, in the
Commission's view, the way the remuneration was fixed
and the considerations that played a part in that respect can
certainly provide pointers to the extent to which the Land
behaved like a market-economy investor.

(233) Furthermore, it was agreed between the shareholders of
WestLB that
the remuneration should be fixed once
WestLB's financial results for 1992 onwards were available.
In the Commission's view, the financial results of the bank
should not, in fact, be of any relevance in determining the
level of the fixed remuneration, which should be based not
on the profits actually generated by WestLB but on the risk
for the Land and the potential benefits of the transfer for
the bank. A market-economy investor would not be
prepared to accept a lower level of fixed remuneration
because the results of the company in question were poor.
This agreement does not
therefore suggest behaviour
corresponding to that of an investor acting under normal
market-economy conditions.

(234) During the Commission's preliminary investigations,
negotiations took place between the complainant and
WestLB with a view to finding a solution, i.e. to establishing
on a common basis a remuneration regarded as being in
line with the market, without recourse to the procedure laid
down in Article 88(2) of the EC Treaty. These negotiations
successful. During them, however, WestLB
were not
proposed that,
in the event of its liquidation, the Land
should be granted the right to receive, in addition to the
existing fixed remuneration of 0,6 %, an appropriate
consideration for the increase in value of WestLB due to
the additional business made possible by the transfer of
Wfa, i.e. the Land would be given an additional share in
WestLB's open and hidden reserves. This fact suggests that
the value to WestLB of the transferred capital actually
exceeded the agreed remuneration. However, no such share

in the break-up value was agreed. Nor would a market-
economy investor accept such a hypothetical remuneration
since, in the case of a perpetual company like WestLB, he
would never be able to encash it; it would thus have no
value.

Total remuneration

(235) On the basis of the above considerations and in agreement
with the complainant BdB, the Land of North Rhine-
Westphalia and WestLB, the Commission considers that an
appropriate remuneration for the investment in question
would be 6,92 % (after corporation tax), i.e. 10,19 % (after
corporation tax) normal return on equity plus a premium
of 0,3 percentage point (after corporation tax) on account
of the particularities of the transaction less 3,75 percentage
points (after corporation tax) on account of the financing
costs resulting from the transferred assets' lack of liquidity
for WestLB.

iv) Appropriate

remuneration for

the amount of

DEM 3 400 million (EUR 1 740 million)

(236) As already mentioned, the equity of DEM 3 400 million
(EUR 1 740 million) is also of material value to WestLB and
its economic function may 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.

(237) In the decision to initiate the procedure laid down in
Article 88(2) of the EC Treaty, the Commission quoted a
rate of 0,3 % as having been indicated by Germany as the
appropriate commission on a bank guarantee (‘Avalprovi-
sion’) for a bank like WestLB. However, two factors in
particular must be taken into account here. Firstly, the
amount of DEM 3 400 million (EUR 1 740 million)
exceeds what is normally covered by such bank guarantees.
Secondly, bank guarantees are normally associated with
certain transactions and limited in time. By contrast, Wfa's
special reserve is at WestLB's disposal without any time
limit. These two factors require an increase in the premium
to about 0,5 % 0,6 %. Guarantee premiums normally count
as operating expenses and therefore reduce taxable profit,
but the remuneration for Wfa's capital is paid to the Land
from after-tax profits,
so the rate must be adapted
accordingly. In view of all this, the Commission is of the
opinion that a rate of 0,3 % after
tax is a correct
remuneration for this kind of capital.

v)

Synergy effects

(238) The German authorities claim that the real reason for the
transfer was to achieve potential synergies and not to
increase WestLB's equity. It might be true that a discussion
on the efficiency of housing promotion had already begun
in the 1970s. However, despite this lengthy debate, the
transfer did not take place until 1991, when WestLB's
capital requirements forced its public owners to take such
action. It is clear from the documents — especially the

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relevant material on the Transfer Law, such as the grounds
of the law and the minutes of the parliamentary debates —
that the actual purpose of the transfer was to provide
WestLB with the equity base needed to comply with the
new solvency rules. Synergy effects were seen as a positive
(side-)effect but were certainly not the main driving force
behind the transaction at that time.

