2006/738/EC: Commission Decision of 20 October 2004 on State Aid implemented by Germany for Norddeutsche Landesbank — Girozentrale (notified under document number C(2004) 3926)   (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 Norddeutsche Landesbank — Girozentrale

(notified under document number C(2004) 3926)

(Only the German text is authentic)

(Text with EEA relevance)

(2006/738/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

(4)

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

(5)

(1)

(2)

The subject of these proceedings is the transfer of three
Land trust agencies (Landestreuhandstellen (‘LTS’)) to Nord-
deutsche Landesbank — Girozentrale (‘NordLB’) by the
Land of Lower Saxony. There are a further six cases in which
proceedings have been initiated against Germany in
connection with transfers of assets to Landesbanks, and
in particular to Westdeutsche Landesbank — Girozentrale
(‘WestLB’).

By letter of 12 January 1993,
the Commission asked
Germany for information on a capital increase in WestLB
resulting from the incorporation of the housing organisa-
tion Wohnungsbauförderanstalt
and on similar
increases in the own funds of the Landesbanks of other
Länder. It also asked which Landesbanks had benefited from
a transfer of publicly owned promotion-related assets and
for information on the reasons for those transactions.

(‘WfA’)

(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.

(1) OJ C 81, 4.4.2003, p. 2.

shares

the
By letters of 31 May and 21 December 1994,
Bundesverband deutscher Banken e.V. (‘BdB’), an association
representing private banks
established in Germany,
informed the Commission among other things that, under
a law adopted on 17 December 1991, the Land of Lower
Saxony’s
in assets used to promote housing,
agriculture, trade and industry had been transferred to
NordLB with effect from 31 December 1991. This increased
the own funds at NordLB'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)). In February and March
1995 and December 1996 several banks associated
themselves individually with the complaint lodged by the
BdB.

The Commission investigated first the transfer of assets to
WestLB but announced that it would examine the transfers
to the other Landesbanks, including NordLB, 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 remuneration 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 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. On 20 October 2004 the Commission, having
become aware of an understanding between the complai-
nant, WestLB and the Land of North-Rhine Westphalia,
issued a new decision which took account of the Court's
criticisms.

(6) On 1 September 1999, following Decision 2000/392/EC,
the Commission sent Germany a request for information
on the transfers of assets to the other Landesbanks. By letter

(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).

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L 307/59

of 8 December 1999, Germany supplied information on
the transfer of the LTS to NordLB which it supplemented in
a letter dated 22 January 2001 in response to the
Commission’s requests for further information.

(7) On 1 March 2001 the Commission asked for more
information,
in particular on the transfers of capital by
the Niedersächsische Sparkassen und Giroverband (‘NSGV’).
Germany replied on 15 May 2001.

(8)

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 to NordLB of the promotion-related
assets of the Land of Lower Saxony. At the same time, it
launched the investigation procedure in respect of similar
transfers of assets to Bayerische Landesbank — Girozen-
trale, Landesbank Schleswig-Holstein — Girozentrale,
Hamburgische Landesbank — Girozentrale and Land-
esbank Hessen-Thüringen.
It had already opened an
investigation into a further similar transfer of assets by
the Land of Berlin to Landesbank Berlin back in July 2002.

(9)

The decisions initiating the procedure were published in the
Official Journal of the European Union (1). The Commission
called on interested parties to submit comments.

(10) By letter of 11 April 2003, Germany submitted its
comments on the initiation of the procedure in the NordLB
case.

(11) By letter of 29 July 2003, the BdB submitted comments on
all the decisions taken on 13 November 2002 to initiate the
investigation procedure. On 30 October 2003 Germany
forwarded a reply by the Land Government of North Rhine-
Westphalia and WestLB AG to the BdB's comments on the
proceedings concerning the transfer of LTS to NordLB.

(12)

further
In response to the Commission’s request
information dated 1 September 2003, Germany supplied
additional information and replied to the BdB's comments
on NordLB on 28 October.

for

(13) On 7 April and 3 May 2004 the Commission sent
Germany further requests for information, to which the
latter replied by letters dated 27 May and 28 June 2004. On
16 August and 9 September 2004 Germany sent further
comments supplementing its previous position.

(14) On 19 July 2004 the complainant (the BdB), the Land of
North Rhine-Westphalia and WestLB AG submitted a
provisional understanding on the appropriate remuneration
for the transferred assets. In their view, this remuneration
should form the basis for the Commission’s decision.

(1) OJ C 81, 4.4.2003, p. 2.

Likewise, the BdB, the Land of Lower Saxony and NordLB
submitted a proposal for an understanding on appropriate
remuneration for the transfer of the LTS assets. These
parties and Germany subsequently addressed several letters
to the Commission. The final version of the understanding
on the transfer of the LTS assets to NordLB reached the
Commission on 7 October 2004.

II.

DETAILED DESCRIPTION OF THE MEASURES

1.

NORDDEUTSCHE LANDESBANK — GIROZENTRALE

(15) NordLB, to which the LTS were transferred, is a publicly
owned credit institution operating in the form of a public-
law institution (Anstalt des öffentlichen Rechts) with registered
offices
and
Schwerin. With a group balance-sheet total of EUR 193 000
million (at 31 December 2003), it is one of Germany's
largest banks. NordLB currently employs around 9 500
staff.

in Hanover, Braunschweig, Magdeburg

(16) NordLB was formed in 1970 by the union of four publicly
owned credit
institutions (Niedersächsische Landesbank,
Braunschweigische Staatsbank (including Braunschwei-
gische Landessparkasse), Hannoversche Landeskreditanstalt
and Niedersächsische Wohnungskreditanstalt-Stadtschaft).

(17) When the capital transfer under investigation took effect,
60 % of NordLB by the Land of Lower Saxony and 40 % by
NSGV, a public-law corporation.

(18) Under two State Treaties of 1991 and 1992, the Länder of
Lower Saxony, Saxony-Anhalt and Mecklenburg-Western
Pomerania agreed to operate NordLB as a joint Land
institution. With effect from 12 January 1993, the owner-
ship and guarantor structure was altered as follows: Land of
Lower Saxony 40 %, NSGV 26,66 %, Land of Saxony-
Anhalt 10 %, Land of Mecklenburg-Western Pomerania
10 %,
Sachsen-Anhalt
(‘SBV’) 6,66 %, and Sparkassenbeteiligungszweckverband
Mecklenburg-Vorpommern (‘SZV’) 6,66 %.

Sparkassenbeteiligungsverband

(19) Under the terms of its articles of association, NordLB is
required to operate as a Land bank, a central savings bank
and a commercial bank. It may also engage in any other
business that serves the purposes of the bank, its owners
and the municipal corporations in the Länder.
In the
Braunschweig area it operates as a savings bank. NordLB
offers financial services to private customers, businesses,
institutions and public authorities and is an important
player on international capital markets, both for its own
account and as manager of other issuers' debt instruments.
Like many German all-purpose banks, NordLB holds a
number of stakes in financial and non-financial enterprises.

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(20) NordLB has a presence in the world’s major financial and
trading centres. It has a stock-exchange office in Frankfurt,
branches in London, New York, Singapore, Stockholm,
Helsinki and Shanghai,
representative offices in Oslo,
Tallinn and Beijing and subsidiaries in London, Zürich,
Luxembourg, Riga, Vilnius and Warsaw.

(21)

In 2003 NordLB’s equity ratio was 11,5 % at institutional
level and 10,1 % at group level; its core-capital ratio was
7,1 % at institutional level and 6,3 % at group level. Its
income-to-equity ratio stood at [...] (*) % in 2003.

2.

LAND TRUST AGENCIES (‘LTS’)

(22)

In 1948 the Land of Lower Saxony set up a trust agency
with the task of promoting social housing. On the basis of a
‘trustee agreement’ between the Land and NordLB, the bank
the promotion-related
took over the administration of
assets and the tasks carried out by the trust agency. On the
basis of this and two other, similar trustee agreements,
NordLB became the owner — in legal but not in financial
terms — and the trustee administrator of the assets for
promoting housing, agriculture and industry on the Land’s
behalf. It granted promotional loans in its own name, but
on the Land’s financial account.

(23) The three LTS are not legally independent but are managed
within NordLB as autonomous and — in operational,
personnel and organisational terms — separate business
divisions. The three LTS are exempt from corporation tax,
property tax and tax on business capital.

(24) The Land housing trust

agency (LTS-Wohnungswesen)
manages assets specifically earmarked for housing and
Land guarantees for the promotion of housing construc-
tion.
it promotes the construction and
modernisation of owner-occupied homes and rented homes
and the purchase and acquisition of owner-occupied
homes.

In particular,

(25) The Land agriculture trust agency (LTS-Agrar) administers
in

public loans and grants
particular agricultural investment and forestry measures.

to promote agriculture,

(26) The Land industry trust agency (LTS-Wirtschaft) issues and
administers loans and grants for the promotion of industry,
specialising in investment by small and medium-sized
enterprises and in business start-ups. It looks after the EU’s
Interreg Initiative
financial
intermediary under the Joint European Venture (JEV).

recognised as

and is

a

(*) Confidential information.

3.

CAPITAL REQUIREMENTS UNDER THE OWN FUNDS

DIRECTIVE

(the

‘Solvency Directive’)

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

items which are at

the core capital

(28) By 30 June 1993 German banks had to adapt their own
funds to the new requirements of the Solvency Directive
and the Own Funds Directive (3).

