2006/741/EC: Commission Decision of 20 October 2004 on State Aid implemented by Germany for Landesbank Schleswig-Holstein — Girozentrale, now HSH Nordbank AG (notified under document number C(2004) 3930)   (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 State Aid implemented by Germany for Landesbank Schleswig-Holstein — Girozentrale, now
HSH Nordbank AG

(notified under document number C(2004) 3930)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/741/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

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

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

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

Whereas:

I.

PROCEDURE

(1)

(2)

is

these proceedings

The subject of
the transfer of
Wohnungsbaukreditanstalt des Landes Schleswig-Holstein
(‘WKA’), Wirtschaftsaufbaukasse Schleswig-Holstein AG
(‘WAK’) and the special-purpose real-estate reserve by the
Land of Schleswig-Holstein to Landesbank Schleswig-
Holstein — Girozentrale (‘LSH’). There are a further six
cases in which proceedings have been initiated against
Germany in connection with transfers of assets to Land-
esbanks, and in particular to Westdeutsche Landesbank
Girozentrale (‘WestLB’).

By letter of 12 January 1993,
the Commission asked
Germany for information on a DEM 4 billion capital
increase for WestLB resulting from the incorporation of the
housing organisation Wohnungsbauförderanstalt
(‘WfA’)
the
and on similar
Landesbanks of other Länder. It asked which Landesbanks
had benefited from a transfer of public enterprises and for
information on the reasons for those transactions.

in the own funds of

increases

(3) Germany replied by letters dated 16 March and 17 Septem-
ber 1993. The Commission requested further information
by letters of 10 November and 13 December 1993, to
which Germany replied by letter of 8 March 1994.

(4)

By letters of 31 May and 21 December 1994,
the
Bundesverband deutscher Banken e.V. (‘BdB’), an association

(1) OJ C 76, 28.3.2003, p. 2.

established in Germany,
representing private banks
informed the Commission that, among other
things,
WKA and WAK, together with their entire assets, had been
transferred to LSH with effect from 1 January 1991. At the
same time, WKA's and WAK's tasks had been transferred to
the recently set-up Investitionsbank Schleswig-Holstein
(‘IB’).
IB operated as a special division of LSH. This
increased the own funds at LSH's disposal and, in the BdB's
view, distorted competition in its favour since the parties
had not agreed remuneration consistent with the market-
economy investor principle. In its second letter, the BdB
accordingly lodged a formal complaint and called on the
Commission to initiate proceedings against Germany under
Article 93(2) of the EC Treaty (now Article 88(2)).

(5)

The complaint also related to similar transfers of assets to
Landesbank Berlin, Westdeutsche Landesbank, Nord-
deutsche Landesbank, Hamburger Landesbank and Bayer-
In February and March 1995 and
ische Landesbank.
December 1996 several banks
associated themselves
individually with the complaint lodged by their association.

(6)

By letters of 6 August 1997 and 30 July 1998, the BdB
informed the Commission of two further transfers of assets,
to Landesbank Schleswig-Holstein in Schleswig-Holstein
and Landesbank Hessen-Thüringen in Hessen. According to
the BdB,
the Land of Schleswig-Holstein intended to
transfer the real estate it owned to IB as a special-purpose
reserve forming part of LSH's equity capital. The BdB
referred in this context to Section 20 of a bill amending the
Schleswig-Holstein Investment Bank Act
(version as at
26 June 1997), which stipulates that the real-estate assets,
after deduction of
liabilities, should be considered to
constitute a special-purpose reserve forming part of LSH's
equity capital. The BdB also referred to the comments on
Section 20 contained in the explanatory memorandum to
this bill, which state that the special-purpose real-estate
reserve constitutes part of the bank's liable equity capital
according to the principles of the Banking Act (Kreditwe-
sengesetz). The stated objective of ‘mobilising Land assets in
loss of disposal or
order

to create liquidity without

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decision-making authority on the Land's part’ would not be
achieved if LSH were actually to pay the market price for
the real estate transferred to it.

(7)

The Commission first examined the transfer of assets to
WestLB but announced that it would review the transfers to
the other banks in the light of the findings in that case (2).
By Decision 2000/392/EC (3), it finally declared in 1999
that the aid measure (the difference between the remunera-
tion paid and the normal market remuneration) was
incompatible with the common market and ordered that
the aid should be recovered. This decision was annulled by
the Court of First Instance of the European Communities
on 6 March 2003 (4) as insufficient reasons had been given
for two of the factors used to calculate the appropriate
remuneration, but it was confirmed in all other respects.

(8) On 1 September 1999 the Commission sent Germany a
request for information on the transfers of assets to the
other Landesbanks. By letter of 8 December 1999,
Germany supplied information on the transfer of WKA
and WAK to LSH, supplementing that information in a
letter of 22 January 2001. Germany replied to a further
request for information dated 22 February 2001 by letter of
3 May 2001.

(9)

By letter of 13 November 2002, the Commission informed
Germany of its decision to initiate the formal investigation
procedure laid down in Article 88(2) of the EC Treaty in
respect of the transfer of WKA, WAK and the special-
the Land of Schleswig-
purpose real-estate reserve of
Holstein to LSH. At
launched the
investigation procedure in respect of similar transfers of
assets
to Norddeutsche Landesbank — Girozentrale,
Bayerische Landesbank Girozentrale, Hamburgische Land-
esbank — Girozentrale and Landesbank Hessen-Thüringen.
It had already opened an investigation into the transfer of
Wohnungsbaukreditanstalt to Landesbank Berlin back in
July 2002.

the same time,

it

(14) The Commission asked for

further

information on
11 September 2003, and Germany replied on 29 October
and 6 November 2003, commenting also on BdB's
comments on LSH. On 30 October 2003, Germany
forwarded comments by the Land Government of North
Rhine-Westphalia and by WestLB on the BdB's statement
concerning the five Landesbank cases opened in November
2002.

(15) The Commission sent further requests for information on 7
and 30 April, 19 May and 12 August 2004, to which
Germany replied on 1 and 28 June, 27 May, 23 June,
27 August and 30 September 2004.

(16) On 19 July 2004 the complainant (BdB), the Land of North
Rhine-Westphalia and WestLB AG submitted a provisional
agreement on the appropriate remuneration for
the
transferred assets. In their view, this remuneration should
form the basis of the Commission Decision. The Commis-
sion received the final version of this understanding on
13.10.04. On 29 September 2004, the BdB, the Land of
Schleswig-Holstein and HSH Nordbank — which was
formed from LSH and Hamburgische Landesbank in 2003
— submitted a provisional understanding on the appro-
priate remuneration for the transferred assets. These parties
and Germany subsequently addressed several letters to the
Commission. The definitive version of the understanding
on the transfer of the special-purpose assets to LSH reached
the Commission on 14.10.04. Similar understandings
reached in the other cases involving transfers of assets to
Landesbanks — except Landesbank Hessen-Thüringen —
were also submitted to the Commission.

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

(11) By letter of 11 April 2003, LSH submitted its comments on

the initiation of the procedure in the LSH case.

(12) By letter of 14 April 2003, Germany commented on the

decision to initiate the procedure.

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

(2) OJ C 140, 5.5.1998, p. 9.
(3) OJ L 150, 23.6.2000, p. 1; actions challenging that decision have
been brought by Germany (Case C-376/99), by North Rhine-
Westphalia (Case T-233/99) and by WestLB (Case T-228/99). The
Commission has also brought proceedings for infringement of the
Treaty (Case C-209/00).
[2003] ECR I-435.

(4)
(5) Norddeutsche Landesbank: OJ C 81, 4.4.2003, p. 2; Bayerische
Landesbank: OJ C 81, 4.4.2003, p. 13; Hamburgische Landesbank:
OJ C 81, 4.4.2003, p. 24; Landesbank Hessen-Thüringen: OJ C 73,
26.3.2003, p. 3.

II.

DETAILED DESCRIPTION OF THE MEASURES

1.

LANDESBANK SCHLESWIG-HOLSTEIN —

GIROZENTRALE

(17) Landesbank Schleswig-Holstein — Girozentrale (LB Kiel),
with its head office in Kiel, had a group balance-sheet total
of EUR 145 500 million (as at 31 December 2002), making
it one of Germany's 15 largest banks. Founded in 1917 as
the bank of the Province of Schleswig-Holstein, it was a
publicly owned credit institution operating in the form of a
public institution (Anstalt des öffentlichen Rechts).

(18) From 1994 LSH was owned by the WestLB group (39,9 %),
the Land of Schleswig-Holstein (25,05 %), the Sparkassen-
und Giroverband für Schleswig-Holstein (25,05 %) and
Landesbank Baden-Württemberg (10 %). This ownership

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structure resulted from a transfer of capital holdings from
the Land of Schleswig-Holstein and the Sparkassen- und
Giroverbands für Schleswig-Holstein to WestLB and Land-
esbank Baden-Württemberg on 1 January 1994. Prior to
this transfer, the Land and the Sparkassen- und Giroverband
each held 50 % of the shares.

(19) On 2 June 2003, LSH and Hamburgische Landesbank
merged to form HSH Nordbank AG, a public limited
company (Aktiengesellschaft). For tax and balance-sheet
purposes, the merger had a retroactive effect as of 1 January
2003.

(20) According to its annual report for 2002, LSH's core capital
ratio was 6,5 % and its equity ratio 10,3 %. Its income-to-
equity ratio stood at 10,4 % in 2002.

(21) Under Section 42 of the Schleswig-Holstein Savings Bank
Act (Sparkassengesetz für das Land Schleswig-Holstein),
LSH was required to perform the tasks of a government-
owned bank, a central savings bank and a commercial
bank. It had to manage the Land's banking operations,
support the savings banks in carrying out their tasks and
it
issue municipal
granted credit to public authorities and participated —
sometimes in a consortium with private banks — in the
placement of Land loans and note loans. It also operated as
an all-purpose commercial bank.

loans. As a government-owned bank,

(22) Employing over 2 500 staff, LSH had a regional base and an
international
focus, viewing the north of northern
Germany and the Baltic Sea area as its core banking
region. It had its own branches, representative offices and
holdings and was an international product and sector
specialist in transport, shipping and real-estate finance,
bank finance and — increasingly — in syndication and as a
player on the international capital markets.

2.

TRANSFER TO LSH OF WKA'S AND WAK'S ASSETS AND THE

SPECIAL-PURPOSE REAL-ESTATE RESERVE

2.1. SETTING-UP AND DEVELOPMENT OF INVESTITIONS-

BANK SCHLESWIG-HOLSTEIN

(23) Under the Schleswig-Holstein Investment Bank Act (Inves-
titionsbankgesetz: ‘IBG’) of 11 December 1990, IB was set
up with effect from 1 January 1991 as a public institution
with organisational and economic independence.
is
therefore refinanced on behalf of and with the involvement
of LSH.

It

(24)

the

central development

IB is
institution providing
economic and structural policy back-up in Schleswig-
Holstein. Its product range covers economic and housing
assistance, support for environmental and energy projects,
project
municipal

agricultural

assistance,

and

and

management for the Land and municipal authorities (6). It
also assists infrastructure projects in the Baltic area.