(244) The Commission takes the view, therefore, that the claimed
synergy effects do not represent a remuneration paid by
WestLB for the transfer of Wfa, but it is prepared to regard
the amount of DEM 33 million (EUR 17 million) paid by
WestLB in 1992 for Wfa's pension costs as part of the
remuneration paid by WestLB for the transfer.

(239) The German authorities and WestLB claim that the Land
had not only received the payment of 0,6 % on the amount
of DEM 2 500 million (EUR 1 280 million) but also
benefited from synergy effects worth about DEM 30 million
(EUR 15 million) annually as a result of the transfer and
integration of Wfa and WestLB's takeover of Wfa's pension
obligations totalling DEM 33 million (EUR 17 million). The
cost savings from synergies arise from the merger of Wfa
with the former housing promotion division of WestLB,
which led to an organisational streamlining of the Land's
housing promotion activities and a reduction in staff.

(240) Synergy effects are the normal consequence of a merger.
However, it is not clear how such synergies dovetail with
the closed-circuit approach claimed by the Land and the
competitive neutrality of Wfa.
In so far as they were
achievable after the transfer, despite the clear separation
between the two entities, and arose from the merger of Wfa
with the housing promotion division of WestLB, which had
already in the past worked exclusively for Wfa, it is difficult
to understand why it should not also have been possible to
obtain such synergies without the transfer.

(241) Furthermore, if such synergies and cost savings accrue to
Wfa, this will help the housing promotion activities (and
hence the Land) by reducing costs but cannot be regarded
as consideration paid by WestLB for the provision of the
original own funds. Since these synergies neither reduce the
usability of the transferred capital for WestLB nor increase
WestLB's costs from the transfer, they should also not
influence the level of remuneration for the equity provided
which a market-economy investor can demand from the
bank. Even if an actual benefit accrued to the Land as a
result of synergies, any competitor would have been forced
the
by competition to ‘pay’
appropriate consideration for
the equity provided, a
‘remuneration’
in the form of benefits for the financial
instrument (Wfa).

to the Land, on top of

(242) For the rest, synergy effects as result of a merger operation
normally arise in both merged entities. It is difficult to
understand why WestLB should not profit at all from such
advantages.

(243) If WestLB made payments for Wfa's pension obligations
which reduce Wfa's annual costs, such payments cannot be
regarded as synergies from the merger. Nevertheless, they
can be regarded as indirect remuneration for the Land paid
by WestLB. The benefits should arise within the housing
promotion business and therefore increase the funds
available there.

f)

INCLUSION OF THE YEAR 2002

(245) Contrary to the view taken by the parties to the agreement,
the Commission furthermore came to the conclusion that
the year 2002 needs to be taken into account when
determining the aid element, on a proportional basis up to
1 August 2002. Germany, it is true, has stated repeatedly
that, because of the retroactive accounting effect of the
merger on 1 January 2002 of Wfa and Landesbank
Nordrhein-Westfalen, which was ordered by law, the state
aid element was to be regarded as having ceased to exist on
that date. However, irrespective of the accounting effect,
Wfa's capital was at the disposal of WestLB for under-
pinning its competitive business until 1 August 2002. This
is the decisive point as regards the question to be addressed
here.

(246) In particular, it has been argued that not only the profits of
Wfa and the areas assisted but also the entire business
involving public bonds were transferred to the Landesbank
on 1 January 2002 as part of the reorganisation, with the
result that the losses of WestLB regarded as being linked
directly to the solution for the future of Wfa have been
considerably higher than the appropriate remuneration for
Wfa's capital, and this should be recognised as appropriate
compensation. However, this argument is unconvincing.
The Commission has thus come to the conclusion that the
disadvantage stemming from the separation of the areas
assisted as well as of the business involving public bonds
does not represent remuneration for the use of Wfa's
capital up to 1 August 2002. It is precisely not only the
areas assisted and the business involving public bonds that
are underpinned by Wfa's capital but also the full range of
WestLB's competitive activities. WestLB will therefore have
to pay a remuneration of 6,92 % on a pro rata basis until
1 August 2002.

g)

AID ELEMENT

(247) As calculated above,

the Commission considers

the
following remuneration to be
in line with market
conditions: 6,92 % per annum after tax for the part of
the capital which could be used by WestLB to underpin its
commercial business, i.e. DEM 2 500 million (EUR 1 280
million) at the end of 1993, and 0,3 % after tax for the
difference between this part and the amount of DEM 5 900
million (EUR 3 020 million) shown as equity in WestLB's
balance sheet, i.e. DEM 3 400 million (EUR 1 740 million)
at the end of 1993.