(29) The own-funds

cushion of many Landesbanks was
comparatively small even before transposal of the Solvency
Directive into German law. They now had to strengthen
their own-funds base as a matter of urgency in order to
avoid restrictions on their business expansion or at least to
maintain their current level of activities.

(30) However, because the budgetary situation was tight, the
public shareholders were unable to provide any fresh capital
but were not prepared to contemplate privatisation and to
raise additional capital on capital markets. It was therefore
decided to undertake transfers of assets and capital: for
example,
in WestLB's case the assets of WfA and in
NordLB’s case the above-mentioned promotion-related
assets of the three LTS.

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

EC (OJ L 126, 26.5.2000).

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

(OJ L 126, 26.5.2000).

(3) Under the Solvency Directive, credit institutions must have own
funds equivalent to at least 8 % of their risk-adjusted assets, whereas
the old 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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4.

TRANSFER OF THE LTS AND ITS EFFECTS

(a)

THE TRANSFER

(31) By the Act on the contribution of the promotion-related
assets of the Land of Lower Saxony to the liable equity
capital of Norddeutsche Landesbank — Girozentrale,
adopted by the Lower Saxony Parliament on 17 December
1991 (1), the Land’s Finance Ministry was empowered to
transfer at their market value the Land’s shares of the
promotion-related assets of the three LTS to NordLB as
equity capital. The Land also undertook to maintain the
total market value of the transferred assets at not less than
DEM 1 500 million.

(32) On the basis of this Act, the Land of Lower Saxony and
NordLB concluded a transfer agreement on 20 December
1991 by which the Land transferred to NordLB as liable
equity capital its entire shares of the respective promotion-
related assets. The purpose of transferring the assets was to
increase by DEM 1 500 million the equity capital of
NordLB recognised for supervisory purposes.

(b)

VALUE OF THE LTS

(33) On 21 February 1992 NordLB charged the audit firm
Treuarbeit AG with the task of determining the value of the
transferred assets at 31 December 1991. Treuarbeit AG
concluded that the total value of the assets transferred came
to DEM 1 754 million and confirmed that the special-
purpose reserve of DEM 1 500 million,
formed in
connection with the transfer and shown on NordLB’s
balance sheet at 31 December 1991 as equity capital, should
be regarded as containing value.

für das Kreditwesen — ‘BAKred’) on
(Bundesaufsichtsamt
26 February 1992 asking for the special-purpose reserve
of DEM 1 500 million to be recognised for supervisory
purposes as liable equity capital within the meaning of the
second sentence of Section 10(2) KWG.

(36) On 26 July 1993 BAKred provisionally recognised the DEM
1 500 million as liable equity capital. In response to a
request by BAKred,
the Land of Lower Saxony again
confirmed its undertaking to maintain the value of the
promotion-related assets at not less than DEM 1 500 mil-
lion. On 22 November 1993 BAKred finally gave notice
that it was withdrawing its initial reservations regarding the
value of
the special-purpose reserve. Before formally
recognising the promotion-related assets of the LTS as
core capital, BAKred allowed them to be used to cover
liabilities, in so far as was necessary to comply with the
solvency rules in force at the time.

(37) From the time of the transfer, the sum of DEM 1 500
million was shown under NordLB’s equity capital as a
combined special-purpose reserve, while the difference vis-
à-vis the value of the assets was booked as a provision for
commitments arising from the transfer agreement.

the assets

transferred was

(38) Germany has stated that each year around DEM 100 million
of
required to underpin
promotion-related business. All the remaining assets were
available to NordLB to underpin its competitive business
from the time when BAKred granted its recognition. Until
BAKred granted its final recognition, only the portion of
the assets that was actually necessary to comply with
solvency rules was available for competitive business.

(34) The value of the assets transferred to NordLB by the Land of
Lower Saxony is continually updated. The table below
shows the values established up to the end of 2003:

(39)

In detail,
competitive business:

the following amounts were available for

Date

Value (DEM million)

31.12.1991

31.12.1992

31.12.1993

31.12.1994

31.12.1995

31.12.1996

31.12.1997

31.12.1998

31.12.1999

31.12.2000

31.12.2001

31.12.2002

31.12.2003

1 754,4

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

(35) On the basis of Treuarbeit AG's report, NordLB applied to
Authority

Supervisory

Banking

German

the

(1) Lower Saxony Official Gazette [Niedersächsisches Gesetz- und Ver-

ordnungsblatt], No 47/1991, p. 358.

1992

January

February

March

April

Mai

June

July

August

September

October

November

December

Value of assets available for compe-
titive business, according to Ger-
many (DEM million)

120

101

145

109

71

0

0

0

0

19

63

162

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1993

January

February

March

April

May

June

July

August

September

October

November

December

Value of assets available for compe-
titive business, according to Ger-
many (DEM million)

133

133

207

147

174

1 143

1 222

1 071

1 176

1 204

1 149

1 197

Irrespective of the use to which the assets may be put for
the purposes of banking supervision, NordLB is committed
by agreement to inform the Land before the beginning of
each business year how much of the LTS promotion-related
assets it plans to use (‘earmarking of capital’). For 1992
NordLB notified the use of DEM 180 million. For 1993 the
figure was DEM 1 400 million. Since 1994 the amount of
capital notified to the Land has coincided with the
maximum value available for competitive business (the
different amounts
totalling DEM 1 500 million were
needed for promotion-related activities).

Date

Earmarked capital (DEM million)

31.12.1991

31.12.1992

31.12.1993

31.12.1994

31.12.1995

31.12.1996

31.12.1997

31.12.1998

31.12.1999

31.12.2000

31.12.2001

31.12.2002

31.12.2003

—

180

1 400

1 400

1 390

1 390

1 390

1 390

[...]

[...]

[...]

[...]

[...]

(c)

EFFECTS OF THE TRANSFER OF THE LTS ASSETS ON
NORDLB

(40) Germany states that, as at 31 December 1991, NordLB had
core capital of DEM 2 043 million and additional capital of
DEM 543 million. The promotion-related assets of DEM

1 500 million therefore increased the total equity capital
base of DEM 2 586 million by 58 %.

(41) The scope for business expansion using 100 % risk-adjusted
assets was increased by a factor of 12,5, i.e. by around DEM
17 500 million. In reality, however, an increase in own
funds of around DEM 1 400 million can expand the
permissible credit volume by much more, as a bank's assets
are normally not 100 % risk-adjusted. Since the increase in
core capital allowed NordLB to raise further additional
capital, there was an even greater indirect increase in its
actual lending capacity.

(d)

REMUNERATION FOR THE TRANSFER OF THE LTS

(42) Under Section 7(1) of the transfer agreement of 20 Decem-
ber 1991, a remuneration of 0,5 % per annum after tax was
agreed for the transfer of the promotion-related assets of all
three LTS. The remuneration is payable each subsequent
year. In this context NordLB must determine the amount of
remuneration for the following business year by 31 January.
According to the terms of
the agreement, the rate of
remuneration is based on the notified use of the reserves
formed pursuant to the transfer agreement, i.e. only on the
the following
capital actually earmarked. Accordingly,
amounts have been paid:

Date

Earmarked
capital
(DEM million)

Interest rate

Remuneration
paid (DEM mil-
lion)

31.12.1992

180

31.12.1993

1 400

31.12.1994

1 400

31.12.1995

1 390

31.12.1996

1 390

31.12.1997

1 390

31.12.1998

1 390

31.12.1999

[...] (*)

31.12.2000

31.12.2001

31.12.2002

31.12.2003

[...]

[...]

[...]

[...]

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,5 %

0,9

7

7

6,95

6,95

6,95

6,95

[...]

[...]

[...]

[...]

[...]

(43) Under the transfer agreement, the Land of Lower Saxony
to withdraw interest payments and
also has the right
flow back to the promotion-related
amortisations that
assets, in so far as the market value of the assets exceeds
DEM 1 500 million. Germany stated that, up to March
2003, a total of DEM 473,88 million (EUR 242,29 million)
was withdrawn, which, it argues, corresponds to an interest

(*) Confidential information.

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premium of around 2,79 %-2,85 % per annum on top of
the agreed 0,5 % per annum.

e)

CAPITAL CONTRIBUTIONS BY THE OTHER SHARE-
HOLDER (NSGV)

(44)

In preliminary discussions on the transfer of
the LTS
promotion-related assets to NordLB, the Land of Lower
Saxony made it clear to the only other guarantor at that
time, namely NSGV, that, in its view, both guarantors bore
joint financial responsibility and that NSGV would have to
make its own contribution in accordance with its 40 %
share of capital. If this were to pose problems, a change in
ownership structure would have to be discussed.

(45) A draft agreement

to be concluded between the two
guarantors was annexed to the draft law of 15 October
1991. According to Germany, the only obstacle to this
‘guarantor agreement’ being signed immediately was the
fact that it had to be co-signed by the Land of Saxony-
Anhalt and SBV, and the latter had not yet been set up at
time. On concluding the transfer agreement on
that
20 December 1991, the assembled guarantors, consisting
at that time of the Land of Lower Saxony and NSGV,
decided to reach such a guarantor agreement which was
then duly concluded on 5 March 1992 — after the entry
into force of the State Treaty — with the participation of
the Land of Saxony-Anhalt and SBV.

(46) According to Germany, NSGV subsequently honoured its
undertakings under the guarantor agreement of 5 March
1992 and in July and October 1994 increased NordLB's
own funds recognised for supervisory purposes by a total of
DEM 1 000 million (in line with its 40 % share of NordLB’s
capital at that time) by means of two measures described in
more detail below.