(25) By the Act of 7 May 2003, which came into force on 1 June
2003, IB was split off from LSH's assets, with legal effect
from 1 June 2003 and with retroactive effect on the balance
sheet as of 1 January 2003, and set up as an independent
public-law institution (Anstalt des öffentlichen Rechts)
under the name ‘Investitionsbank Schleswig-Holstein’ with
its head office in Kiel. The assets assigned to Investitions-
bank Schleswig-Holstein,
including all asset and liability
items, were transferred to the hived-off Investitionsbank
succession.
Schleswig-Holstein by means of universal
Despite the retroactive effect on the balance sheet as of
1 January 2003, LSH was able to continue to use IB's capital
to underpin its competitive business in the same manner
until 1 June 2003.

(26) The real-estate administration body Liegenschaftsverwal-
tung Schleswig-Holstein (‘LVSH’) was also set up as an
independent public-law institution, with its head office in
Kiel, with legal effect from 1 June 2003 and with retroactive
effect on the balance sheet as of 1 January 2003. The
special-purpose real-estate reserve was therefore hived off
to LVSH on 1 June 2003. At the same time, all assets and
liabilities were transferred to Investitionsbank Schleswig-
Holstein by means of universal succession. Despite the
retroactive effect on the balance sheet as of 1 January 2003,
LSH was able to continue to use the special-purpose real-
estate reserve to underpin its competitive business in the
same manner until 1 June 2003.

2.2. TRANSFER OF WKA TO LSH

‘Landestreuhandstelle

(27) By the Act of 31 March 1950, WKA was set up as a public
institution under
für
the name
Wohnungs- und Kleinsiedlungswesen in Schleswig-Hol-
stein’. Its purpose was to support the Land, particularly by
financing public and low-tax residential construction and in
providing the public with suitable housing. Its assets were
made up of so-called special assets and own funds. By law,
the special assets had to be used for the specific purpose of
financing social-housing operations. WAK's own funds
were not subject to this requirement. WKA used its own
funds to grant building loans at particularly low interest
rates (7).

(28) Under Section 2(1) of the IBG, WKA and its entire assets
were transferred, minus the costs of the liquidation, to LSH
with effect from 1 January 1991. Section 2(1) of the IBG
thus provided for the merger of WKA and LSH. Under
Section 14(1) of the IBG, all of the tasks and responsibilities
of WKA referred to in Annex 1 to the IBG were transferred
to IB with effect from 1 January.

(6) See its annual report for 1998, p. 1.
(7) Communication from Germany, 8.12.99, p. 84.

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2.3. TRANSFER OF WAK TO LSH

property was based on the market value, as determined
beforehand by an expert evaluation.

(29) WAK was a special credit institution set up by the Land as a
public limited company (Aktiengesellschaft) with the task of
providing financial assistance to the projects of commercial
businesses and other measures designed to strengthen the
economic and communications structure.

(36)

(30) Section 3 of the IBG authorises the Minister for Finance to
take over all of WAK's assets, including all of its rights and
obligations. This was necessary because, as a public limited
company, WAK could not be merged with LSH in the same
way that WKA was. WAK's assets were therefore initially
transferred to the Land by means of universal succession
under Section 359 of the Public Limited Company Act
(Aktiengesetz) so that they could subsequently be trans-
ferred to LSH. In financial terms, this was the same as WAK
being incorporated into LSH.

(31) The Ministry of Finance made use of this authorisation and
accepted the offer made by WAK's executive board on
19 November 1990 to transfer the assets on 2 January
1991. An ‘incorporation agreement’ of 2 January 1991
between the Land and LSH regulated the transfer of WAK's
assets, including all rights and obligations, with effect from
1 January 1991 (8).

(32) Under Section 14(1) of the IBG, IB continued to perform all

of WAK's tasks, which are listed in Annex 2 to the IBG.

2.4. TRANSFER OF THE SPECIAL-PURPOSE REAL-ESTATE

RESERVE TO LSH

(33) Under Section 17(2) of the IBG, the Schleswig-Holstein
Ministry of Finance and Energy was authorised to transfer
real estate to IB. This involved IB becoming the legal and
economic owner of the real estate in question. According to
Germany, IB may not, however, freely dispose of the real
estate transferred to it. Instead, the real-estate assets as a
whole, including any gains made on them, had to be used
for a specific purpose.

(34) Under Section 20(1) of the IBG, the transferred real-estate
assets were accordingly designated as a special-purpose
real-estate reserve. Under Section 20(2), proceeds from
these assets had to be used to maintain, acquire and
construct real estate. However, they could also be used —
subject to a decision by the Land Government — for the
tasks of the Investitionsbank or be returned to the Land.

(35) The Land of Schleswig-Holstein has sold a total of […] (*)
properties to IB in several lots. The purchase price for each

(8) Communication from Germany, 8.12.99, p. 89.
(*) Confidential information.

In each case the Land of Schleswig-Holstein transferred part
of the price it received to LSH via the ‘special-purpose real-
estate reserve’. The effect of these transfers on LSH's own
funds as shown in the balance sheet was as follows: the
purchase of the first lot of properties by IB increased LSH's
own funds as shown in the balance sheet at 31 December
1999 by DEM […] million. On 31 December 2000 the
special-purpose real-estate reserve had increased to a total
of DEM […] million following the purchase of a second lot
of properties. Following the purchase of the third lot, it
reached a total of DEM […] million on 31 December 2001
and remained at the same level on 31 December 2002 (9).

(37) Germany submits

that

the special-purpose real-estate
reserve did not perform either a financing or a business-
expansion function for LSH.
It could not be used for
business activities as it had not been recognised by the
Federal Banking Supervisory Office (Bundesaufsichtsamt für
das Kreditwesen — ‘BAKred’) (10) as core capital
for
supervisory purposes.

3.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS

AND SOLVENCY DIRECTIVES

(38) Pursuant to Council Directive 89/647/EEC of 18 December
1989 on a solvency ratio for credit institutions (11) (the
‘Solvency Directive’) and Council Directive 89/299/EEC of
17 April 1989 on the own funds of credit institutions (12)
(the ‘Own Funds Directive’), which amended the German
Banking Act (Kreditwesengesetz, or KWG), banks must
have a level of own funds equal to 8 % of their risk-adjusted
assets. At least 4 percentage points of this amount must
consist of what is termed core capital, or ‘tier 1’ capital,
meaning items of capital which are at the credit institution's
disposal without restriction and immediately to cover risks
or losses as soon as they arise. In determining the total own
funds available to a bank for supervisory purposes, the core
capital is of decisive importance because additional capital,
or ‘tier 2’ capital,
is accepted as underpinning for risk-
bearing transactions only up to the amount of the available
core capital.

(39) By 30 June 1993 (13) German banks had to adapt (14) their
own funds to the new requirements of
the Solvency
Directive and the Own Funds Directive. Even before the
Solvency Directive was transposed into German law, many

(9) Communication from Germany, 30 September 2004.
(10) Now the Federal Agency for the Supervision of Financial Services

(Bundesanstalt für Finanzdienstleistungsaufsicht — ‘BaFin’).

(11) OJ L 386, 30.12.1989, p. 14; replaced by Directive 2001/12/EC of
the European Parliament and of the Council (OJ L 126, 26.5.2000,
p. 1).

(12) OJ L 124, 5.5.1989, p. 16; replaced by Directive 2000/12/EC.
(13) In fact, the new own funds requirements should have entered into
force on 1 January 1993; they were introduced late in Germany.
(14) Under the Solvency Directive, credit insitutions must have own
funds equivalent to at least 8 % of their risk-adjusted assets, whereas
the previous German legislation required a ratio of 5,6 %; however,
this ratio was based on a narrower definition of own funds than that
which has applied since the entry into force of the Own Funds
Directive.

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Landesbanks had relatively weak own-funds positions. They
now had to strengthen their own-funds base as a matter of
urgency in order to avoid restrictions on their business
expansion and indeed to maintain their current level of
activities. However, because the budgetary situation was
tight, public shareholders were unable to provide any fresh
capital but neither were they prepared to contemplate
privatisation and to raise additional capital on the capital
markets. It was therefore decided to undertake transfers of
assets and capital: in WestLB's case, for example, there was a
the housing organisation
transfer of
Wohnungsbauförderungsanstalt des Landes Nordrhein-
Westfalen (‘WfA’), and in LSH's case there was a transfer
of the assets of WKA and WAK, followed later by the real
estate.

assets of

the

4.

EFFECTS OF THE TRANSFERS ON LSH

4.1. TRANSFER OF WKA'S AND WAK'S ASSETS TO LSH

(40) According to Germany, WKA's own assets and WAK's
assets were placed in IB's special-purpose reserve. This took
IB's capital up to a total of DEM 1 306,05 million (IB
special-purpose reserve of DEM […] million made up of
WKA's capital (DEM […] million) and WAK's capital (DEM
[…] million), plus the special housing reserve of DEM […]
million) (15). The provisional opening balance sheet at
1 January 1991 showed total equity capital of DEM 1 558
million. The final audit at 1 January 1991 corrected this
amount to DEM 1 306,05 million (16).

(41) BAKred had acknowledged by letter of 15 August 1991 that
LSH's liable equity capital had increased by DEM 1 559,44
million as a result of IB's capital reserve. Germany pointed
out that the final audit indicated that the recognised equity
capital was only DEM 1 306,05 million and that, from
15 August 1991, LSH had only that amount of additional
liable capital at its disposal (17).

(42) Because the special-purpose reserve was earmarked for promotion-related tasks, even though it constituted own funds, it was not,
however, at LSH's unrestricted disposal. Of the IB special-purpose reserve of DEM 1 306 million, DEM 288 million was assigned in
1991 to IB's promotion-related tasks. Germany states that, for the period 1991-2003, the following amounts were available to LSH
for use in competitive business or were actually used by LSH as a liability basis.

Figure 1:

Transferred IB capital and capital amounts available for and actually used in competitive business (annual average values)

1991

(4

months)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

DEM million

2003

(5 months

Total IB capital

1 306,0 1 312,2 1 337,9 1 387,0 1 472,0 1 563,0 1 665,9 1 763,0 1 814,0 1 817,0 1 849,2 1 923,9

1 967,6

Recognised for supervisory purposes

1 306,0 1 312,2 1 337,9 1 387,0 1 472,0 1 563,0 1 665,9 1 763,0 1 814,0 1 817,0 1 849,2 1 923,9

1 967,6

Used by IB

288,0

299,0

383,9

363,0

380,0

391,0

401,9

417,0

[…]

[…]

[…]

[…]

[…]

Amount available to LSH

1 018,0 1 013,1

954,0 1 024,0 1 092,0 1 172,0 1 264,0 1 346,0

[…]

[…]

[…]

[…]

[…]

Actually used by LSH

0

0

347,0

326,0

161,0

508,0

815,0 1 104,0

[…]

[…]

[…]

[…]

[…]

(43) Germany states that, at 31 December 1990, LSH had core
capital of DEM 581 million and additional capital of DEM
100 million. The promotion-related assets of DEM 1 306
million therefore increased the total equity capital base of
DEM 681 million by around 190 %.