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(248) WestLB paid a remuneration of 0,6 % only on the amount
which it could use for underpinning its commercial
business. This remuneration was first paid for 1993. As
explained above, the Commission accepts the payments by
WestLB in 1992 for Wfa's pension claims as additional
remuneration for the Land.

(250) Table 5: Calculation of the aid element

(249) The aid element can be calculated as the difference between
the actual payments and the payments which would
correspond to market conditions.

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

(DEM million)

13

2 510

2 819

3 048

3 108

3 112

3 113

[...]

[...]

[...]

[...]

5 887

3 390

3 081

2 852

2 792

2 788

2 787

[...]

[...]

[...]

[...]

0,9

173,7

195,1

210,9

215,1

215,4

215,4

[...]

[...]

[...]

17,7

10,2

9,2

8,6

8,4

8,4

8,4

[...]

[...]

[...]

18,6

183,9

204,3

219,5

223,5

223,8

223,8

[...]

[...]

[...]

[...]

[...]

[...]

33,1

15,1

16,9

18,3

18,6

18,7

18,7

[...]

[...]

[...]

[...] (1)

1. Part of

special

reserve

available to WestLB

2. Remainder

(difference
vis-à-vis DEM 5 900) in
2002 at a proportional
rate of 7/12

Remuneration of 6,92 %
(after tax) on point 1

Remuneration
(after tax) on point 2

of

0,3 %

Total remuneration in line
with market conditions

Actual remuneration (after
tax)

Aid element

- 14,5

168,8

187,4

201,2

204,9

205,1

205,1

208,6

209,3

209,3

128,6

(Amount: DEM 1 913,80 million = EUR 978,51 million)
(1) According to Germany, WestLB paid DEM [...] for the whole of 2002. In terms of the relevant period from 1 January to 1 August 2002 ([...] multiplied by the factor

of 7/12), an amount of [...] was thus paid as remuneration.

4.

TAX EXEMPTIONS

these tax provisions are not intended to favour and do not
favour WestLB over other taxable persons.

(251) As stated in the Commission decision to initiate the
procedure laid down in Article 88(2) of the EC Treaty, state
aid may be involved if a particular enterprise is exempt
from taxes whereas its competitors are subject to normal
taxation. If the construction of an ‘entity within an entity’
involves a non-profit, tax-exempt entity, steps have to be
taken to ensure that the economic effects of tax privileges
are limited strictly to the non-profit entity and do not spill
over to the enterprise in the competitive sector.

(253) Profits accruing within WestLB's competitive business as a
result of the use of Wfa's capital for solvency calculations
are being taxed normally. Only profits in the housing
promotion sector are exempt
the
exemptions from taxes on business capital and on property
are limited to the housing promotion business. It is not the
Commission's task to decide whether the German tax laws
regarding exemptions for non-profit oriented activities
have been infringed but only to assess the measure under
the state aid rules of the EC Treaty.

from tax. Similarly,

(252) WestLB was subject to neither property tax (Vermögen-
ssteuer) nor tax on business capital (Gewerbekapitalsteuer) on
the transferred capital. Furthermore, the profit from Wfa's
from corporation tax (Kör-
activities remained exempt
perschaftssteuer) after the transfer. According to Germany,

(254) The exemption from property tax, tax on business capital
and corporation tax enjoyed by Wfa within WestLB
boosted Wfa's profits (or reduced its losses), alleviated the

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potential need for the Land to inject additional funds into
housing promotion and subsequently increased Wfa's net
assets. Since Wfa needed only a certain part of
this
(enlarged) capital base as original own funds for its own
business, the part available to WestLB to underpin its
competitive activities also increased over time. However,
had this share increased, the basis for the remuneration to
be paid to the Land would also have increased. If the
remuneration were fixed at an appropriate level, there
would have been no distortion of competition in favour of
WestLB as a result of the tax exemptions for the housing
promotion business. According to the above calculations,
an appropriate level would be 6,92 % per annum and 0,3 %
per annum respectively.