(i)

LBS special-purpose reserve of DEM 450 million

the end of 1993,

(47) Following negotiations between the Land, NSGV and
NordLB at
the Landesbausparkasse
(LBS), previously incorporated in NordLB, was hived off
by an Act adopted on 6 June 1994 and turned into an
independent public-law institution (Anstalt des öffentlichen
Rechts) with legal capacity, with effect from 1 July 1994.

(48) Up to then, LBS had been 60 %-owned by the Land of
Lower Saxony and 40 %-owned by NSGV. Their value was
estimated at DEM 900 million. It was agreed that NordLB
would withdraw DEM 450 million from LBS before it was
hived off and that NSGV would inject the same amount
into LBS. This last measure was effected by deducting
DEM 450 million from NGSV’s commitment under the
guarantor agreement to inject DEM 1 000 million into
NordLB, on condition that NSGV would make a further
capital contribution of DEM 550 million.

the banking supervisory rules. The special
meaning of
reserve yielded cumulative interest before tax of 7,5 % per
annum and was owned jointly by the guarantors in
accordance with their internal relationship, i.e. 60 % by the
Land and 40 % by NGSV.

(ii) Silent partnership contribution of DEM 550 million

(50) Germany states that on 10 October 1994 NSGV and
NordLB concluded an agreement concerning a capital
contribution under Section 10(4) KWG. Under
that
agreement, NSGV undertook to make a capital contribution
to NordLB in the form of a silent partnership amounting to
DEM 550 million, with effect from 10 October 1994, in
return for payment of a profit-linked remuneration the
amount of which would be derived from the interest rate
(specified in more detail) on 10-year bearer bonds
amounting to 7,91 % plus a margin of 1,2 % per annum.
This produces a total
interest rate of 9,11 %, which,
according to the German authorities, corresponds to the
normal market remuneration for silent partnerships and at
the same time to the remuneration payable to the Land of
Lower Saxony for contributing the promotion-related assets
as liable equity capital. The German authorities state that
the contribution was made in accordance with the
agreement and was recognised for supervisory purposes
as liable equity capital of NordLB.

III.

COMMENTS FROM INTERESTED PARTIES

1.

COMPLAINT AND OBSERVATIONS BY THE

COMPLAINANT (THE BDB)

(51)

In BdB's view, the transfer of the LTS promotion-related
assets and the associated increase in NordLB's capital
distorted competition in favour of NordLB since the latter
did not pay remuneration consistent with the market-
economy investor principle.

(52) The BdB submits that

the application of

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

(53)

the transfer of

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

(49) NordLB booked the sum of DEM 450 million it had
withdrawn to a revenue reserve in the form of a special
liable equity capital within the
reserve as additional

(54) The BdB states that the question of what remuneration was
appropriate for the transfer of the promotion-related assets,
particularly in the case of NordLB, should be determined

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7.11.2006

using the method employed by the Commission in its
WestLB decision of 8 July 1999. The first step is therefore to
compare the capital provided with other equity instru-
ments. The second step is to determine the minimum
remuneration which an investor would expect for a real
in the Landesbank. Finally, a
equity-capital
calculation must be made of any premiums and discounts
applied by virtue of the particularities of the transfer.

investment

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.

Comparison with other equity instruments

Minimum remuneration for a share-capital investment
in a Landesbank

(55) The BdB comes to the conclusion that the transfer of the
LTS promotion-related assets to NordLB — and the transfer
of capital
in all the other Landesbank cases — can be
compared to an injection of share capital.

(59) 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. These methods can be traced back to the
following basic principle:

(56)

capital

the time of

the promotion-related assets transferred
It argues that
cannot be compared with capital
in the form of profit
participation certificates, as profit participation rights
the
constitute only additional capital. At
respective transfers, in particular at the end of 1991, only
share
(and reserves within the meaning of
Section 10(2) KWG) and silent partnership contributions
were
in Germany. Any
comparison with silent partnership contributions could
be ruled out across the board. First, such contributions were
made available by an investor for a limited period only. An
investor could not therefore expect to receive the same
return on a silent partnership contribution as for equity
instruments recognised for supervisory purposes for an
unlimited period, in particular a injection of share capital.

recognised as

capital

core

(57) Second, although 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. The injected
capital made up a significant proportion of the total core
capital, making it extremely likely that it would be drawn
on — at least in part — in the event of losses (1).

(58) Third,

the BdB submits that

the difference in quality
between silent partnership contributions and the capital
transferred to the Landesbanks as promotion-related assets
is confirmed by the definition of core capital for super-
visory purposes adopted by the Basle Committee for
Banking Supervision. According to this definition, silent
partnership contributions must be recognised for super-
visory purposes as no more than lower tier I capital, which
may account for no more than 15 % of the requisite core-
capital ratio. In other words, where the core-capital ratio is
4 %, 3,4 % must be made up of nominal capital and open
reserves (e.g. the special-purpose reserves transferred to the
Landesbanks). Furthermore, banks only ever
took up
subordinate equity instruments such as preference shares

(1) 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.

Expected return on a risky investment

=

risk-free return + risk premium for the risky investment

(60) To determine the risk-free return, the BdB uses the returns
on long-term government bonds,
fixed-rate securities
issued by state bodies being the form of investment with
the least or no risk. To offset the effects of inflation, the rate
of return on a long-term government bond should be
determined for each transfer period, initially disregarding
the inflation expectations. Then, to estimate the long-term
risk-free basic rate, the estimated figure for average long-
term inflation expectations (3,6 %) is added to the ‘real
basic rate’ at the time in question.

(61) According to the BdB, the first step in working out the
market-risk premium is to determine the difference between
the long-term average return on shares and that on
government bonds.

(62) As a second step, the BdB determines 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.

Premiums and discounts on account of the
particularities of the transactions

(63) The BdB notes that

the Commission's deduction,

in
Decision 2002/392/EC, from the minimum remuneration
to allow for the lack of liquidity of Wfa’s assets was upheld
by the Court of First Instance. It therefore sees no reason to
depart from this method in the present case, with the result
that a deduction for liquidity should also be made here. The
amount of this discount would be calculated using the
WestLB method, on the basis of net refinancing costs (gross

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refinancing costs minus the applicable corporation taxes).

(64) The Court of First

Instance also upheld the premium
applied by the Commission in Decision 2000/392/EC. If
the circumstances leading to an increase in risk compared
with a ‘normal share-capital investment’ are also present in
the other Landesbank cases (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 investment, i.
e. the impossibility of withdrawing the invested capital from
the company again at any time), the BdB considers that a
premium is also justified here.

2.

COMMENTS BY THE LAND OF NORTH RHINE-

WESTPHALIA AND WESTLB

(65) On 30 October 2003 Germany forwarded a response from
the Land of North Rhine-Westphalia and WestLB to the
Commission's decision to initiate the investigation proced-
ure in which they disputed the statement that the assets
transferred to the Landesbanks, including NordLB, could be
compared to share-capital. They argued that silent partner-
ship contributions and ‘perpetuals’ had in fact been
recognised as core capital in Germany since 1991, adding
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
than with share-capital
contributions or
investments.

‘perpetuals’

(66) WestLB had no objections to the Capital Asset Pricing
Model
(CAPM) method for calculating the minimum
remuneration for a share-capital investment but felt that
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 risk because of the
institutional
liability (Anstaltslast) and guarantor liability
(Gewährträgerhaftung) which it enjoyed and which were not
challenged at the time.

(67) Moreover, they argued that,

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

(68) 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 remuneration for capital market instru-
ments 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.

(69) 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.

3.

COMMENTS BY NORDLB AND THE LAND OF LOWER

SAXONY

(70) Since the observations made by NordLB and by the Land of
Lower Saxony were also presented by the Federal Govern-
ment, they are included here together with the comments
by Germany.

4.

COMMENTS BY GERMANY

(71) Germany argues that, even after the decision by the Court
of First Instance, there are still fundamental doubts as to
whether investments in profitable undertakings by public
authorities can be assessed using the private investor test. It
is also convinced that the transfer of promotion-related
assets to NordLB by the Land of Lower Saxony does not
constitute aid according to the principles applied by the
Commission in Decision 2000/392/EC.

(72)

In NordLB’s case, the only other partner besides the Land at
the time the assets were transferred, i.e. NSGV, undertook
to make a contribution corresponding in volume to that of
the Land — proportionate to its own shareholding — and
under similar conditions. It duly made such a contribution.
In this respect, the Land already acted like a private investor
in its transfer of the promotion-related assets to NordLB.

(73) Moreover, Germany argued, NordLB also paid an appro-
priate remuneration. It pointed out here that the remunera-
tion paid (0,5 % after tax or 1,2 % before tax) corresponded
to an indicative interest rate of around 9,5 % before tax
(1,2 % + 8,3 %), taking into account the refinancing costs of
around 8,3 % which the Land as investor had saved.
Furthermore, in addition to the remuneration of 0,5 % after
tax,
the Land of Lower Saxony had also obtained
continuous revenue flows from the promotion-related
assets amounting to EUR 242,29 million (DEM 473,88 mil
lion).