(45) Assuming also that, since the Community solvency ratio of
8 % has been applicable, between DEM 1 024 million
(1994) and DEM […] million (2002) has been available for
LSH's competitive business, its 100 % risk-lending capacity
has been enhanced by DEM 12 800 million (1994) and by
over DEM […] million (2002) respectively. In 1999 it had

(44) Assuming that DEM 1 013 million was available for LSH's
competitive business
its 100 % risk-lending
in 1992,
capacity, based on the then applicable solvency ratio of
5,6 % laid down in the Banking Act, was enhanced by at
least DEM 18 000 million.

(15) Communication from Germany, 8.12.99, p. 90.
(16) Communication from Germany, 8.12.99, p. 91.
(17) Communication from Germany, 8.12.99, p. 94.

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as much as DEM […] million available, representing an
increase in capacity of at least DEM […] million.

(46)

In reality, the permissible credit volume could have been
expanded even more because the risk-adjusted assets of a
bank are not normally deemed to bear a 100 % risk (18).
This is also true for LSH since inter alia it conducts its
refinancing business with savings banks and its lending
business with municipalities. On the basis of a realistic risk
adjustment, which in LSH's case is probably below 50 %, it
should be possible to double the above-mentioned business
expansion to over DEM 30 000 million.

4.2. TRANSFER OF LAND-OWNED REAL ESTATE TO LSH

(47) According to Germany, BAKred refused, by letter of 25 May
1999, to recognise the special-purpose real-estate reserve as
core capital
to
constitute a capital reserve but not equity capital. In its
the transferred property and the special-purpose
view,

for supervisory purposes, deeming it

(50) LSH has paid the following remuneration (22):

reserve formed immediately after its acquisition by LSH
were ‘deductible’ at any time (19).

(48) Following this refusal, LSH did not, according to Germany,
again seek BAKred's recognition of this reserve as core
capital, not even in view of
the current proceedings
concerning the amount of remuneration. The consequence
of this is, in Germany's view, that the special-purpose real-
estate reserve cannot be used by LSH for its commercial
business or by IB in its own business (20).

5.

REMUNERATION FOR THE OWN FUNDS TRANSFERRED

5.1. REMUNERATION FOR WKA'S AND WAK'S ASSETS

(49) LSH paid remuneration for the transferred IB capital, but
only to the extent of the liable amount actually used.
According to available information, a flat-rate remunera-
tion of DEM 900 000 was agreed for 1993. For 1994 and
1995 a so-called ‘profits advance’ (Gewinnvorab) of 0,5 %
was charged on those portions of
the special-purpose
reserve used for competitive business, in addition to a flat-
rate remuneration of DEM 750 000 (1994) and DEM
200 000 (1995). For 1997 to 2002, the profits advance was
set at
IB's capital used for
competitive business (21). No remuneration was paid for
1991 or 1992.

the portion of

[…] % of

Figure 2:

Remuneration paid on transferred IB capital (after tax)

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Remuneration paid (after tax)

0

0

0,9

2,4

1,0

2,5

5,0

6,6

[…]

[…]

[…]

[…]

[…]

DEM million

(51) According to Germany, however,

the new Solvency
Directive was not
the only reason for the transfer of
WKA's and WAK's assets. The purpose of transferring the
special-purpose residential property assets without allowing
them to be used as liquid capital was to enable the assets to
be used as efficiently as possible by, on the one hand,
broadening the capital base or further promotion-related
activities and, on the other, putting the assets to a
commercial use. The Land felt that merging WKA and
WAK with LSH was the appropriate financial solution, even

setting up a legally
compared with the option of
independent promotion institution (23).
It also enabled
LSH's financial strength to be enhanced in the event of a
sale of its shares. At the same time, the merger secured
LSH's long-term equity-capital base in the face of more
stringent Community requirements (24). The prospect of
increasing its
liable equity capital was, according to
Germany, a major factor in the decision to transfer WKA's
and WAK's assets to LSH.

(18) See footnote 3; paragraph 64 of the Decision.
(22) Communications from Germany, 14 April 2003 (Annex 1) and

30 September 2004.

29 October 2003, p. 18.

(23) Communication from Germany, 8.12.99, p. 86.
(24) Communication from Germany, 8.12.99, p. 88.

(19) Letter from BAKred, 25.5.99.
(20) Communication from Germany, 3.5.01, p. 2.
(21) Communications from Germany of 8 December 1999, p. 96, and

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5.2. REMUNERATION FOR THE REAL ESTATE

(52) Germany states that LSH paid no remuneration to the Land
of Schleswig-Holstein for the assets transferred in the form
of the special-purpose real-estate reserve (25).

LSH could achieve the full extent possible of any increase in
its business volume only if it refinanced the additional
lending in full on the capital market. The Land could not
therefore expect the same return as a provider of liquid
capital, and the appropriate remuneration had to be
reduced accordingly.

III.

GROUNDS FOR INITIATING THE PROCEDURE

(53)

In its decision of 13 November 2002 initiating the
procedure, the Commission concluded that the transfer of
WKA and WAK and the placing of EUR […] million in a
special-purpose real-estate reserve of the Land of Schleswig-
Holstein probably constituted state aid to LSH within the
meaning of Article 87(1) of the EC Treaty.

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

(55)

In the present case, the Commission regarded the economic
advantage conferred on LSH by the injection of own funds
as consisting in particular in the increase in its commercial,
competitive lending capacity (by dint of
the business-
expansion function of equity capital). Under normal market
conditions, the capital contribution would be remunerated
in line with the value of the contributed capital, taking
account of its function and the risk incurred. One method
of determining the normal market remuneration for the
contributed capital was thus to take the long-term risk-free
rate (for 10-year Federal bonds) and apply to it a risk
premium corresponding to the higher risk of equity capital.
As Germany had already indicated that
the rate of
remuneration for a long-term, risk-free investment of assets
stood at around 9 % per annum (26) at the end of 1990,
when the transfer of assets took place, the Commission had
serious doubts as to whether the flat-rate remuneration
paid and/or an extra 0,5 % or […] % per annum for the
equity capital actually used could be deemed normal for the
market, irrespective of any necessary risk premium.

(56) The Commission also doubted whether a market-economy
investor would have agreed to limit remuneration to the
portion of the funds actually used.

(57) However, the Commission had already acknowledged in its
decision to initiate the procedure that
the contributed
capital's lack of liquidity should not be disregarded when
determining the normal market remuneration. Although
the bank's non-liquid equity capital permitted an increase in
the volume of its lending, it had to be borne in mind that

(25) Communication from Germany, 29.10.03, p. 2.
(26) In LSH's annual report for 1990, values of between 8,8 % and over
9 % are mentioned (p. 28). In the annual report for 1991, values for
that year of between 8,4 % and 9,17 % are mentioned (page 27).
Since the transfer of WAK's and WKA's assets occurred on 1 January
1991, any agreement on a normal market remuneration would have
been tailored to the normal returns for 1990.

(58) The Commission could not see that the Land of Schleswig-
Holstein, when transferring WKA's and WAK's assets, had
ensured that it was going to participate to an appropriate
extent in the distribution of the bank's profits and the
increase in its value. In particular, the Land did not insist on
a change in the ownership structure in its favour, which it
would have had to do in order to ensure that dividend
payments and increases in value were consistent with the
level of invested capital. Moreover, since 1 January 1994 the
this
Land had not
increase in value.

increased but reduced its share of

(59) The Commission therefore concluded in its decision to
initiate the procedure that the measures in favour of LSH,
which conducts business mainly at regional level but also
operates nationally and internationally, constituted state aid
within the meaning of Article 87(1) of the EC Treaty. As
none of the exemptions provided for in Article 87(2) and
(3) or Article 86(2) of the EC Treaty applied in the present
case, the state aid appeared not to be compatible with the
common market.

IV.

COMMENTS BY GERMANY AND LSH

(60)

(a)

functions:

It was submitted that IB's capital had been of only limited
use to LSH since, unlike ordinary core capital, it failed to
perform — or performed only to a limited extent — three
important
the financing function, which
would have been at LSH's disposal only if WAK and WKA
had been transferred in full; (b) the guarantee function,
which was severely restricted as IB's capital was subordinate
in liability to LSH's other equity capital
(moreover, a
replenishment commitment ensured that IB's capital would
not be used even in the event of LSH becoming insolvent);
(c) IB's capital was also of only limited use for generating
business because, first, part of it had to be deducted for use
as cover for the Land's real estate transferred to IB and,
second, the portion of IB's capital available to LSH had
shrunk in recent years because of IB's own expansion of
business.

(61) The conclusion reached was that the transfer of IB's capital
should not be regarded as a normal capital investment and
that the special circumstances of
the case reduced the
remuneration which the Land was entitled to expect as
appropriate.

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(62)

liability)

(institutional

enjoyed by publicly owned banks

It was also submitted that there is no state aid within the
meaning of Article 87(1) of the EC Treaty in the present
case. First, at the time when IB's capital was transferred, the
relationship between the Landesbank and its guarantors
was still determined primarily by the special guarantee
in
arrangements
Germany (i.e. Anstaltslast
and
Gewährträgerhaftung (guarantor
liability)). Anstaltslast
should be taken to mean an obligation on the part of the
guarantors to furnish the institution with the financial
resources it needs to perform its tasks and hence ensure
that it is capable of functioning for the duration of its
existence. That was precisely the purpose of the transfer of
IB's capital. To reduce Anstaltslast to a mere obligation on
the guarantor to keep the institution out of bankruptcy
would be inconsistent with the historical understanding of
this established guarantee arrangement. Second, LSH argues
that it provides services of general economic interest. Third,
the average return requirement is said to be at variance with
Article 87(1) EC, read in conjunction with Article 295 EC,
since imposing such a special requirement on the public
investor infringes the principle of equal treatment of private
and public undertakings arising from Article 295 EC.

Appropriate remuneration according to the principle of the
market-economy investor

(63) Three different economic approaches were discussed which
could be used to calculate the normal market remuneration
for a capital injection: the insurance premium approach, the
risk profile approach and the share capital approach.

(64) The starting-point for the insurance premium approach is
the fact that the transfer of WAK's and WKA's assets to LSH
was subject to restrictions and that, because of their special
purpose, the liquidity remained entirely with the Land. As a
result, remuneration is said to be payable only for the risk
to the Land that IB's capital might be used in the event of
the Landesbank becoming insolvent.

(65) Under the risk profile approach, the point of reference for
determining the appropriate market remuneration is the
risk underlying an investment in a bank's liable equity
capital. In this respect, the transfer of assets such as IB's
capital is compared with capital market instruments that
are similar to the Land's investment in terms of economic
profile, and the normal market remuneration is determined
as a result.

(66) The share capital approach is much more complex and
prone to errors but, if applied properly, it should yield the
same result as the other two approaches. The following
comments were made on the basic interest rate used and
the individual premiums and discounts applied:

(67) Minimum return after tax: Given current earnings in the
banking sector, and especially public banks, the 12 % rate
applied is said to be too high. The basic rate should be 11 %

at most. Reference is made here to various expert reports
submitted in the WestLB case.