5.

WAIVER OF LIABILITY

(259) Given that

the aid has no regional objective — it

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

(260) Since the economic survival of WestLB 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
WestLB 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.

(255) Germany argues that

the waiver of

liabilities did not
adversely affect the Land's financial position and did not
confer any competitive advantage on Wfa or WestLB.
Following the transfer, Wfa's assets (the Land housing
promotion fund) were not reduced each year by this
liability, so that higher proceeds would have been possible
in the event of Wfa being wound up, with such higher
proceeds accruing to the Land. The German authorities also
state that, without the waiver, BAKred would not have
accepted DEM 4 000 million (EUR 2 050 million) as
original own funds of Wfa.

(256) The waiver has certainly increased Wfa's value. However,
since the remuneration to be paid by WestLB was based on
the valuation of Wfa after the waiver,
i.e. taking into
account this increase in its value, the waiver did not confer
an advantage on WestLB in so far as the remuneration was
in line with the market.

6.

COMPATIBILITY OF THE MEASURE WITH THE

EC TREATY

(257) On the basis of the foregoing considerations,

it can be
stated that all the criteria laid down in Article 87(1) of the
EC Treaty are met and the transfer of Wfa therefore
involves state aid within the meaning of that Article. On
this basis, an assessment has to be made as to whether that
aid can be considered compatible with the common
market.
the German
Government did not invoke any exemption clause of the
EC Treaty with regard to possible state elements in
connection with the transfer of Wfa.

should be pointed out

that

It

it

(261) Under Article 87(3)(c) of the EC Treaty, aid may be found
compatible if
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,
this
for
exemption clause are not met. WestLB is not described as
an undertaking in difficulty whose viability should be
restored with the support of state aid.

the application of

the conditions

(262) Article 86(2) of the EC Treaty, which allows exemptions
the Treaty under certain
from the state aid rules of
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’ (1). However,
it is clear that the
transfer was effected in order to allow WestLB to comply
with the new own funds requirements and with no regard
to any services of general economic interest. Furthermore,
Germany did not claim that
the transfer of Wfa was
designed to indemnify WestLB for the provision of certain
this
services of general economic interest. Therefore,
exemption clause does not apply either in the case at hand.

(263) 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.

VII.

CONCLUSIONS

(264) The Commission finds

that Germany has unlawfully
implemented the aid in question in breach of Article 88
(3) of the EC Treaty. This aid is therefore illegal.

(258) None of the exemption clauses of Article 87(2) of the
EC Treaty are applicable. The aid is not of a social character,
is not granted to individual consumers, does not make
good the damage caused by natural disasters or exceptional
occurrences, and does not compensate for economic
disadvantages caused by the division of Germany.

(265) The aid cannot be found compatible either under Article 87
(2) or (3) or under any other provision of the EC Treaty. It

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

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is therefore declared incompatible with the Treaty and must
be discontinued and the aid element of
the measure
illegally put into effect must be recovered by the German
Government.

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.

HAS ADOPTED THIS DECISION:

Article 1

state

aid which Germany

implemented for West-
The
deutsche Landesbank-Girozentrale, now WestLB AG, between
1 January 1992 and 1 August 2002,
to
EUR 978,51 million, is incompatible with the common market.

amounting

Interest shall be calculated in accordance with the provisions laid
down in Chapter V of Commission Regulation (EC) No 794/
2004 (1).

Article 4

Germany shall inform the Commission, within two months of
notification of this Decision, of the measures taken to comply
with it, using the questionnaire attached in the Annex to this
Decision.

Article 2

Article 5

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

This Decision is addressed to the Federal Republic of Germany.

Article 3

Done at Brussels, 20 October 2004.

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.

For the Commission

Mario MONTI

Member of the Commission

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

7.11.2006

EN

Official Journal of the European Union

L 307/57

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.