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(74) Germany argues that the BdB and the Commission were
mistaken in the way they calculated the minimum
remuneration in the Decision 2000/392/EC. The CAPM
method is said to be unsuitable for determining the market
return for a number of reasons. First, the assets transferred
to NordLB were not freely available. This meant that the
investment alternatives assumed under the CAPM method
were practically non-existent. The risk assumed in the
CAPM to account for market fluctuations did not exist
either, as the Landesbanks were not quoted on the stock
exchange, the investment was remunerated at a fixed rate
time the Landesbanks still benefited from
and at
Anstaltslast (institutional
liability) and Gewährträgerhaftung
(guarantor liability). There were therefore no historical data
series for beta factors.

that

(79)

If NordLB were indeed favoured by the transfer of the
promotion-related assets, the favourable treatment con-
sisted only in compensation for NordLB for the costs it
incurred for carrying out its public mandate. NordLB was
not only the Land bank but also a savings bank in the
Braunschweig area. It therefore performed not only the
traditional public tasks of a Land bank, with the attendant
costs, but also the function of a savings bank.

(80)

If, nevertheless, there were aid in this case, it was in any
event existing aid since the promotion-related assets had
been transferred on the basis of Anstaltslast, on which a
final settlement was reached by the Brussels compromise of
17 July 2001.

(75) Among the special circumstances of

the asset transfer,
consideration should be given to the fact that the liability of
the promotion-related assets is limited in accordance with
the proportion of NordLB’s share capital held by the Land
of Lower Saxony and that
the Land is entitled to
compensation from NordLB's other guarantors. In deciding
to invest, an investor would pay particular attention to the
fact that, although externally the promotion-related assets
were exposed to loss without limitation,
internally their
liability was restricted to an amount corresponding to the
share of NordLB’s capital held by the Land of Lower Saxony.
The Land was therefore entitled to compensation from
NordLB's other guarantors — all of
them public-law
corporations — which ran no risk of insolvency.

5.

UNDERSTANDING BETWEEN BDB, THE LAND OF

LOWER SAXONY AND NORDLB

their basic interpretations of

(81) On 7 October 2004 the Commission was informed of the
outcome of an understanding reached between the
complainant BdB, the Land of Lower Saxony and NordLB.
Irrespective of
the legal
situation, which remained unchanged, the parties to the
understanding agreed on what
they themselves would
regard as suitable parameters for determining an appro-
priate remuneration and as an appropriate remuneration.
The parties asked the Commission to take account of the
outcome of the understanding in its decision.

justified.

(76) With regard to a premium on account of the exceptionally
high volume of the transaction, Germany cannot under-
stand how such a volume is to be defined or why such a
premium is
transferred
represented only 34,89 % of the total equity of the NordLB
group recognised for supervisory purposes. This propor-
tion had fallen to a mere 9,62 % by 2001. The figures for
NordLB’s equity capital used as a basis for these calculations
are DEM 4 298 million in 1992 and DEM 15 596 million
in 2001. They already include the LTS assets.

In 1992 the assets

(82) Applying the CAPM,

rates of

the parties

the REX1O Performance

first determined a
minimum remuneration for a hypothetical share-capital
investment
in NordLB. They arrived at an appropriate
minimum remuneration of 10,03 % for the LTS promo-
tion-related assets. They took as their basis the risk-free
interest
Index of
Deutsche Börse AG and, for the beta factors, a KPMG
the
report of 26 May 2004 drawn up on behalf of
Landesbanks (and now in the Commission's possession). In
practical terms, a risk-free basic interest rate of 7,15 % was
calculated for NordLB as at 31 December 1991 and a beta
value of 0,72 was applied on the basis of the KPMG study.
The market-risk premium was set at 4 % (for all Land-
esbanks).

(77) Germany also argues that no premium is justified on
account of the failure to issue new shares to the Land of
Lower Saxony. At the time of the transfer, NSGV gave an
undertaking to inject capital
in line with its share of
NordLB, which it subsequently did. There was therefore no
reason to increase the shares held by the Land.

(83) A deduction was then determined for the capital's lack of
liquidity on the basis of the risk-free interest rate of 7,15 %
as gross refinancing costs. To determine the net refinancing
costs, the standard tax burden of NordLB at the transfer
date was fixed at a flat rate of 50 %, giving a liquidity
discount of 3,75 %.

(78) Finally, in Germany’s view, no premium is justified either
for the lack of fungibility of the promotion-related assets.
For the purposes of calculating the minimum return, the
BdB and the Commission compared the asset transfer to a
share-capital investment. But the fungibility of share-capital
investments was just as low as that of the LTS promotion-
related assets.

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

failure to issue voting rights.

(85) This resulted overall

in an appropriate remuneration of
6,76 % per annum after tax for that portion of the LTS
the
proportion-related assets

that could be used for

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competitive activities of NordLB. This remuneration was
payable as of the end of the month when the assets were
recognised as core capital (30 November 1993).

state measure provided NordLB with such equity capital for
solvency purposes, it directly influenced the bank's business
possibilities.

(86) The understanding makes no mention of any remuneration
for that portion of the LTS promotion-related assets that
could not be used for the competitive activities of NordLB
(bank guarantee — Avalprovision).

(93)

IV.

ASSESSMENT OF THE MEASURE

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

1.

STATE RESOURCES AND FAVOURING OF A

PARTICULAR UNDERTAKING

(88) As described above, the Land of Lower Saxony’s shares in
the promotion-related assets of
the three LTS were
transferred to NordLB as equity capital. If state assets of
this kind, which have a commercial value, are transferred to
an undertaking, then state resources within the meaning of
Article 87(1) of the EC Treaty are involved.

(89)

In order to verify whether the transfer of state resources to
a publicly owned undertaking favours the latter and is
therefore liable to constitute state aid within the meaning of
Article 87(1) of the EC Treaty, the Commission applies the
‘market-economy investor principle’. This principle has
been accepted (and developed) by the Court in a number of
cases. The assessment under that principle will be made in
paragraph 93 et seq. below.

2.

DISTORTION OF COMPETITION AND EFFECT ON

TRADE BETWEEN MEMBER STATES

(90) 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, especially since remaining obstacles to
competition in the financial services markets are being
gradually dismantled.

(91) NordLB is an all-purpose bank and an important player on
the international capital markets. It offers banking services
in competition with other European banks inside and
outside Germany. Aid given to NordLB therefore distorts
competition and affects trade between the Member States.

(92)

It should also be recalled that there is a close link between
the equity of a credit institution and its banking activities.
Only on the basis of sufficient accepted equity capital can a
bank operate and expand its commercial operations. As the

3.

MARKET-ECONOMY INVESTOR PRINCIPLE

In deciding whether a financial measure taken by a public
owner of an enterprise constitutes aid within the meaning
of Article 87(1) of the EC Treaty, the Commission applies
the market-economy investor principle. This principle has
been applied by the Commission in many cases and has
been accepted and developed by the Court of Justice of the
European Communities in several decisions. (1) It allows the
Commission to bear in mind the specific circumstances of
each case, e.g. to take into account certain strategies of a
holding company or group of companies or to distinguish
between the short- and long-term interests of an investor.
The market-economy investor principle will also be applied
to the case at hand.

(94) According to the principle, no state aid is involved if funds
are made available on ‘terms which a private investor would
find acceptable in providing funds to a comparable private
undertaking when the private investor is operating under
normal market-economy conditions’. (2)
In particular, a
financial measure must be considered unacceptable to a
market-economy investor if the proposed remuneration
arrangements are less attractive than the market-rate
remuneration paid for comparable investments.

(95)

In the light of the market-economy investor principle, the
key question is therefore whether such an investor would
have supplied NordLB with capital that had the specific
the same
characteristics of
conditions, especially in view of the probable return on the
investment. This question will be examined below.

the LTS assets and under

(a)

ARTICLE 295 OF THE EC TREATY

(96) Article 295 of the EC Treaty lays down that the system of
property ownership in the various Member States must not
be affected. This does not, however, justify any infringement
of the competition rules of the Treaty.

(97) Germany claims that, because of the constraints imposed
by the special purpose assigned to the LTS assets, the only
possible profitable use of these resources was to transfer
them to a similar public-law institution. Consequently, the
transfer represented the commercially most sensible use of

(1) See, for example, Cases C-303/88 Italy v Commission [1991] ECR I-
1433 and C-305/89 Italy v Commission [1991] ECR I-1603.
(2) Commission communication to the Member States on the
application of Articles 92 and 93 of the EEC Treaty and of Article 5
of Commission Directive 80/723/EEC to public undertakings in the
manufacturing sector (OJ C 307, 13.11.1993, p. 3, point 11). While
this communication deals explicitly with the manufacturing sector,
the principle can undoubtedly be applied in the same way to all
other sectors. As regards financial services, this has been confirmed
by a number of Commission decisions, e.g. Crédit Lyonnais (OJ
L 221, 8.8.1998, p. 28) and GAN (OJ L 78, 16.3.1998, p. 1).

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those assets. So any remuneration for the transfer, i.e. any
additional return on the LTS capital, would be sufficient to
justify the transfer in the light of the market-economy
investor principle.

between the transactions already shows that they did not
take place under similar conditions.

(98) This line of argument cannot be accepted. It may be that the
transfer of the three LTS to NordLB, which subsequently
allowed NordLB to use part of the LTS capital to underpin
the commercially most
its competitive business, was
sensible use. However, simply taking the view of a public
investor would leave out of account
the fundamental
question of whether the recipient benefited from prefer-
ential treatment. The presence of such treatment can be
ascertained only by checking whether the price paid by the
recipient corresponds to the market price. As soon as
public monies and other assets are used for commercial,
competition-oriented activities, the normal market rules
must be applied.