(68) Risk premium: It is argued that the 1,5 % risk premium in
Decision 2000/392/EC is unwarranted and should be
dropped altogether. The capital injection in LSH totalled
only DEM 1 600 million, compared with DEM 5 900
financial
million in the WestLB case
(a substantial
investment). Moreover,
from the investor's standpoint,
what matters is not the size of the investment, but the
risk structure. The failure to increase voting rights is not
pertinent in the LSH case as additional rights would not
have secured any greater influence. The third argument
raised, namely the lack of fungibility of IB's capital, is also
dismissed as inaccurate since IB's capital was transferred to
LSH for an unlimited period, but not irrevocably.

(69) Discount for lack of liquidity: The liquidity cost is said to
reside in the fact that, because of the restrictions on the
transfer, LSH received IB's capital only as subordinated
capital but had to obtain the corresponding liquidity on the
capital market, since the liquidity of IB's capital remained
with the Land. The additional interest on the outside funds
— up to the amount of the risk-free interest rate — should
therefore be deducted in full from the return demanded by
the Land as an investor.
the
Commission applied a deduction of around half as much,
citing as justification the reduction in the bank's taxable
income and the resulting lower level of corporation tax
liability. This approach is said to be incorrect. In material
terms, the corporation tax payable on a standard invest-
ment is an advance payment on the investor's income or
corporation tax. Accordingly, under German corporation
tax law, it is not levied on the undertaking.

In the WestLB case,

(70) Corporation tax credit procedure: LSH argues that, if the
Commission wishes to abide by its share capital approach,
it must either subtract the tax credit balance from the return
of a comparable private investor or add a corresponding
fictional tax credit balance to the Land's return.

(71) Owner effect, coupon effect, discount for fixed remunera-
tion: LSH mentions other economic effects that lead to a
reduction in what can be regarded as an ‘appropriate’
remuneration for IB's capital.

(72)

It was also argued that it was irrelevant for the purposes of
state aid legislation how the Land of Schleswig-Holstein
arranged a remuneration from LSH for the transfer of IB's
capital. In assessing the remuneration paid to the Land,
account must be taken of
the synergy gains achieved
through the transfer. The transfer of IB's capital enabled the
Land to obtain a higher price than would have otherwise
been possible for holdings in LSH acquired by WestLB and
Landesbank Baden-Württemberg.

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(73)

It was also claimed that the special-purpose real-estate
reserve did not perform either a financing or a business-
generating function for LSH since it was not recognised by
for supervisory purposes. No
BAKred as core capital
remuneration need therefore be paid for
the assets
transferred to LSH as a special-purpose real-estate reserve
since the transfer conferred no economic advantage on LSH
for which a market-economy investor would have
demanded a remuneration.

(74) To sum up, the transfer of the housing-promotion assets of
the Land of Schleswig-Holstein to LSH was said not to
constitute state aid. A hypothetical private investor would
have undertaken a similar transfer. The Land received for
the transfer to LSH an appropriate remuneration in line
with market conditions.

V.

COMMENTS BY THE BDB

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

(76)

In its comments of 29 July 2003 on the procedures
initiated in respect of the Landesbanks on 13 November
2002, the BdB states that the question of whether the
remuneration was appropriate should be determined using
the method employed by the Commission in Decision
2000/392/EC.

excluded from any comparison non-voting preference
shares, profit participation rights and perpetual preferred
shares.
In Germany these three equity instruments are
recognised not as core capital but as additional capital (‘tier
2 capital’). Moreover, perpetual preferred shares did not
exist in Germany at the beginning of the 1990s.

(80) At the time of the respective transfers, only share capital
and silent partnership reserves were recognised as core
capital in Germany. Any comparison with silent partner-
ship contributions could be ruled out across the board.
First, unlike share capital, silent partnership contributions
were valid for a limited period only or could be terminated
and had to be paid back to the investor on maturity. An
investor could not therefore expect to receive the same
remuneration for a silent partnership contribution as for
equity instruments recognised for supervisory purposes for
an unlimited period.

(81) Second, although in some cases it was asserted that the
transferred capital was subordinate in liability to share
capital pursuant to agreements between the Landesbanks'
owners, this did not necessarily mean a lower risk for the
investor. In all cases the transferred capital made up a
significant proportion of the total core capital, sometimes
even more than 50 %. This made it extremely likely that the
injected capital could be drawn on — at least in part — in
the event of losses (27).

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

applied by virtue of

and discounts

Comparison with other equity instruments

(78)

In its comments the BdB came to the conclusion that the
transfer of housing-construction and promotion-related
assets in all five of the above Landesbank cases, i.e. also in
the case of LSH, can be compared to an injection of share
capital.

(79) Nearly all the Landesbanks are said to have required fresh
core capital from 1992 onwards in order to meet the
stricter requirements arising from the Solvency Directive.
Without these increases in capital, the Landesbanks would
have had to scale down their business. It can therefore be
concluded, the BdB argues, that the capital injected can be
compared only with equity instruments that were recog-
(‘tier 1 capital’) and available in
nised as core capital
Germany in the year of the transfer. This immediately

(82) Third,

the BdB submits that

the difference in quality
between silent partnership contributions and share capital
is confirmed by the definition of core capital for super-
visory purposes adopted by the Basle Committee for
Banking Supervision. According to this definition, silent
partnership contributions must be recognised for super-
visory purposes as no more than lower tier 1 capital, which
may account for no more than 15 % of the requisite core-
capital ratio. In other words, where the core-capital ratio is
4 %, 3,4 % must be made up of nominal capital and open
reserves (e.g. the special-purpose reserves transferred to the
Landesbanks). Furthermore, banks only ever
took up
subordinate equity instruments such as preference shares
or profit participation rights in small volumes. Under
pressure from the rating agencies, such instruments hardly
ever accounted for more than 10 % of a bank's total core
capital — a very different situation from that in the cases
under examination. Against this background, silent partner-
ship contributions could not be used for large volumes
invested by a single investor.

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

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Minimum remuneration for a share-capital investment in a
Landesbank

discount for lack of liquidity would be calculated, using the
WestLB method, on the basis of net refinancing costs (gross
refinancing costs minus the applicable corporation tax).

(83) The BdB argues that all methods of determining an
for the provision of
appropriate remuneration (return)
share capital start from a risk-free return and add a risk
premium.

(89)

They can be traced back to the following basic principle:

Expected return on a high-risk investment

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

(84) To determine the risk-free return, the BdB used the returns
on long-term government bonds,
fixed-rate securities
issued by state bodies being the form of investment with
the least or no risk (28).

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

(86)

It then determined the beta value for the Landesbanks, i.e.
the individual risk premium for the banks by which the
general market-risk premium was to be adjusted. The BdB
stated that it had determined the beta values statistically,
which means that it estimated them on the basis of a
historical data sample. The BdB initially concluded that all
the beta values for all
the Landesbanks and periods
considered were greater than one (29).

(87) On the basis of a risk-free basic interest rate of 9,74 % and a
beta factor for LSH of 1,1105, the BdB calculated the
expected minimum remuneration for an investment in the
share capital of LSH to be 14,85 % per annum at the time
when IB's capital was transferred on 31 December 1990.

Premiums and discounts on account of the particularities of the
transactions

(88) The BdB also noted that

the Commission's deduction
pursuant to Decision 2000/392/EC from the minimum
remuneration to take account of the lack of liquidity of
Wfa's assets had been upheld by the Court of First Instance.
It therefore saw no reason to depart from this method in
the present case, with the result
that a deduction for
liquidity should also be made here. The amount of the

(28) To offset the effects of inflation, the rate of return on a long-term
government bond should be determined for each transfer period,
initially disregarding the inflation expectations. In estimating the
long-term, risk-free basic interest rate, the estimation of the expected
long-term average inflation rate of 3,60 % was then added to the
‘real basic interest rate’ at the relevant moment.

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

In the BdB's view, three aspects of the transfer increased its
risk compared with a ‘normal share capital investment’: the
in part exceptionally high volume of assets transferred, the
failure to issue new shares in the company and the related
forgoing of additional voting rights, and the lack of
fungibility of
the impossibility of
withdrawing the invested capital from the company again at
any time.

the investment,

i.e.

Capital basis and elements of remuneration

(90) Lastly, the BdB argued that, in calculating the appropriate
remuneration in LSH's case, the entire amount recognised
as core capital should be taken into account, and not just
the part which was actually used. It backs up this argument
by stating that a market-economy investor would never
agree to limit his remuneration to the portion of funds
actually used. For a private investor bearing the risk of
losing his investment,
it is irrelevant whether the credit
institution actually uses the injected capital to expand its
business. What matters to the investor is that he himself
can no longer invest that amount and obtain a correspond-
ing return.

(91) The BdB also argued that a remuneration of 0,3 % should
have been paid for the special-purpose real-estate reserve,
which has not yet been recognised by BAKred as own funds
for supervisory purposes. Although this amount was not
recognised as core capital,
it too was available to the
Landesbank's creditors to cover losses, and both investors
and rating agencies take as a reference not only a bank's
core capital, but also the economic equity capital shown on
the balance sheet. The 0,3 % per annum guarantee
commission (Haftungsprovision) applied by the Commis-
sion in its WestLB decision, which it calculated by
comparing the amount of capital with a guarantee,
is
equally appropriate in this case.

VI.

GERMANY'S RESPONSE TO THE BDB'S

COMMENTS AND FURTHER COMMENTS BY GERMANY

(92)

In its response of 29 October 2003 to the BdB's comments,
Germany rejected the argument that remuneration should
is recognised for
also be paid for the IB capital

that

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supervisory purposes but not used. It contended that this
part of IB's capital conferred no economic advantage on
LSH and therefore required no remuneration. Not all of a
bank's additional liable capital recognised for supervisory
purposes was automatically of economic use or conferred
an economic advantage. Moreover, the capital transferred to
LSH was not liquid share capital but non-liquid assets
which performed an — at most — limited guarantee
function and so could not be used by LSH for investment or
lending purposes.

(93) Germany also contested the argument that remuneration
should be paid for the portion of transferred capital not
recognised for supervisory purposes (in LSH's case, the
special-purpose real-estate reserve). It argued that, since that
capital is assigned to a specific long-term purpose, it forms
part of a circular financial circuit and has not conferred any
advantage on LSH by increasing its solvency. Germany
added that the rating agencies concentrate exclusively on
capital recognised for supervisory purposes as liable core
capital. Accordingly,
it did not see why the banking
supervisory authorities and creditors should regard the
special-purpose real-estate reserve as a lasting reservoir of
value.

(94) Germany submitted that IB's capital is closest in nature to
perpetual preferred shares, profit participation certificates
and silent partnership contributions.

(95) Germany argued that in 1994 LSH's guarantors agreed on a
proportionate replenishment commitment which would
in the (unlikely) event of LSH becoming
ensure that,
insolvent, IB's capital would not be called on. Accordingly,
an investor in a Landesbank faced a risk which might
require remuneration in that the transferred capital might
be lost as a result of ongoing losses. However, an investor
the
was protected from that risk by the existence of
subordination agreement.

(96) The BdB's calculation of the minimum remuneration was
said to be wrong for a number of reasons:
incorrectly
defined factors in the CAPM calculation, the unrealistic
assumption of
the guaranteed fixed remuneration and
incomprehensible discounts and premiums.

(97) Germany also took a critical view of the CAPM used by the
BdB to determine the minimum return for share-capital
investments in the Landesbanks. It criticised not only the
suitability of the CAPM for determining the expected return
on an investment which should yield a fixed remuneration,
rate,
but also the factors employed (risk-free interest
market-risk premium and beta value).

(98)

It objects to the BdB's method of determining the risk-free
interest rate based on a
interest rate,

i.e. using a real

reference date, arguing instead for the use of an average
value over the longest possible period. Germany applied an
arithmetic mean of the annual total returns of the REX10
between February 1970 and December 1990, which yielded
a result of 6,91 %.

(99) Germany rejected the figure of 4,6 % used by the BDB for
the market-risk premium, proposing 3,0 % instead.

(100) The banks listed in the CDAX used by the BdB to determine
the beta value for LSH are said to give rise to distortions:
first, the five largest commercial banks together account for
a very high proportion of the CDAX banks (76 %); second,
there are differences in business profile. Instead, the correct
beta value for LSH should be determined by taking a
comparable group, namely IKB, BHF Bank and Vereins- und
Westbank, resulting in a beta value of 0,7894.

(101) Germany therefore concluded that the minimum remu-
neration for an investment in the share capital of LSH at
31 December 1990 (taking account of the beta factor of
0,7894, the market-risk premium of 3 % and the base rate
of 6,91 %) was 9,28 %.

VII.

COMMENTS BY THE LAND OF NORTH RHINE-

WESTPHALIA AND WESTLB

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

investment but

(103) WestLB had no objections to the CAPM method for
calculating the minimum remuneration for a share-capital
investment, WestLB had no objections to the CAPM
method for calculating the minimum remuneration for a
share-capital
the beta values
determined by the BdB — at well over 1 — were
inappropriate. A beta factor of more than 1 meant that a
company's shares represented a higher risk than the market
as a whole. Yet the risk of investing in a Landesbank was
well below the overall market
the
institutional
liability (Anstaltslast) and guarantor liability
(Gewährträgerhaftung) which it enjoyed and which were
not challenged at the time.

risk because of

that

felt

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(104) Moreover, they argued that,

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

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

the asset

transfers.

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

VIII.

UNDERSTANDING BETWEEN THE BDB, THE

LAND OF SCHLESWIG-HOLSTEIN AND HSH NORDBANK

(107) On 8 October 2004, the Commission was informed of the
outcome of an understanding between the complainant
(the BdB),
the Land of Schleswig-Holstein and HSH
Nordbank, which was formed from LSH and Hamburgische
Landesbank in 2003. Although their basic legal positions
remained unchanged, the parties to that understanding
concurred on what they themselves regarded as suitable
parameters for determining an appropriate remuneration.
The parties asked the Commission to take account of this
understanding in its decision.

(108) First, the parties determined a minimum remuneration for a
hypothetical investment in the share capital of LSH on the
basis of
the CAPM, which produced an appropriate
remuneration for the special-purpose reserve of around
9,29 % per annum. To arrive at this figure, the parties used
the long-term risk-free interest rate calculated on the basis
of the REX10 Performance Index of Deutsche Börse AG and
the beta factor estimated on the basis of a study by KPMG

of 26 May 2004 commissioned by the Landesbank. In
concrete terms this yielded a risk-free basic interest rate for
LSH of 6,61 % at the time of the transfer (31 December
1990). A beta factor of 0,670 was applied on the basis of
KPMG's study. A uniform market-risk premium of 4 % was
set for all the Landesbanks.

(109) A deduction was then determined for the capital's lack of
liquidity on the basis of the risk-free interest rate of 6,61 %
as gross refinancing costs. To determine the net refinancing
costs, the standard tax burden on LSH at the time of the
transfer was set at a flat rate of 50 %, producing a liquidity
discount of 3,31 %.

(110) Lastly, a premium of 0,3 % was added to allow for the

failure to issue voting rights.

(111) Altogether this produced an appropriate remuneration for
the special-purpose reserve of 6,28 % per annum after taxes
for the portion of the promotion-related assets available for
use in LSH's competitive business. This remuneration was
payable as of the end of the month when the assets were
recognised as core capital (31 August 1991).

(112) According to the understanding, the aid element, which
HSH Nordbank must pay back, resides in the difference
between the actual remuneration paid by LSH and the
remuneration determined as appropriate (6,28 %).

(113) The parties also agreed on a guarantee commission of
0,3 %, payable not only on the liable capital used by IB
itself, but also on the special-purpose real-estate reserve.
Furthermore, HSH Nordbank raised no objection to the
suggestion that, for the period of the transfer up to the end
of the month when the assets were recognised as core
capital by BAKred (1 January 1991 — 30 August 1991), a
guarantee commission of 0,3 % is also payable on the sum
of DEM 1 306,05 million shown on the balance sheet.

(114) During negotiations on the understanding, it was argued
for the first time that, in addition to the remuneration for
IB's capital already mentioned, a further remuneration
element consisted of IB's annual surplus, which was paid to
the Land of Schleswig-Holstein as a dividend on the basis of
Section 17(2) IBG (1990 version) or Section 19(2) IBG
(1998 version). In accordance with these legal provisions,
the annual surplus from the IB's special-purpose reserve
was paid out to the Land (in each case on the basis of a
corresponding decision by the Landesbank's bodies). Under
a rule laid down in the respective budgetary law of the Land
of Schleswig-Holstein, these payments were intended for
the purposes of the IB, i.e. for the Land's promotion-related
tasks, and transferred back to IB accordingly. This
arrangement served to respect the budgetary sovereignty
of the Land Parliament, as it should be the parliament, not
the executive arm that had decision-making power over
these funds. In economic terms, this was a ‘pay out and

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claw back’ arrangement which did not prevent the amounts
being counted as dividend payments.

(115) Moreover, the cycle was broken by the suspension of the
special purpose by a number of individual laws accom-
panying the budget, each relating to the annual surplus. In
these cases the dividends paid out were not reinvested in IB.
As the special purpose was suspended, the surplus in those

(116) The table below shows the IB dividend payments to the Land:

years was paid entirely to the Land of Schleswig-Holstein to
finance expenditure from the Land budget. It should be
borne in mind here that the lion's share of the dividend
payments discussed here concerns amounts that, for that
reason, were not
transferred back to IB but remained
entirely with the Land.

Figure 3:

IB dividend payments to the Land of Schleswig-Holstein (DEM million)

IB dividend payments to the Land

0,0

0,0

1,1

2,6

1,5

2,5

3,5

47,5

[…]

[…]

[…]

[…]

[…]

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

DEM million

(117) Accordingly, these dividend payments from the annual
surplus must be taken into account in calculating the aid
element and were indeed included by the parties to the
understanding in their calculations.

IX.

ASSESSMENT OF THE MEASURES

1.

STATE AID WITHIN THE MEANING OF ARTICLE 87(1)

OF THE EC TREATY

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

1.1.

STATE RESOURCES

1.2.

FAVOURING OF A PARTICULAR UNDERTAKING

(120) In order to verify whether the transfer of state resources to
a publicly-owned undertaking favours the latter and is
therefore liable to constitute state aid within the meaning of
Article 87(1) of the EC Treaty, the Commission applies the
‘market-economy investor principle’. The European Court
of Justice and Court of First Instance have accepted and
developed this principle in a number of cases, most
recently in the judgment of the Court of First Instance of
6 March 2003 in the WestLB case, which is of relevance to
the present case (30).

(a) Market-economy investor principle

(121) According to the market-economy investor principle, no
state aid is involved where funds are made available on
‘terms which a private investor would find acceptable in
providing funds to a comparable private undertaking when
the private investor is operating under normal market-
economy conditions’ (31). In contrast, the undertaking is
being favoured within the meaning of Article 87(1) of the
EC Treaty if the agreed remuneration and/or the financial
position of the undertaking are such that a normal return
on investment cannot be expected within a reasonable
period of time.

(119) With the transfer of assets described above, the Land of
Schleswig-Holstein opted for a form of capital
increase
based on the concept of transferring the assets and real
estate of WKA and WAK to LSH in order to strengthen its
equity-capital base. Although the resources transferred were
not at LSH's unrestricted disposal, as the special-purpose
reserve was earmarked for promotion-related tasks, the
assets were recognised by the supervisory authority and
could therefore be used to provide cover for the liabilities of
LSH, which was in competition with other credit institu-
tions. There can therefore be no doubt that state resources
were transferred to LSH.

(30) See footnote 4.

(122) The market-economy investor principle applies here even
though LSH was a profitable company at the time the
promotion-related assets were transferred. Although the
principle has previously been applied mainly to under-

(31) Commission communication to the Member States on the
application of Articles 92 and 93 of the EEC Treaty and of Article 5
of Commission Directive 80/723/EEC to public undertakings in the
manufacturing sector (OJ C 307, 13.11.1993, p. 3, point 11).
Although this communication deals expressly with manufacturing,
the principle doubtless applies likewise to all other sectors of the
economy. 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).

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takings
application is restricted to that category of undertakings.

this does not mean that

in difficulties,

its

(123) 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 cannot expect
an appropriate return on his capital contribution (in the
form of dividends or an increased 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,
is
applicable in the same way to all public enterprises,
whether profitable or
loss-making. The Commission's
position in this respect was confirmed by the European
Court of First Instance in its judgment in WestLB (32).

the market-economy investor principle

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

(125) According to Germany, the chief considerations here were
to draw together all the Land's promotion-related activities
and continue them in a more economic and more efficient
manner, to optimise deliberation on and completion of
promotion-related tasks and to create the conditions for
the flexible use of funds. This reorganisation was combined
with an increase in LSH's capital base, which helped secure
its long-term capacity for expansion, given the foreseeable
changes in solvency requirements. Furthermore, the Land
intended to make a fundamental change in its business
orientation by managing its own real estate and the real
estate used by the various Land departments
and
institutions with the aim of reducing inefficiency.

(126) Even if a market-economy investor already holds shares in
an undertaking, he will look into other investment options
outside that undertaking. As a rule he will then choose to
invest further resources in the public undertaking only if he
can expect a reasonable return on the investment of the
fresh capital contributions. So, in determining whether a
capital injection constitutes state aid, one must in principle
disregard the shareholder's prospects of long-term profit-
ability or efficiency and synergy aspects. Whatever the
motives behind it, a capital
injection by a shareholder
should be measured instead according to whether the
investor can expect a normal return within a reasonable
period.

(127) The Court of First Instance has raised no objections to this
interpretation of the market-economy investor principle,
which the Commission has already applied in Decision
2000/392/EG (33). It has also adopted as a guiding principle
that even a private investor who already owns share capital
in an undertaking is not normally content with the fact that
an investment does not cause him a loss or produces only
limited profits. Instead he will always seek to obtain an
appropriate return on his investment according to the
particular circumstances and the satisfaction of his short-,
medium- or long-term interests (34).

(128) In the light of the market-economy investor principle, the
key question in examining this case is whether a market-
economy investor would have transferred capital that had
the same characteristics as the Land of Schleswig-Holstein's
promotion-related assets and under the same conditions,
especially in view of the expected return on the investment

(b) Article 295 of the Treaty

(129) Article 295 lays down that

the system of property
ownership in the various Member States must not be
affected. But this cannot justify any infringement of the
Treaty's competition rules.