(b) NO CHANGE IN OWNERSHIP STRUCTURE

(99) One way of ensuring an adequate return on the capital
provided would have been to increase the Land's participa-
tion in NordLB accordingly, provided that the bank's overall
profitability corresponds to the normal rate of return that a
market-economy investor would expect from his invest-
ment. However, this course was not taken by the Land of
Lower Saxony.

(100) Germany also attributes the failure to increase the Land’s
shares in NordLB to the fact that, at the time of the asset
transfer, NSGV undertook to inject capital in proportion to
its share in NordLB, which it then did by creating the LBS
special-purpose reserve of DEM 450 million and making
the silent partnership contribution of DEM 550 million.
Moreover, Germany argues that, in Alitalia, the Court held
that a capital injection from public funds would always
satisfy the private investor principle if another shareholder
made an investment and that in such a case no state aid was
involved. (1)

(101) It should be pointed out that the Court of Justice's ruling in
Alitalia referred to investments by private parties. But, in
the case of NSGV, we are dealing not with a private party
but with a public-law entity. The contributions by NSEV
were, moreover, not comparable to the transfer of the LTS
assets either in timing or in content.

(102) Whereas the LTS assets were transferred to NordLB with
effect from 31 December 1991, it was only with effect from
1 July 1994 that LBS was hived off from NordLB and the
LBS special-purpose reserve of DEM 450 million was
formed.
of
DEM 550 million took effect only from 10 October
1994. In the Commission’s view, this difference in timing

contribution

partnership

silent

The

(1)

Judgment given by the Court of Justice on 12 December 2000 in
Case T-296/97.

(103) Moreover, the investments in question took a different
form, at least in the case of the silent partnership. At that
time, all silent partnership contributions constituted ‘lower
tier I capital’,
i.e. additional capital which could not be
drawn on to the same extent as share capital in order to
in contrast to
comply with solvency regulations. Also,
share-capital investors, silent partners do not share in a
company’s increases in value, but are remunerated entirely
by means of direct payments, which are normally lower
than those for share-capital investments.

(104) Even if one assumes that a higher remuneration should
have been paid for the (liquid) silent partnership contribu-
tion of DEM 550 million than for
the (non-liquid)
promotion-related assets of the LTS, the transfers of assets
by the Land and by NSGV are not comparable given the
differences in remuneration. Each year a payment of 7,5 %
(before tax) is made for the LBS special-purpose reserve,
while, according to the Federal Government, the silent
partnership contribution yields interest of around 9,11 %
(before tax). By contrast, the LTS assets yield interest of
tax (around 1,2 % before tax). So the
0,5 % after
remuneration for the LTS assets is much lower than that
for the measures taken by the NSGV.

(105) Given such marked differences between the transactions
carried out by the Land and by NSGV, the question can
ultimately be left open as to whether, at the time when the
LTS assets were transferred to NordLB, NSGV was in fact
bound by an obligation to inject into NordLB an amount of
capital corresponding to its shareholding or whether this
obligation was laid down only later.

(106) It can therefore be concluded that there was no propor-
tional, comparable capital injection by a private investor, so
that the conditions underlying the Alitalia case are not met
here. The investment was made by another public share-
holder, NSGV, and the conditions of the capital injection
are not comparable since the two contributions took place
at different times and the terms also differed.

(c) OWNER EFFECT

(107) Germany believes that, in calculating the remuneration, a
market-economy investor would have taken into account
the increase in value in its own holding in NordLB. At the
time when the LTS assets were transferred, the Land of
Lower Saxony had a 60 % share in NordLB, the value of
which increased as a result of
the transfer. Moreover,
according to Germany, the Land ensured that NSGV also
injected capital commensurate with its own holding in
order to prevent NSGV from sharing in an increase in value
brought about solely by the Land.

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(108) For the reasons set out

in paragraph 102 et seq., no
importance can be attached to the fact that the Land had
shares in NordLB and NSGV’s capital injection cannot be
regarded as a comparable investment. By means of that
injection NSGV shared in the increase in value without
having made a corresponding contribution. No market-
economy investor would agree, as a joint owner, to bear the
entire cost of an investment if it were then to realise only
part of the gains from it. The Court of First Instance has
specifically confirmed this view in its
in
WestLB (1).

judgment

(d)

CAPITAL BASIS FOR CALCULATING THE REMUNERA-
TION

(109) Germany submits that only the part of

the accepted
original own funds which can be used by NordLB to
underpin its commercial business has an economic value
for the bank, so that a remuneration can be demanded by
the Land in respect of this part only. BdB claims that the
whole amount of DEM 1 754.4 million is at risk and
therefore a remuneration must be paid on that amount.

(110) As determined in Decision 2000/392/EC and confirmed by
the Court of First Instance, remuneration is, in principle,
payable on the entire value of the transferred assets. This
approach was applied in the WestLB case and upheld by the
Court. However,
the
different parts of the transferred assets.

the remuneration may differ for

(111) For the purpose of determining an appropriate remunera-
tion, a distinction should be made between the different
parts of the LTS assets according to their use to NordLB.

(112) The value of the assets is determined every year. At the end
of 1991 it stood at DEM 1 754.4 million. However, only
DEM 1 500 million was entered as equity on NordLB's
balance sheet. The difference between this amount and the
value of the LTS assets was booked as a provision for
commitments arising from the transfer agreement. Such
provisions are built up against imminent liabilities and do
not constitute equity capital. As a consequence,
they
generally do not improve a firm’s credit standing. The Land
of Lower Saxony is also entitled to withdraw interest
payments and amortisations which flow back to the
promotion-related assets, in so far as the market value of
the assets exceeds DEM 1 500 million. Since NordLB is
therefore unable to use the capital that exceeds the value of
DEM 1 500 million either to expand its business or to
cover liabilities, the Commission assumes that an investor
could not demand a remuneration for this portion of the
promotion-related assets.

(1) OJ L 150, 23.6.2000, p. 1, paragraph 316.

(113) Since the time of the transfer, a value of DEM 1 500 million
has been booked as equity capital
in NordLB’s balance
sheet. However, the LTS assets could not be used in full as
equity capital until recognised by BAKred. Until the amount
was provisionally recognised on 26 July 1993, the use of
the promotion-related assets was tolerated by BAKred only
in so far as was necessary in order to comply the solvency
rules in force at
the time. The full amount of DEM
1 500 million could be used only after it was provisionally
recognised on 26 July 1993. However, of
this DEM
1 500 million, only around DEM 1 400 million — the
exact amount fluctuates from year to year — can be used
by NordLB to expand its competitive business activities
since the remainder is needed for its promotion-related
business. The main basis for determining the remuneration
payable to the Land should therefore be, for 1992 and up to
August 1993, only the capital actually used and, from
August 1993, the capital earmarked for use,
i.e. around
DEM 1 400 million each year.

(114) Although the remaining original own funds (around DEM
100 million a year from August 1993, previously a higher
amount) cannot be used to expand competitive business,
they are of use to NordLB since the amount of own funds
shown in the balance sheet is an indication to the bank's
lenders of its soundness and thus influences the conditions
under which the bank is able to raise outside funds.
Creditors and ratings agencies look at the bank’s overall
economic and financial standing. Since the amount of
around DEM 100 million each year cannot be used to
expand business but improves the bank's appearance in the
eyes of creditors, its economic function may be compared
in that respect to at least that of a guarantee.

(115) Since the amount of around DEM 100 million each year is
also of economic use to WestLB, a market-economy
investor would have asked for a remuneration to be paid
on it. The level of this remuneration will certainly be lower
than that for the DEM 1 400 million, which is of greater
use to NordLB, since it can also be used under the solvency
rules as own funds to expand its commercial business.

remuneration is payable for

(116) A final point to be made here is that the text of the
understanding between the Land of Lower Saxony, NordLB
and BdB states that
the
transferred assets only as of the end of the month in
which they were finally recognised as core capital by
BAKred, i.e. 30 November 1993. On this point, however,
the Commission cannot agree with the understanding. The
transferred LTS assets were available for use by NordLB
following the transfer on 31 December 1991 at least to the
extent that their use was tolerated by BAKred, and NordLB
did indeed use a considerable portion of the assets before
they were finally recognised by BAKred.

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(e)

APPROPRIATE REMUNERATION FOR THE CAPITAL

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

it

(i)

Comparison with other equity instruments

(118) Germany believes that the remuneration for share capital is
not the correct benchmark for calculating an appropriate
remuneration for the LTS assets. While acknowledging that,
for supervisory purposes, share capital counts as core
capital, it points out that not all of a bank’s capital that
qualifies as core capital is at the same time share capital. In
particular, share capital which is fully at the bank’s disposal
for it to invest is entirely different in quality from the
transferred LTS assets, which continue to be available to the
Land for specific promotion-related purposes and are
therefore not profitable for NordLB itself.

(119) At the time of their transfer, the LTS assets were most
comparable to capital in the form of profit participation
certificates. At that time, NordLB and the Land of Lower
Saxony compared the remuneration for the promotion-
related assets with remuneration for profit participation
certificates. Profit participation capital is additional capital
which may, in principle, be taken into account only up to
the core capital. At 31 December 1991,
the extent of
NordLB is
said to have had core capital of DEM
2 043 million and additional capital of DEM 543 million.
The need for equity capital could therefore have been
covered by issuing profit participation certificates amount-
ing to DEM 1 500 million, instead of the promotion-related
assets recognised as core capital.

(120) In their comments, the Land of North Rhine-Westphalia
and WestLB also dispute the assertion that the various
transfers of assets to the Landesbanks, i.e. also in the case of
NordLB, could be compared to share capital. They argue
instead that the transfers are comparable to silent partner-
ship contributions or so-called ‘perpetuals’. Silent partner-
ship contributions and ‘perpetuals’ had been recognised as
core capital in Germany since 1991. Moreover, remunera-
tion for an investment depended not on how it was
classified by the banking supervisory authorities, but on its
risk profile. Since the LTS assets were junior-ranking, the
risk pattern had more in common with silent partnership
contributions or
than with share-capital
investments.

‘perpetuals’

(121) The Commission shares the BdB’s view that the transfer of
the LTS assets, which were recognised by BAKred as core
capital, is most comparable to a share-capital investment.

(122) In this connection,

it should first be stressed that the
relatively wide range of innovative equity instruments now
available to credit institutions in several countries did not
exist in Germany back in 1991, when a decision was taken
on transferring the LTS to NordLB or,
in 1993, when
NordLB had to comply with new, stricter capital require-
ments. Some of these instruments were developed in the
meantime, while others already existed but were not
accepted in Germany. In practice, the main instruments
which were available and used at that time were profit
participation certificates and subordinated loans (both of
which are merely additional own funds, the latter being
accepted only since 1993).

(123) It is therefore inappropriate to compare the LTS capital to
such innovative instruments, most of which have devel-
oped in the meantime and some of which are available only
in other countries. Germany itself (indirectly) rejects such a
comparison, claiming that the Commission must examine
the case on the basis of the facts available at the time of the
decision at the end of 1991.

(124) As regards perpetual preferred shares and profit participa-
tion certificates, a number of specific points should be
stressed. Perpetual preferred shares count as core capital in
some countries but are still not accepted in Germany. Profit
participation certificates constitute only additional own
funds, whereas the LTS capital qualifies as core capital. The
latter is therefore of much greater use to NordLB because it
can be used to raise additional own funds (such as profit
participation certificates) up to the same amount in order
to increase the bank's own-funds base. Moreover,
if
profitable years followed loss-making ones, profit partici-
pation certificates would be replenished before the LTS
capital. In addition, the LTS capital is available to NordLB
without any time limitation, while profit participation
certificates are usually issued for a period of ten years.
Furthermore, the enormous size of the capital
injection
would be atypical for profit participation certificates, and
the ranking in the event of losses must be seen in this
context. Since the share of the LTS capital is rather large, it
will be used relatively quickly when major losses occur.

either

is not

suitable

(125) The Commission considers that a comparison with silent
for
partnership contributions
determining the appropriate remuneration for the special-
purpose reserve recognised as core capital. In its view, an
important factor here is that the LTS assets were transferred
precisely not
silent partnership
contribution but as a special-purpose reserve. BAKred too
recognised the transfer as a reserve and not as a silent
partnership contribution under Section 10 KWG. The fact
that the German supervisory authority treated the transfer
as a reserve suggests that the capital made available is more
than to a silent partnership
akin to share capital
contribution.

form of a

in the

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(126) In addition, there is no less risk that at least part of the
transferred capital might be lost in the event of insolvency
or liquidation than would be the case for a share-capital
investment, as the LTS assets make up a considerable
proportion of NordLB’s equity capital and NordLB has used
a substantial amount of those assets to cover risk-bearing
assets over many years.

(127) For all these reasons, the Commission believes that, because
of the peculiarities of the LTS capital, a comparison with
perpetuals, profit participation certificates and silent
partnership contributions
is not a suitable way to
determine the appropriate remuneration to be paid for
the LTS capital. Instead, the transfer of the LTS assets has
most in common with a share-capital investment.

(ii) Right to compensation and low liability risk

(128) The liability in respect of the promotion-related assets is
limited internally to the share of the Land of Lower Saxony
in NordLB’s capital, and the Land is entitled to seek
compensation from all of NordLB’s other guarantors.
Germany argues that an investor would have given this due
consideration in his investment decision and his demand
for remuneration.

the

capital

transfer must be

(129) However, the internal restriction on liability cannot justify
any reduction in remuneration since, from NordLB's point
of view, it remains the case that the advantage obtained by
adequately
means of
remunerated in order to avoid distortions of competition.
The Land’s
to compensation from the other
guarantors constitutes an agreement between guarantors
and not a concession by NordLB that might justify a lower
remuneration. If, for example, the other guarantors had
agreed to assume full liability for the promotion-related
assets internally, this could not have led to a situation
where NordLB had to pay no remuneration at all.

right

(130) Moreover,

from the Commission’s point of view,

is
irrelevant whether the LTS assets were used continuously
and fully in order to meet solvency requirements. Even if
this were not the case, a market-economy investor would
have insisted on remuneration in full since the bank was
free to employ all the capital in its competitive business
according to its economic discretion.

it

(iii) Appropriate remuneration for the amount of DEM

1 400 million

(131) There are no doubt different ways of calculating the
amount of DEM
appropriate
1 400 million which was available to NordLB each year

remuneration for

the

for its competitive business. However, as will be shown, all
the methods for calculating the remuneration for capital
made available follow the same basic principles. Taking
these basic principles,
the Commission here does the
calculation in two steps: first, it determines the minimum
for a
remuneration that an investor would expect
(hypothetical) investment in the share capital of NordLB.
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
methodically robust quantification of that amount.

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

(132) The expected return on an investment and the investment
risk are key determinants in the decision of a market-
economy investor to invest. In order to determine their
level, the investor incorporates all available firm-related and
market-related information into his calculation. He bases
himself on historical average rates, which, generally
speaking, are also a point of reference for a firm's future
efficiency, and inter alia on an analysis of the company's
business model for the investment period in question, the
the relative
strategy and quality of management or
prospects for the sector in question.

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

there are sufficient alternatives

(134) Various methods exist

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

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

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

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(135) The basis for any determination of return is thus the
existence of a default-risk-free form of investment with an
assumed risk-free return. The expected return on fixed-
interest government
is normally used in
securities
determining the risk-free basic rate (or, as the case may
be, an index based on such securities), but these represent
investment with a comparably low risk. The
forms of
various methods differ, however, when it comes
to
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
the historical capital costs incurred by
approach,
comparable banks are first of all determined. The
arithmetic average of the historical capital costs is
then compared with the future expected equity capital
costs and hence with the investor's expected-return
requirement.

— Financing approach with compound annual growth rate: At
the heart of this approach stands the use of the
geometric rather than the arithmetic mean (com-
pound annual growth rate).

— Capital Asset Pricing Model (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:

Minimum return
=
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.

risk premium of 4,6 % was too high. Had the BdB applied
the CAPM correctly, it would have arrived at a much lower
minimum remuneration for a hypothetical investment in
the share capital of NordLB.

(138) In their understanding on the normal market remunera-
tion, the Land of Lower Saxony, NordLB and the BdB
concluded that a minimum remuneration of 10,03 % was
appropriate.

(139) In their calculations, the parties based themselves on the
CAPM and applied a risk-free basic interest rate of 7,15 %
for NordLB. Determination of this interest rate was based
on the assumption that the LTS special-purpose assets were
to be made available on a permanent basis. The parties thus
decided not to use a risk-free rate obtaining on the market
at the time of the capital injection for a fixed investment
period (e.g. 10-year return on government bonds) since
such an approach would disregard the reinvestment risk, i.
e. the risk that it would not be possible to invest again at
the level of the risk-free interest rate once the investment
period had expired. In the view of the parties, a total return
index was the best way of taking the investment risk into
account. They opted, therefore, for the REX10 Performance
Index of Deutsche Börse AG, which tracks the performance
of an investment in Federal loans over a period of ten years.
The index series used in the present case contains the
the REX10 Performance
relevant end-of-year results of
Index after 1970. The parties then determined the rate per
annum, which reflects the trend tracked by the REXIO
Performance Index in the period 1970-91 and, in this way,
arrived at the risk-free basic interest rate of 7,15 % referred
to above.

(140) Since NordLB'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.

(136) The CAPM is the predominant method of calculating
investment returns in the case of large listed companies.
However, since NordLB 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.

(141) The beta factor of 0,72 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 HLB's business profile,
this beta factor is to be regarded as appropriate.

(137) In its comments of 29 July 2003, the BdB, using the CAPM,
concluded that the minimum remuneration to be expected
for an investment
in the share capital of NordLB at
31 December 1991, when the LTS assets were transferred,
was 13,34 % 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-

(142) The Commission also regards the market-risk premium of
4,0 % as acceptable. Previously, in Decision 2000/392/EC,
the so-called general long-term market-risk premium, i.e.
the difference between the long-term average return on a
normal share portfolio and that on government bonds, was
applied on several occasions. In the corresponding report
on the procedure, a range of some 3 % to 5 % was applied,

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depending on the method, the period under examination
and the basic relevant data. A report prepared for BdB
calculated figures of 3,16 % and 5 %. Another report on
WestLB drawn up in the first procedure produced figures of
4,5 % and 5 %, while Lehman Brothers, also for WestLB,
calculated a figure of 4 %. Against this background, the
Commission has here 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.

(143) The Commission therefore has no reason to believe that the
minimum remuneration determined by the parties for a
hypothetical share-capital investment cannot stand up to a
market test. Accordingly, it sets the minimum remunera-
tion for the special-purpose reserve at 10,03 % per annum
(after corporation tax and before investor tax).

(iv) Return discount for lack of liquidity

(144) Germany believes

that NordLB paid an appropriate
remuneration, as a private investor would have deducted
from the remuneration the refinancing costs he had saved.
Since the investor saved the cost of refinancing the capital,
Germany concludes that the LTS promotion-related assets
yielded around 9,5 %.