(130) In connection with the Landesbank proceedings, Germany
has argued that the resources transferred could not have
been used in any other profitable manner
than by
transferring them to a similar public institution. Conse-
quently, the transfer represented the commercially most
sensible use of those assets. It is therefore argued that any
remuneration for the transfer, i.e. any additional return on
the assets transferred, would be sufficient to justify the
transfer
the market-economy investor
principle.

in the light of

(131) This line of argument cannot be accepted. It may be true
that the transfer of the promotion-related assets to LSH,
which subsequently allowed LSH to use the capital for
solvency purposes, was the most commercially sensible use.
However, as soon as such public funds and assets are used
for commercial competitive activities, they must be subject
to normal market economy rules. This means that the State,
once it decides to use certain assets (also) commercially for
public purposes, must demand a remuneration in line with
the normal market remuneration.

(c) No change in ownership structure

(132) One way for a market-economy investor in a bank to
secure a normal market remuneration is to have an
appropriate share in the bank's profits and increases in its
value. This can be achieved by means of a change in the
structure of ownership in line with the capital injection,
giving the investor an appropriate share in the dividends
and in a possible increase in value as a result of enhanced

(32) See footnote 4; paragraphs 206 et seq. of the decision.

(33) See footnote 3; paragraphs 161 et seq. of the decision
(34) See footnote 4; paragraphs 241 and 314 of the decision.

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earning capacities. Therefore, one way of ensuring an
adequate return on the capital provided would have been to
increase the Land's participation in LSH accordingly,
provided that the bank's overall profitability corresponds
to the normal rate of return that a market-economy
investor would expect from his investment. This would
have avoided the discussion of whether the agreed rate of
remuneration on that part of the funds actually used to
underpin competitive business is appropriate. However,
this course was not adopted by the Land.

(133) In this regard Germany argues that, for the purposes of
state aid law, it is irrelevant how the Land of Schleswig-
Holstein arranged a remuneration from LSH for the transfer
of IB's capital, as the capital injection was not necessarily
linked to acquisition of a share in profits and voting rights.
It also points out that the transfer of IB's capital to LSH
enabled the Land to obtain a higher price than would have
otherwise been possible for holdings in LSH acquired by
WestLB and Landesbank Baden-Württemberg.

(134) However, if a redistribution of shares were not feasible, a
market-economy investor would,
in the Commission's
view, have embarked on the investment only if agreement
had at
least been reached on an appropriate direct
remuneration. Normally a market-economy investor is
not content to avoid losses or to obtain a limited return on
his investment, but attempts to maximise the return on his
assets according to the circumstances in question and his
interests (35). So a private investor who already holds shares
in the beneficiary undertaking will usually insist on either a
change in ownership structure or an appropriate fixed
remuneration. Otherwise he would forgo part of
the
additional returns achieved as a result of
the capital
injection, as the other shareholders would also profit from
higher dividends and an increase in the undertaking's value
without having made a corresponding contribution.

(135) There is therefore nothing to indicate that a market-
economy investor would have forgone an appropriate
direct remuneration in a situation comparable to the
transfer of promotion-related assets to LSH, where no shift
in share structure was achievable and the owner of the
other half of the shares did not make a corresponding
capital contribution directly connected with the capital
injection.

(d) Capital basis for the remuneration

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

the ‘guarantee function’ of capital

least

(138) On 1 January 1991,

the Land of Schleswig-Holstein
transferred to LSH the capital of IB, which, according to
the final audit, came to DEM 1 306 million. The capital
transferred increased in value year on year, amounting to
DEM 1 967,6 million in 2003.

(139) On the balance-sheet date of 31 December 1999 the Land
also transferred the special-purpose real-estate reserve to
LSH, thereby increasing the equity capital shown on the
balance sheet by DEM […] million. After two further
transfers, this special-purpose reserve totalled DEM […]
million at 31 December 2002.

it was not entirely at LSH's disposal

(140) Each year the full amount of the capital transferred from IB
was recognised as additional core capital by BAKred (36).
However,
for
underpinning its competitive business. As in the WestLB
case, part of the special-purpose reserve was also used for
promotion-related tasks by IB itself. Accordingly, this part
of the special-purpose reserve was not at LSH's disposal for
expanding competitive areas of its business, although it did
have a guarantee function. The same applied to the special-
purpose real-estate reserve, which was not recognised as
core capital by BAKred, but served as a guarantee for the
bank.

(136) As with its approach in the WestLB case, the Commission
will determine the appropriate remuneration for
the
promotion-related assets
special
purpose real-estate reserve on the basis of their commercial
benefit to LSH, while drawing a distinction in the present
case between the ‘business-expansion function’ and the
(mere) ‘guarantee function’ of the promotion assets made
available as equity capital for the bank's business activities.

transferred and the

(35) See footnote 4; paragraphs 320 and 335 of the decision.

(141) The Commission believes that the extent to which the
capital provided was actually used cannot be a factor in
determining the appropriate remuneration. All that matters
is the possibility of using the capital to expand business.
Even a private investor would not be happy with a

(36) Contrast this with the WestLB case,

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

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remuneration dependent on the capital being used. In this
regard the Commission agrees with the BdB's observation
that, for the market-economy investor who runs the risk of
losing his investment,
it is irrelevant whether the credit
institution actually uses the injected capital to expand its
business. As the BdB rightly points out, all that matters to
the market-economy investor is that he himself can no
longer use the amount transferred to engage in economic
activity and hence achieve corresponding returns. So the
fact that LSH used the injected capital in full between 1999
and 2003 is irrelevant to the question of the capital basis
being examined.

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

(143) However, insofar as the capital had already been shown in
the balance sheet as own funds,
it also had at least a
guarantee function, as explained above in more detail. The
same applies to the amount used by the IB itself and to the
special-purpose real-estate reserve. These points must also
in determining the appropriate
be taken into account
remuneration.

(e) Comparison with other equity instruments

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

reserve

special-purpose

(146) The complainant submits that the promotion-related assets
concentrated in the
can be
compared only to share capital. The special-purpose reserve
was recognised by BAKred as core capital (‘tier 1’ capital)
and can therefore be compared only with equity instru-
ments that were recognised as core capital in Germany in
the year of the transfer. However, Germany considers that
the only purpose of comparison with various equity
instruments is to determine which risk profile (and hence
which range of remuneration)
is closest to that of the
investment from an investor's point of view. IB's capital is
therefore said to be closest in nature to perpetual preferred
shares, profit participation certificates and silent partner-
ship reserves.

(147) It should be borne in mind that the instruments used by
Germany for the comparison 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, the promotion-related assets transferred to LSH
virtually tripled its own funds for solvency purposes. Even
if one takes account only of the increase in the amount
usable by LSH to underpin its commercial business, this still
represents an increase of over 50 %. As the BdB points out,
the other instruments referred to were usually issued up to
a much lower level. It would not have been possible to
increase LSH's capital in the same way, and on a permanent
basis, by one of the instruments compared.

(148) In this connection,

it should also be stressed that the
relatively wide range of innovative 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 IB's capital was transferred
or in 1993, when LSH had to comply with new, stricter
capital requirements. Some of these instruments have been
developed in the meantime, while others already existed but
were not accepted in Germany.
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). It is therefore inappropriate to compare
IB's capital to such innovative instruments, most of which
have developed in the meantime and some of which were
available only in other countries.

In practice,

(145) It

in some respects, but

is beyond dispute that

the promotion-related assets
transferred to LSH cannot be compared directly to other
transactions. The transfer might resemble certain instru-
there are also enough
ments
differences compared with each instrument to assign only
a limited value to this comparison. Consequently, as in the
WestLB case (37),
the appropriate remuneration can be
determined only by comparing the asset transfer with
various equity instruments normally found on the markets,
in order to determine by analogy which instrument is most
similar to it and is therefore the benchmark for determining
the remuneration.

(37) See footnote 3; paragraph 19 of the decision.

(149) As to the two instruments which, as the closest bench-
marks, play the central role in Germany's comparison,
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 as
such in Germany. Profit participation certificates constitute
only additional own funds, whereas IB's capital qualifies as
original own funds. The latter is therefore of much greater
use to LSH because it can be used to raise additional own
funds (such as profit participation certificates) up to the

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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
IB's capital. In addition, IB's capital
is available to LSH
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 the fact that the ranking in the event of
losses must be seen in this context. Since the share of IB's
capital is rather large, it will be used relatively quickly when
major losses occur.

(150) For all these reasons, the Commission believes that, because
of the peculiarities of IB's capital, the comparison with
innovative equity instruments submitted by Germany is not
a suitable way to determine the appropriate remuneration
to be paid for IB's capital. Moreover, in the understanding
of 8 October 2004,
the
transaction was akin to a share capital injection.

the parties assumed that

maintain existing assets at that level) (39). Because of these
extra costs, which do not arise in the case of equity capital
provided in liquid form,
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.

(153) However, in the Commission's view, 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 LSH because
of
transferred. The
Commission therefore accepts that LSH incurs additional
‘liquidity costs’ to the extent of ‘refinancing costs minus
corporation tax’ (40).

the special nature of

the capital

(151) Furthermore, the Commission agrees with the BdB that the
risk to the investor is not reduced by the subordination
agreement
in the covering agreement between LSH's
shareholders whereby IB's capital is to be used only after
other equity capital of LSH. The injected capital makes up a
significant proportion of the total core capital, making it
extremely likely that it will be drawn on — at least in part
— in the event of losses.

(g) Appropriate remuneration

Appropriate remuneration for the amount available
for competitive business

(f)

Liquidity costs

(152) LSH's argument

regarding the liquidity costs can in
principle be accepted. A ‘normal’ capital injection into a
bank supplies it both with liquidity and with an own funds
base which it requires for supervisory reasons to expand its
activities. In order to use the capital in full, i.e. to expand its
100 % risk-adjusted assets by a factor of 12,5 (i.e. 100
divided by a solvency ratio of 8), the bank must refinance
itself on the financial markets 11,5 times over. Put simply,
the difference between 12,5 times the interest received and
11,5 times the interest paid minus other costs of the bank
(e.g. administration) gives the profit on the equity (38). Since
the promotion assets did not provide LSH with initial
liquidity because they and all
the income from them
remained earmarked by law for business and housing
promotion, LSH faced additional funding costs equal to the
amount of the capital if it was to raise the necessary funds
on the financial markets to take full advantage of the
business opened up by the additional capital, i.e. to expand
risk-adjusted assets by 12,5 times the capital amount (or to

(38) 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.

(39) 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).

(154) There are no doubt different ways of calculating the
appropriate remuneration for the amount available for
competitive business. All the methods for calculating the
remuneration for capital made available follow the same
basic principles, however. Taking these basic principles, the
Commission here does the calculation in two steps: first, it
determines the minimum remuneration that an investor
would expect for a (hypothetical) investment in the share
capital of LSH. It then examines whether, in view of the
particularities of the transaction at issue, the market would
have agreed on a premium or a discount, and if so, whether
it can produce a sufficiently robust quantification of that
amount.