(145) However, the Commission considers that the key question
here is not how much the Land saved as an investor. The
Land transferred the LTS assets to NordLB as non-liquid
capital. The Land made no savings as it was not obliged to
ensure the assets’ liquidity.

(146) 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 (1).

(147) Since the LTS capital does not provide NordLB with initial
liquidity, NordLB faces additional financing costs equal to
the amount of the capital if it is 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

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

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

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

risk-adjusted assets by 12,5 times the capital amount (or to
maintain existing assets at that level) (2). Because of these
extra costs, which do not arise in the case of equity capital
in other forms, 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.

(148) The Commission does not believe that the entire refinan-
cing interest rate has to be taken into account. Refinancing
costs constitute operating expenses and therefore 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 NordLB because of the
the
special nature of
Commission accepts that NordLB incurs additional ‘liquid-
ity costs’
‘refinancing costs minus
corporation tax’.

transferred. Overall,

to the extent of

the capital

(149) On the basis of the REX10 Performance Index of Deutsche
Börse AG, the risk-free interest rate stood at 7,15 % at the
end of 1991. Two 30-year German Government bonds
issued in 1986 had secondary-market yields of 7,8 % and
7,6 % at the time. Germany stated that NordLB’s individual
refinancing rate at 31 December 1991 was [...] %. In the
understanding the parties used a long-term risk-free rate of
7,15 %. They also agreed to assume a flat 50 % tax rate (3).
On this basis, they arrive at a net refinancing rate of 3,57 %
and hence a corresponding deduction for liquidity.

(150) In view of that understanding and the fact that the amounts
in question still fall below the range previously cited by
Germany, the Commission sees no reason to regard 3,57 %
as inappropriate and consequently uses this rate as a basis
for determining the aid element.

(v) Return premium on account of the particularities of

the transfer

(151) 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 LTS capital,
constitute grounds for adjusting the determined minimum
remuneration of 10,03 %, which a private investor would

the transfer of

It must

(3) According to documents provided by Germany, the corporation tax
rate was 46 % in 1992, plus a solidarity surcharge of 3,75 %, i.e.
49,75 % in total. The overall tax rate fell to 46 % in 1993 and stood
at 49,5 % from 1994 to 2000. From 2001 the overall tax rate was
30 %.

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investment in the capital of
expect for a (hypothetical)
NordLB, and whether a methodically robust quantification
of that adjustment can be produced. 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.

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

(153) The size of the amount transferred and its effect on NordLB
from the point of view of the Solvency Directive have
already been mentioned (paragraph 40 et seq.). Through the
transfer of the LTS, NordLB's core capital was increased
substantially without any acquisition or 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 LTS 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, a capital injection of some DEM 1 500 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 the transfer took place at the end of 1991,
large silent 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. Consequently,
the Commission is not imposing a premium linked to the
volume of the asset transfer, something which works in
NordLB’s favour. The understanding between the parties
also assumes that no premium should be applied on
account of the high volume of assets transferred.

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 LTS assets, this option was not available to
the Land. However, the Commission sees no reason for a
further premium. Although the Land was unable to realise
the economic countervalue by trading freely in the
investment, it was and is able at any time to withdraw
the special-purpose assets from NordLB by law and achieve
possibly higher
returns by reinvesting them in other
institutions. Here too the understanding between the BdB,
the Land and NordLB assumes that no premium should be
applied on account of the lack of fungibility

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

(vi) No reduction in remuneration for agreement on a

fixed amount

(156) In the case of shares, the remuneration depends directly on
the performance of the company and is expressed mainly
in the form of dividends and a share in the increased value
of the company (expressed, for example,
in share price
increases). The Land receives a fixed remuneration which
should reflect
these two aspects of remuneration for
‘normal’ capital injections. It could be argued that the fact
that the Land receives a fixed remuneration instead of one
directly linked to NordLB's performance constitutes an
advantage which justifies a reduction in the rate of the
remuneration. Whether such a fixed rate actually constitu-
tes an advantage as compared with a variable, profit-linked
rate depends on the company's performance in the future.
If
the performance declines, a fixed rate benefits the
investor but, if it improves, it places him at a disadvantage.
However, the actual trend cannot be taken into account
subsequently when it comes to assessing the investment
decision. Taking all these factors into consideration, the
Commission believes that the rate of remuneration need
not be reduced.

(154) Lastly, attention must be drawn to the lack of fungibility 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

(157) On the basis of all these considerations, the Commission
concludes
the
investment in question would be 6,76 % per annum (after
corporation tax), namely, a 10,03 % normal return on

that an appropriate remuneration for

(vii) Total remuneration

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equity plus a premium of 0,3 % for the particularities of the
transaction minus 3,57 % on account of the financing costs
resulting from the transferred assets' lack of liquidity for
NordLB.

(162) Currently, NordLB pays a remuneration of 0,5 % per
annum after tax on the amount which it can actually use
for underpinning its competitive business. This remunera-
tion was first paid for 1992.

(viii) Appropriate remuneration for the amount of DEM

1 400 million

(158) As already mentioned, the equity share of around DEM
100 million each year is also of material value to NordLB
and its economic function may be compared to that of a
guarantee. A market-economy investor would demand an
appropriate remuneration in return for exposing himself to
a risk of this sort. This question is not addressed in the
understanding between the BdB, the Land and NordLB.

(159) In its decision to initiate the procedure laid down in
Article 88(2) of the EC Treaty, the Commission quoted a
rate of 0,3 % per annum (after tax) as having been indicated
by Germany as the appropriate commission on a bank
guarantee (Avalprovision) for a bank like NordLB. It seems
inappropriate to increase this remuneration on account of a
particularly large ‘guarantee’, given that
the amount
involved is around DEM 100 million. Even for the two
years in which a much higher amount was available (1992
and 1993), the Commission feels there is no justification
for a premium. For the same reasons that no premium was
applied on the remuneration of the capital available for
competitive business, it is also doubtful whether this rate
can be increased on the grounds that the LTS promotion-
in principle, available to NordLB
related assets were,
without restriction.

(160) The guarantee premium counts as operating expenses for
NordLB and hence reduces
the taxable profit. The
remuneration payable to the Land of Lower Saxony for
the LTS assets comes out of after-tax profits. The rate of
0,3 % must therefore be adjusted for the tax rate. As with
the refinancing costs, the Commission assumes a single
overall tax rate of 50 %, in this case in NordLB’s favour.
Consequently, it sets a rate of 0,15 % per annum after tax.

(f)

AID ELEMENT

(163) In addition to the remuneration of 0,5 % per annum after
tax, Germany argues that there is a further remuneration
component, namely the Land’s right to withdraw interest
payments and amortisations that flow back to the LTS
promotion-related assets, in so far as the market value of
the assets exceeds DEM 1 500 million.

(164) The Commission believes that a market-economy investor
would not have consented to receive remuneration from
income that depended on the behaviour of
the bank
administering the promotion-related assets. Furthermore,
NordLB derived no economic advantage from the part of
the assets exceeding DEM 1 500 million (consequently, no
remuneration is payable for that part). Nor can amounts
withdrawn from that portion of the LTS assets be viewed as
additional remuneration since, as in economic terms, they
belong not to NordLB but a priori to the Land.

If

the LTS benefit

the usability of

synergies neither

(165) Germany also claims that one reason for the transfer was to
achieve potential synergies rather than to increase NordLB's
equity. Yet, at least part of the purpose of transferring the
promotion-related assets was to satisfy the requirements of
the Solvency Directive.
from such
synergies and cost savings, this will help them by reducing
costs but cannot be regarded as a consideration paid by
NordLB for the provision of the original own funds. Since
these
the
reduce
transferred capital for NordLB nor increase the costs to
NordLB arising from the transfer, they should also not
influence the level of
remuneration which a market-
economy investor can demand from the bank for the equity
provided. 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 for the
financial
instrument (the LTS) not only the appropriate
consideration for the equity provided but also a ‘remunera-
tion’ in the form of such benefits. Moreover, following a
merger operation, synergy effects normally arise in both
merged entities. It is difficult to understand why NordLB
should not profit at all
from such advantages. The
Commission therefore takes the view that any synergy
effects do not constitute remuneration paid by NordLB for
the transfer of the LTS.

(161) As calculated above,

the Commission considers

the
in line with market
following remuneration to be
conditions: 6,76 % per annum after tax for the part of
the capital which could be used by NordLB to underpin its
commercial business, i.e. around DEM 1 400 million, and
0,15 % per annum after tax for the difference between this
part and the DEM 1 500 million shown as equity in
NordLB’s balance sheet, i.e. around DEM 100 million.

(166) Lastly, the ‘owner effect’

is not a reason to assume a
remuneration of more than 0,5 % per annum. As pointed
out above, a market-economy investor who already holds
shares in a company will not forgo full direct remuneration
if one or more shareholders profit from the capital injection
without themselves having made a corresponding con-
tribution. Since NSGV has not made a corresponding

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7.11.2006

capital contribution, the Land should therefore have insisted
on comprehensive direct remuneration.

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

(168) Calculation of the aid element (DEM million)

1992

1992

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1. Amount available for compe-

120

101

145

109

71

0

0

0

0

19

63

162

titive business

2. Remainder (difference vis-à-vis

1 380

1 399

1 355

1 391

1 429

1 500

1 500

1 500

1 500

1 481

1 437

1 338

DEM 1 500 million)

Remuneration of 6,76 % per
annum (after tax) on point 1

Remuneration of 0,15 % per
annum (after tax) on point 2

Total remuneration in line with
market conditions

Actual remuneration (after tax)
(0,5 %) for the whole of 1992

Aid element

0,67

0,56

0,81

0,61

0,39

0

0

0

0

0,1

0,35

0,91

0,17

0,17

0,16

0,17

0,17

0,18

0,18

0,18

0,18

0,18

0,17

0,16

0,84

0,73

0,97

0,78

0,56

0,18

0,18

0,18

0,18

0,28

0,52

1,07

Σ 6,47

0,9

5,57

1993

1993

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

1. Amount available for compe-

133

133

207

147

174

1,143

1,222

1 400

1 400

1 400

1 400

1 400

titive business

2. Remainder (difference vis-à-vis

1,367

1,367

1,293

1,353

1,326

357

278

100

100

100

100

100

DEM 1 500 million)

Remuneration of 6,76 % per
annum (after tax) on point 1

Remuneration of 0,15 % per
annum (after tax) on point 2

Total remuneration in line with
market conditions

Actual remuneration (after tax)
(0,5 %) for the whole of 1993

Aid element

0,74

0,74

1,16

0,82

0,98

6,43

6,88

7,88

7,88

7,88

7,88

7,88

0,17

0,17

0,16

0,16

0,16

0,04

0,03

0,01

0,01

0,01

0,01

0,01

0,91

0,91

1,32

0,98

1,14

6,47

6,91

7,89

7,89

7,89

7,89

7,89

Σ 58,09

7

51,09

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L 307/77

Year

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

1. Amount available for competitive business

1,400

1,390

1,390

1,390

1,390

2. Remainder (difference vis-à-vis DEM 1 500 mil-

100

110

110

110

110

1 500 million)

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

[...]

Remuneration of 6,76 % per annum (after tax) on
point 1

Remuneration of 0,15 % per annum (after tax) on
point 2

94,64

93,96

93,96

93,96

93,96

[...]

[...]

[...]

[...]

[...]

0,15

0,16

0,16

0,16

0,16

[...]

[...]

[...]

[...]

[...]

Total remuneration in line with market conditions

94,79

94,12

94,12

94,12

94,12

[...]

[...]

[...]

[...]

[...]

Actual remuneration (after tax) (0,5 %)

7

6,95

6,95

6,95

6,95

[...]

[...]

[...]

[...]

[...]

Aid element

87,79

87,17

87,17

87,17

87,17

87,17

85,88

85,88

85,88

85,88

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.

(169) Thus, the difference between the agreed remuneration of
0,5 % per annum and the appropriate remuneration of
6,76 % per annum (for the portion of the LTS promotion-
related assets which NordLB can use for its competitive
business) and 0,15 % per annum (for the portion of the
assets that can be likened to a bank guarantee) constitutes
state aid within the meaning of Article 87(1) of the EC
Treaty.

(170) The aid element for the period from the granting of the aid
up to the end of 2003 amounts to DEM 923,82 million.
Converted into euros this comes to EUR 472,34 million. As
the LTS assets are still at NordLB’s disposal, the amount of
the aid element is continually increasing.

4.

COMPATIBILITY OF THE MEASURE WITH THE EC

TREATY

(171) It can therefore be stated that the transfer of the LTS
promotion-related assets is caught by all the criteria laid
down in Article 87(1) of the EC Treaty and thus involves
state aid within the meaning of that Article. On this basis,
an assessment must be made as to whether the aid can be
considered compatible with the common market. However,
it must be noted that Germany 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 the promotion-
related assets.

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

exceptional occurrences or

compensate

for

(173) Given that the aid has no regional objective — it is designed
neither to promote the economic development of areas
where the standard of living is abnormally low or where
there is serious underemployment nor to facilitate the
development of
areas — neither
certain economic
Article 87(3)(a) nor (c) of the EC Treaty, as regards the
latter's regional aspects,
is applicable. Nor does the aid
promote the execution of an important project of common
European interest. The aid is not aimed either at promoting
culture or heritage conservation.

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

(175) 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. NordLB is
not described as an undertaking in difficulty whose viability
must be restored with the support of state aid.

(176) Article 86(2) of the EC Treaty, which allows exemptions
from the Treaty's state aid rules under certain conditions, is
also applicable, in principle, to the financial services sector.
This was confirmed by the Commission in its report on
in the banking
services of general economic interest
sector (1).

(1) 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.

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(177) Germany submits

the

that,

transfer of

the LTS
if
promotion-related assets did constitute favourable treat-
ment for NordLB, it was no more than compensation for
NordLB for the costs it incurred for carrying out its public
mandate. It argues that NordLB is not only the Land bank
but also a savings bank in the Braunschweig area. So it
performs not only the traditional public role of a Land
bank, with the attendant costs, but also the function of a
savings bank.

(178) However, Germany has not quantified the costs to NordLB
of the public tasks in question. On those grounds alone the
Commission cannot allow an exemption from the applica-
tion of Article 87(1) of the EC Treaty on the basis of
Article 86(2). Moreover, it is clear that the transfer was
made in order to enable NordLB to comply with the new
own funds requirements, not as compensation for a public
mandate carried out by NordLB.

‘necessity requirement’ for Anstaltslast does not apply to
such a normal economic decision by the Land.
In the
absence of another existing applicable state aid scheme
pursuant to Articles 87(1) and 88(1) of the EC Treaty, the
capital
injection must be classed as new aid within the
meaning of Articles 87(1) and 88(3) of the EC Treaty.

VI.

CONCLUSION

(183) The Commission finds

that Germany has unlawfully
implemented the new aid in question in breach of
Article 88(3) of the EC Treaty.

(184) The aid cannot be found compatible with the common
market either under Article 87(2) or (3) or under any other
provision of the Treaty. It 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 Germany,

(179) 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
common market.

HAS ADOPTED THIS DECISION:

Article 1

5.

NO EXISTING AID

(180) Contrary to the arguments put forward by Germany, the
transfer of the LTS promotion-related assets cannot be
regarded as being covered by the existing state aid scheme
for Anstaltslast and Gewährträgerhaftung.

(181) Gewährträgerhaftung is a default guarantee offered to
creditors in the event
the bank's assets are not
that
sufficient to satisfy their claims, and this is not the case
here. The capital
intended to satisfy
injection is not
NordLB’s creditors and the bank's assets have not been
exhausted.

(182) Nor does Anstaltslast apply. Anstaltslast

requires

the
guarantors (the Land of Schleswig-Holstein and NSGV) to
provide NordLB with the resources it needs to function
properly for as long as the Land decides to maintain it in
existence. However, at the time of the capital
injection,
NordLB was far from being in a situation where it was no
longer able to operate properly. The capital injection was
not needed in order to keep NordLB in operation. Rather, it
was made in order to enable the Landesbank to increase its
capital in the light of the new capital requirements under
the Solvency Directive so as to avoid an otherwise
necessary reduction in its business volume and to enable
it to expand in future. This conscious economic calculation
by the Land as joint owner also enabled NordLB to seize
in its competitive business. The
future opportunities

1. The difference between the appropriate remuneration of
6,76 % per annum (after corporation tax and before investor tax)
and the remuneration of 0,5 % per annum (after corporation tax
and before investor tax) agreed by Norddeutsche Landesbank —
Girozentrale and the Land of Lower Saxony for the part of the
transferred capital which Norddeutsche Landesbank — Girozen-
trale was able to use to underpin its competitive business as of
1 January 1992 constitutes aid which is incompatible with the
common market.

the part of

2. The waiver of an appropriate remuneration amounting to
0,15 % per annum (after corporation tax and before investor tax)
for
transferred to Norddeutsche
Landesbank — Girozentrale which could be used as a guarantee
as from 1 January 1992 constitutes aid which is incompatible
with the common market.

the capital

3. The amounts of aid referred to in paragraphs 1 and 2 total
EUR 472,34 million for the period from 1 January 1992 to
31 December 2003 taken for the calculation.

Article 2

1. Germany shall discontinue the aid referred to in Article 1(1)
and (2) by not later than 31 December 2004.

2. Germany shall take all necessary measures to recover from
the beneficiary the aid referred to in Article 1(1) and (2) and
unlawfully made available.

The aid to be recovered and specified in Article 1(1) and (2)
comprises:

(a)

the amount specified in Article 1(3) for the period from
1 January 1992 to 31 December 2003;

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Official Journal of the European Union

L 307/79

(b)

an amount determined in accordance with the methods of
calculation referred to in Article 1(1) and (2) for the period
from 1 January 2004 to the time at which the aid is
discontinued.

Article 3

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

Article 4

Germany shall, by means of the questionnaire annexed hereto,
inform the Commission, within two months of notification of
this Decision, of the measures taken to implement the Decision.

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 beneficiary 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 (1).

For the Commission

Mario MONTI

Member of the Commission

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

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INFORMATION REGARDING THE IMPLEMENTATION OF THE COMMISSION DECISION ON STATE AID
MEASURE

ANNEX

1.

Calculation of the amount to be recovered

1.1.

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

Date(s) of payment (°)

Amount of aid (*)

Currency

Identity of recipient

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

several instalments and reimbursements, use separate rows.

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

Comments:

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

2.

Recovery measures planned or already taken

2.1. Please describe in detail what measures have been taken and what measures are planned to bring about the immediate
and effective recovery of the aid. Please also explain what alternative measures are available in national legislation to
bring about the 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.