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

(155) The return expected on an investment and the risk involved
in the investment
are important determining factors
decision of a market-economy investor.
to
determine their level, the investor incorporates all available
firm-related and market-related information into his
calculation. He bases himself on historical average rates,
which, generally speaking, are also a point of reference for a
firm's future efficiency, and inter alia on an analysis of the

In order

(40) As confirmed by the Court of First
paragraphs 321 to 331 of the decision.

Instance, see footnote 4;

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company's business model for the investment period in
question, the strategy and quality of management or the
relative prospects for the sector in question.

— CAPM:

the CAPM is the best-known and most
frequently tested model of modern finance, by which
the return expected by an investor can be determined
using the following equation:

(156) A market-economy investor will make an investment only
if it offers him a higher return or a lower risk than the next
best alternative use of his capital. Accordingly, he will not
invest in a company whose expected returns are lower than
the average of other companies with a comparable risk
profile.
In this case it can be assumed that there are
sufficient alternatives to the investment that promise a
higher expected return for the same risk.

(157) There are various methods of determining an appropriate
minimum return. They range from differing variants of the
financing approach to the CAPM method. In describing
these various approaches,
it makes sense to draw a
distinction between two components, namely a risk-free
return and a project-specific risk premium:

Appropriate minimum return on a high risk investment

=

risk-free base rate + risk premium for the risky investment.

The appropriate minimum return on a high-risk investment
can therefore be described as the sum of the risk-free rate of
return and the additional risk premium for assuming the
specific investment risk.

(158) The basis for any determination of return is thus the
existence of a default-risk-free form of investment with an
assumed risk-free return. Normally the risk-free base rate is
determined using the
expected return on fixed-rate
securities issued by state issuers (or an index based on
such securities), as they represent forms of investment with
comparably low risks. However, the difference between the
various methods lies in the method of determining the risk
premium: -

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

the historical

capital

costs

is

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

Minimum return on capital =

risk-free base 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.

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

(159) In its comments of 29 July 2003, the BdB, using the CAPM,
concluded that the minimum remuneration to be expected
for an investment in the capital of LSH at 31 December
1990, when the transfer took place, was 14,85 % per
annum. Germany raised objections in principle to the use
of the CAPM. It also argued that the BdB started from a
high beta value and was incorrect in its calculation of the
risk-free base rate, and that the market-risk premium of
4,6 % was too high. Had the BdB applied the CAPM
correctly, it would have arrived at a much lower minimum
remuneration for a hypothetical investment in the share
In their understanding on the normal
capital of LSH.
market remuneration, the Land of Schleswig-Holstein, HSH
Nordbank and the BdB concluded that a minimum
remuneration of 9,29 % was appropriate.

(160) In their calculations, the parties based themselves on the
CAPM and applied a risk-free basic interest rate of 6,61 %.
this interest rate was based on the
Determination of
assumption that special-purpose assets were to be made
available to LSH on a permanent basis. The parties thus
decided not to use a risk-free rate obtaining on the market
at the time of the capital injection for a fixed investment
period (e.g. 10-year return on government bonds), since
such an approach would disregard the reinvestment risk, i.
e. the risk that it would not be possible to invest again at
the level of the risk-free interest rate once the investment
period had expired. In the view of the parties, a total return
index was the best way of taking the investment risk into
account. They opted, therefore, for the REX10 Performance
Index of Deutsche Börse AG, which tracks the performance
of an investment in Federal loans over a period of ten years.
The index series used in the present case contains the
the REX10 Performance
relevant end-of-year results of

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Index since 1970. The parties then calculated the rate of
return per annum, which reflects the trend tracked by the
REX10 Performance Index in the period 1970 to 1990 and,
in this way, arrived at the risk-free base rate of 6,61 %.

rate of 6,61 % (41). They also agree to adopt a flat 50 % tax
rate. On this basis, they arrive at a net refinancing rate of
3,31 % and a corresponding deduction for liquidity.

(161) Since LSH's capital

injection was made available on a
permanent basis, the method of determining the risk-free
basic interest rate appears appropriate in this specific case.
Moreover, the REX10 Performance Index is a generally
recognised source of data. The risk-free basic interest rate
calculated thus appears appropriate here.

(162) The beta factor of 0,670 was estimated on the basis of a
KPMG report on adjusted beta factors for all listed credit
institutions in Germany that is available to the Commis-
sion. In the light of the report and of LSH's business profile,
this beta factor may be regarded as appropriate.

i.e.

(163) The Commission also regards the market-risk premium of
long-term
4,0 % as acceptable. The so-called general
the difference between the
market-risk premium,
long-term average return on a normal share portfolio and
the return on government bonds, has already been applied
on several occasions in the WestLB case, which resulted in
Decision 2000/392/EC. In the corresponding report on the
procedure, a range of some 3 % to 5 % was applied,
depending on the method, the period under examination
and the basic relevant data. A report prepared for BdB
calculated figures of 3,16 % and 5 %. Another report on
WestLB drawn up in the first procedure produced figures of
4,5 % and 5 %, while Lehman Brothers, also for WestLB,
calculated a figure of 4 %. Against this background, the
Commission here sees no reason to depart
from the
market-risk premium used in the understanding. On the
basis of the CAPM, the Commission considers there to be
no doubt that the minimum remuneration determined by
the parties can be regarded as appropriate

(164) The Commission has no reason to believe that, in the case
under consideration, the minimum remuneration deter-
mined by the parties for a hypothetical share-capital
investment cannot stand up to a market test. Accordingly,
it sets the minimum remuneration for the special-purpose
reserve at 9,29 % per annum (after corporation tax and
before investor tax).

Return discount for lack of liquidity

(165) The long-term risk-free rate (10-year German Federal
government bonds) at the end of 1990 was 8,98 %. LSH
claimed that its actual refinancing costs on the basis of its
financial structure at the time of the transfer were 9,2 %. In
their understanding the parties apply a long-term risk-free

(166) In view of that understanding and the fact that the amount
in question falls below the range previously cited by
Germany, the Commission sees no reason to regard this
amount as inappropriate and consequently uses it as a basis
for determining the aid element.

Return premium on account of the particularities of
the transfer

It must

(167) In practice, when remuneration is determined, atypical
circumstances which depart from a normal investment in
the share capital of the company concerned generally give
rise to discounts or premiums.
therefore be
examined whether the particularities, and especially the
specific risk profile of the transfer of IB's capital, constitute
grounds for adjusting the minimum remuneration deter-
mined of 9,29 % which a private investor would expect for
a (hypothetical)
in the capital of LSH and
the Commission can produce a methodically
whether
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.

investment

risk of

those rights,

(168) The transfer did not provide the Land with any additional
voting rights. 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 50 % of
thereby
becoming the majority shareholder. To compensate for
loss without a
this acceptance of a higher
corresponding increase in influence over the company, a
market-economy investor would demand a higher remu-
neration (even if the potential risk were cushioned by
internal agreements with the other shareholders). On the
basis of the higher remuneration for preference shares
compared with ordinary shares and in agreement with the
complainant, BdB, the Land of Schleswig-Holstein and LSH,
who, as a result of their meetings in August and September
2004, regard a rate of 0,3 % per annum (after tax) as
reasonable, the Commission considers a premium of at
least 0,3 % per annum (after corporation tax)
to be
appropriate. The parties to the understanding also regard
a 0,3 % premium as appropriate to take account of the
failure to issue voting rights.

(169) The size of the amount transferred and its effect on LSH
from the point of view of the Solvency Directive has
IB's
already been mentioned. Through the transfer of
capital, LSH's core capital was increased substantially
without
administration costs. A
market-economy investor would probably have demanded
a premium for an injection of capital as large in relative and
absolute terms as the IB assets. On the other hand, in the
light of
the exceptional capital requirements of credit
institutions in the EU laid down by the Solvency Directive,

any acquisition or

(41) The parties use as a basis the risk-free interest rate calculated
according to the REX10 Performance Index of Deustche Börse AG.

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a capital injection of some DEM 1 300 million in one of
the largest German all-purpose banks must not be regarded
as completely alien to any normal business decision.
Moreover, where an investment involves a large volume of
assets, this suggests a similarity with share capital. When
large silent
the transfer took place at the end of 1990,
partnership contributions were atypical on the market. So
if the volume of assets transferred is used to justify a further
premium in the case of an investment that is similar to
share capital, this means that the volume is being unduly
taken into account twice over. The Commission therefore
feels that it cannot be proved with sufficient certainty that a
market-economy investor would have required a particular
premium for an injection of capital as large in relative and
is not
absolute terms as in this case. Accordingly,
imposing a premium linked to the volume of the asset
transfer, something which works in LSH's favour. Similarly,
the understanding between the parties assumes that no
premium should be applied on account of the high volume
of assets transferred.

it

(170) Lastly, attention must be drawn to the non-marketability of
the assets, i.e. the impossibility of withdrawing the invested
capital at any time from the company. Normally, an
investor can sell an equity instrument on the market to
third parties, thereby terminating his investment. A normal
transfer of capital takes place as follows: the investor brings
in assets (either in cash or in kind), which are entered on
the assets side of the balance sheet. As a rule, these are
matched on the liabilities side by a tradable interest
registered in the name of the investor, taking the form, in
the case of a limited company for example, of shares. The
investor can sell these shares to a third party. He cannot
withdraw the assets he originally brought in since these
now form part of the company's liable equity capital and
are no longer at his disposal. But by selling the shares — at
the prevailing exchange price — he can realise their
economic countervalue. His assets have thereby become
fungible. Because of the special circumstances surrounding
the transfer of IB's assets, this option was not available to
the Land. However, the Commission does not see any
reason for a further premium. Although the Land was
unable to realise the economic countervalue by trading
freely in the investment,
it could at any time have
withdrawn the special-purpose reserve from LSH by law
and achieved possibly higher returns by reinvesting it in
other institutions. Here too the understanding between the
BdB, the Land of Schleswig-Holstein and HSH Nordbank
assumes that no premium should be applied on account of
the lack of fungibility.

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

Overall remuneration

and LSH, the Commission comes to the conclusion that an
appropriate remuneration would be 6,28 % (after corpora-
tion taxes), i.e. a 9,29 % normal return on the investment in
question, plus 0,3 % for the particularities of the transac-
tion and minus 3,31 % for the financing costs which LSH
incurred on account of the lack of liquidity of the assets
transferred.

Appropriate remuneration for IB's capital up to the
time when it was recognised by BAKred, for the
amount used by IB and for the special-purpose real-
estate reserve

the Banking Act

(173) As stated above, IB's capital was already of material value to
LSH before it was recognised by BAKred as core capital
within the meaning of
(KWG), as it
appeared on the balance sheet as equity right from the time
of the transfer. The same applies to the amount used by IB
and to the special-purpose real-estate reserve. Its economic
function can be compared to that of a guarantee or liability.
A market-economy investor would demand an appropriate
remuneration in return for incurring a risk of this sort.
Germany initially regarded as inappropriate the basic rate of
0,3 % per annum recognised by the Commission in
Decision 2000/392/EC (42)
the guarantee function
enjoyed by LSH. In Decision 2000/392/EC, a premium of
a further 0,3 % per annum was added on top of that rate
because, firstly, guarantees are normally tied to certain
transactions and limited in time (which was not the case in
WestLB) and, secondly, the amount of over DEM 3 400
million made available to WestLB was higher than that
normally covered by such bank guarantees.

for

(174) Since WestLB and LSH are fundamentally comparable and
for want of any other points of reference, the Commission
assumes that this rate corresponds to the remuneration that
LSH would also have to have paid on the market for a
guarantee in its favour.

(175) Here too the understanding between the BdB, the Land of
Schleswig-Holstein and LSH assumes that a premium of
0,3 % is justified. The Commission therefore considers that
a premium is justified in the case of LSH and lays down a
rate of 0,3 % per annum as appropriate remuneration for
the guarantee function of the capital from the time when
the transferred amount appeared on the balance sheet
(1 January 1991) up to its recognition by BAKred. The
parties used a rate of 0,3 % per annum after tax as a basis in
the table calculating the aid element annexed to the text of
their understanding.

No account to be taken of IB dividend payments

(176) Germany argued that the IB dividends paid to the Land
from 1993 to 2002, amounting to DEM 99,9 million,
should be deducted from the remuneration payable.

(172) In view of all of the above observations and in agreement
with the complainant (BdB), the Land of Schleswig-Holstein

(42) See footnote 3; paragraph 221 of the decision.

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However, payments made or increases in value achieved
after the investment cannot be taken into account when
applying the principle of the market-economy investor,
who, on the basis of the information available to him at the
time of the investment, either expects an appropriate return
or agrees a direct remuneration. Dividends or increases in
value which cannot be calculated in advance are not
relevant.

(177) The Commission therefore considers that the IB dividend
payments should not be deducted from the remuneration
to be paid in this case.

(h) SYNERGY EFFECTS

(178) LSH considers that an assessment of the remuneration paid
to the Land must
the synergy gains
take account of
achieved through the transfer. However, it is clear that the
actual purpose of the transfer was to provide LSH with the
equity base needed to comply with the new solvency rules.
Synergy gains were seen as a positive side-effect but were
certainly not the main driving force behind the transaction
at the time.

(179) Furthermore, if such synergies and cost savings accrue to
IB, this will help the WKA and WAK (and hence the Land)
by reducing costs, but cannot be regarded as consideration
paid by LSH for the provision of the original own funds.
Since these synergies neither reduce the usability of the
transferred capital for LSH nor increase LSH'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 there
were an actual benefit accruing to the Land as a result of
synergies, any competitor would have been forced by
competition to ‘pay’ to the Land on top of the appropriate
consideration for the equity provided, a ‘remuneration’ in
the form of benefits for the financial
instrument (IB's
capital).

(188) The following table shows the calculation of the aid element:

(180) Moreover, following a merger operation, synergy effects
normally arise in both merged entities. It is difficult to
understand why LSH should not profit at all from such
advantages.

(i)

Legislative amendment on 1 June 2003

(181) Germany stated that IB was split off from the assets of LSH
with legal effect as of 1 June 2003. The special-purpose
real-estate reserve was split off from LSH with legal effect as
of 1 June 2003.

(182) After 1 June 2003 LSH was, therefore, no longer able to
underpin risk assets resulting from its competitive business
with special-purpose assets or
to use the latter as a
guarantee.

(183) The Commission therefore accepts that

the favourable
treatment was brought to an end with the hive-off of the
special-purpose assets on 1 June 2003.

(j) Aid element

(184) As calculated above,

the Commission comes

to the
conclusion that LSH should have paid a remuneration of
6,28 % per annum after tax for the special-purpose reserve
that was recognised by BAKred as core capital, and 0,3 %
after tax for the difference between this part and the
amount shown as equity on LSH's balance sheet, as well as
for the special-purpose real-estate reserve.

(185) This remuneration should have been paid from 1 January
1991 until the favourable treatment was brought to an end
on 31 May 2003.

(186) LSH paid a remuneration only on the amount it could use

to underpin its commercial business.

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

Figure 4:

Calculation of the aid element (DEM million)

1991 (*)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

DEM million

2003

(5 months)

Total IB capital

1 306,0 1 312,2 1 337,9 1 387,0 1 472,0 1 563,0 1 665,9 1 763,0 1 814,0 1 817,0 1 849,2 1 923,9

1 967,6

1.

Amount available to LSH

1 018,0 1 013,1

954,0 1 024,0 1 092,0 1 172,0 1 264,0 1 346,0

[…]

[…]

[…]

[…]

[…]

2.

Amount used by IB

288,0

299,0

383,9

363,0

380,0

391,0

401,9

417,0

[…]

[…]

[…]

[…]

[…]

3.

4.

Amount between 1.1.1991
and 30.8.1991

Special-purpose real-estate
reserve

870,7

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

[…]

[…]

[…]

[…]

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1991 (*)

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

DEM million

2003

(5 months)

Remuneration of 6,28 % (after tax)
on point 1

Remuneration of 0,3 % (after tax) on
point 2

Remuneration of 0,3 % (after tax) on
point 3

Remuneration of 0,3 % (after tax) on
point 4

Total remuneration in line with
market conditions

21,3

63,6

59,9

64,3

68,6

73,6

79,4

84,5

[…]

[…]

[…]

[…]

[…]

0,3

0,9

1,2

1,1

1,1

1,2

1,2

1,3

[…]

[…]

[…]

[…]

[…]

2,6

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

—

[…]

[…]

[…]

[…]

24,2

64,5

61,1

65,4

69,7

74,8

80,6

85,8

[…]

[…]

[…]

[…]

[…]

Actual remuneration (after tax)

0

0

0,9

2,4

1,0

2,5

5,0

6,6

Aid element

24,2

64,5

60,2

63,0

68,7

72,3

75,6

79,2

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

[…]

(*)

For balance-sheet purposes IB's capital was transferred as of 1 January 1991. It was available to LSH as a guarantee function for the first eight months of 1991. After recognition by BAKred, i.e. for the last
four months of 1991, it was also available for use to underpin competitive business.
Since 1 January 1999, marks have been converted into euros at a rate of EUR1 = DEM 1,95583. The figures in DEM must be converted accordingly.

(189) Accordingly,

the aid element

for the period from the
granting of the aid up to and including 31 May 2003
comes to DEM 845,6 million, which must be converted to
EUR 432,3 million.

purposes,
possibilities.

it directly influenced the bank's business

(194) It

is clear,

therefore,

that aid given to LSH distorts

competition and affects trade between Member States.

1.3. DISTORTION OF COMPETITION AND EFFECT ON TRADE

BETWEEN MEMBER STATES

1.4. CONCLUSION

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

(191) LSH had a regional base and also carried on international
It defined itself as an all-purpose
banking business.
commercial bank, central bank for the savings banks and
the bank of the Land and its municipalities. Despite its
name, tradition and legally stipulated tasks, LSH was much
more than a mere local or regional bank.

(192) These facts clearly show that LSH offered its banking
services in competition with other European banks outside
Germany and, since banks from other European countries
are active in Germany, inside Germany.

(195) On the basis of all these considerations, it can be stated that
all the criteria of Article 87(1) of the EC Treaty are met and
the special-purpose reserve
hence that
involves state aid within the meaning of that Article.

the transfer of

2.

COMPATIBILITY WITH THE COMMON MARKET

(196) An assessment must also be made as to whether that aid
can be considered compatible with the common market. It
should be noted in this respect that LSH invoked only the
exemption laid down in Article 86(2) of the EC Treaty in
relation to any aid elements present in the transfer of IB's
capital and of the real estate.

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

(193) It should also be pointed out that there is a very close
relationship between a credit institution's equity capital and
its banking activities.
It is only when it has sufficient
recognised equity capital that a bank can do business and
expand its commercial activities. As the state measure
solvency
provided LSH with such equity capital

for

(198) 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
areas — neither
certain economic
development of
Article 87(3)(a) nor (c) of the EC Treaty, as regards the

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is applicable. Nor does the aid
latter's regional aspects,
promote the execution of an important project of common
European interest.
It is not aimed either at promoting
culture or heritage conservation.

sufficient to satisfy their claims, and this is not the case here
from the outset. The capital injection is not intended to
satisfy the Landesbank's creditors and the bank's assets have
not been exhausted.

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

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

(201) Article 86(2) of the EC Treaty, which allows exemptions
from the Treaty's
state aid provisions under certain
conditions, is in principle also applicable to the financial
services sector. This was confirmed by the Commission in
its report on services of general economic interest in the
banking sector (43). LSH argued that it provided services of
general economic interest and that to the extent that any
sums contributed by the Land of Schleswig-Holstein were
used for purposes of its public-service tasks or services of
general interest, such sums did not constitute unlawful state
aid. However, LSH does not meet the necessary formal
conditions: no precise indication is given of the specific
tasks which it carries out in providing services of general
economic interest, and in particular of the specific costs
generated by such tasks. It is therefore clear that the transfer
was effected in order to enable LSH to comply with the new
own funds requirements and with no regard to any services
of general economic interest. Accordingly, this exemption
clause does not apply either in the case at hand.

(202) 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.

(205) Nor does Anstaltslast apply. Anstaltslast

requires the
guarantor,
to provide
the Land of Schleswig-Holstein,
LSH with the resources it needs to function properly for as
in existence.
long as the Land decides to maintain it
However, at the time of the capital injection, LSH was far
from being in a situation where it was no longer able to
operate properly for lack of sufficient resources. The capital
injection was not needed in order to keep the Landesbank
injection was made in
in operation. Rather, the capital
order to enable the Landesbank to increase its capital in the
light of the tighter rules on core capital/own resources
ratios introduced on 30 June 93 so as to avoid an
otherwise necessary reduction in its business volume/risk
assets and (in addition) to enable it to expand in future.
This conscious economic calculation by the Land as joint
owner also enabled LSH to seize future opportunities in its
competitive business. The ‘necessity requirement’
for
Anstaltslast does not apply to such a normal economic
decision by the Land as joint owner of the bank. Since there
is no other existing aid scheme under Articles 87(1) and 88
(1) of the EC Treaty, the capital injection ranks as new aid
within the meaning of Article 88(3) of the EC Treaty and
must be investigated accordingly.

X.

CONCLUSION

(206) The Commission finds

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

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

HAS ADOPTED THIS DECISION:

3.

NO EXISTING AID

Article 1

(203) Contrary to what was argued by Germany and LSH, the
capital injection cannot be regarded as being covered by the
existing state aid scheme for Anstaltslast and Gewährträ-
gerhaftung.

The state aid of €432,3 million which Germany granted to
Landesbank Schleswig-Holstein Girozentrale, now HSH Nord-
bank AG, from 1 January 1999 to 31 May 2003 is incompatible
with the common market.

(204) Gewährträgerhaftung is a default guarantee offered to
creditors in the event that the bank's assets are no longer

Article 2

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

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

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Article 3

Article 4

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.

Using the questionnaire set out in the Annex, Germany shall
inform the Commission, within two months of notification of
this Decision, of the measures taken to implement it.

Article 5

This Decision is addressed to the Federal Republic of Germany.

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

Brussels, 20 October 2004.

Interest shall be calculated in accordance with the provisions of
Chapter V of Commission Regulation (EC) No 794/2004 (44).

For the Commission

Mario MONTI

Member of the Commission

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

L 307/158

EN

Official Journal of the European Union

7.11.2006

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 paymento (°)

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.