(1)

On 10 November 2008 Latvia notified to the Commission a package of State aid measures in favour of AS Parex banka (“Parex banka”), designed to support the stability of the financial system. The Commission approved those measures on 24 November 2008 (4) (“first rescue Decision”) based on Latvia’s commitment to submit a restructuring plan for Parex banka within six months.

(2)

Following requests from Latvia, the Commission approved two sets of changes to the aid measures concerning Parex banka, the first on 11 February 2009 (5) (“second rescue Decision”) and the second on 11 May 2009 (6) (“third rescue Decision”).

(3)

On 11 May 2009 Latvia notified a restructuring plan for Parex banka. By decision of 29 June 2009 (7) the Commission came to the preliminary conclusion that the notified restructuring measures constituted State aid to Parex banka and expressed its doubts that such aid could be found compatible. As a result the Commission decided to initiate the procedure laid down in Article 108(2) of the Treaty and required Latvia to provide information needed for the assessment of the compatibility of the aid.

(4)

Between 11 May 2009 and 15 September 2010, several information exchanges and discussions occurred between Latvia and the Commission concerning the restructuring plan for Parex banka. Latvia provided information and clarifications on several occasions throughout the investigation procedure, and the restructuring plan of Parex banka was also updated six times.

(5)

On 1 August 2010, some assets of Parex banka were transferred to a newly established so-called “good bank” named AS Citadele banka (“Citadele”), in line with the restructuring plan. The restructuring plan envisaged a split of Parex banka into Citadele, which would take over all core assets and some non-core assets (8), and a so-called “bad bank” (“Reverta” (9)) which kept the remaining non-core and non-performing assets.

(6)

By decision of 15 September 2010 (10) (“the Parex Final Decision”), the Commission approved the restructuring plan of Parex banka, based on a commitment paper submitted by the Latvian authorities on 3 September 2010.

(7)

On 10 August 2012, at the request of the Latvian authorities, the Commission approved amendments to three commitments included in the Parex Final Decision (“the Amendment Decision”) (11). Those amendments: 1) extended the disposal deadline for the CIS loans (12) until 31 December 2014; 2) increased the limit of minimum capital adequacy requirements allowed for Citadele at the level of the bank and the group before the asset remuneration described in the Parex Final Decision would be triggered; and 3) allowed carry-over of previous years’ unused caps on lending, whilst respecting market share caps.

(8)

On 1 October 2013 Latvia notified a requested for a further amendment of the Parex Final Decision, asking for the postponement of the divestment deadline for one of the divisions of Citadele, the Wealth Management Business (13). While analysing Latvia’s submissions in support of that amendment request, the Commission identified aid that had been granted by Latvia over and beyond the aid measures already approved by the Commission.

(9)

Between […] (14) and 4 March 2014, several information exchanges have taken place between Latvia and the Commission with regard to the additional aid measures. Latvia submitted information and documents on 30 October 2013, 31 January 2014 and 4 March 2014 (including a revised restructuring plan of Parex banka).

(10)

Since 11 November 2013, the Commission has also received monthly updates regarding Latvia’s progress in selling Citadele, a process it began in October 2013.

(11)

The Latvian authorities have informed the Commission that for reasons of urgency they exceptionally accept that this Decision is adopted in the English language.

(12)

Parex banka was the second-largest bank in Latvia with total assets of LVL 3,4 billion (EUR 4,9 billion) as of 31 December 2008. It was partially nationalised in November 2008.

(13)

In April 2009, the European Bank for Reconstruction and Development (“EBRD”) acquired 25 % of the share capital of Parex banka plus one share. Following the split of Parex banka into a good bank and a bad bank in 2010 along with subsequent changes in the shareholding structure, the shareholders of Citadele are now Latvia (75 %) and the EBRD (25 %), while the shareholders of Reverta are Latvia (84,15 %), the EBRD (12,74 %) and others (3,11 %).

(14)

A detailed description of Parex banka up to the time of the Parex Final Decision can be found in recitals 11 to 15 of that decision. Parex banka was authorised to receive a series of aid measures (including liquidity support, guarantees and recapitalisation and asset relief measures) which are specified in the Parex Final Decision. Those measures were approved by the Commission in the first, second and third rescue Decisions (the “Rescue Decisions”) and the Parex Final Decision.

(15)

The restructuring plan approved by the Commission with the Parex Final Decision provided that the rescue aid previously approved by the Commission was to be extended over the restructuring period and split between Citadele and Reverta. The Parex Final Decision also approved additional restructuring aid for Reverta and Citadele. It also laid down a utilisation mechanism for the aid which had been provisionally approved through the Rescue Decisions after Parex banka was split, in regard to:

a)

liquidity support in the form of State deposits for both Citadele and Reverta (15);

b)

State guarantees on liabilities of Citadele and Reverta (16);

c)

a State recapitalisation for Reverta and Citadele (17); and

d)

an asset relief measure for Citadele (18).

(16)

In order to enable the Commission to find the restructuring aid compatible with the internal market Latvia provided commitments to ensure full implementation of the restructuring plan and limit distortions of competition that result from the restructuring aid (“the commitments”).

(17)

The main commitments regarding Citadele are described in recitals 73 to 83 of the Parex Final Decision. They include: a commitment to divest the CIS loans; a commitment to divest the Wealth Management Business within fixed deadlines (one which applied to divestment by Citadele itself and another which applied to divestment under the control of a Divestment Trustee); the preservation of viability, marketability and competitiveness; a hold-separate obligation in relation to the Wealth Management Business; a commitment to sell Citadele within a fixed deadline; caps on new lending and deposits in the Baltic countries; caps on the deposits in the German and Swedish branches; no increase in the number of branches; remuneration in respect of the asset relief measure; an acquisition ban; and a ban on making new CIS loans.

(18)

The main commitments regarding Reverta are described in recitals 84 to 87 of the Parex Final Decision. They include commitments that there would be no new activities; there would be a wind-down or divestment of activities; and a cap on the total amount of capital that would be provided by Latvia in whatever form.

(19)

Recitals 88 to 93 of the Parex Final Decision describe the commitments jointly applying to Reverta and Citadele. They provide for: a dividend and coupon ban; a ban on any reference to State support in advertising; a separation between Citadele and Reverta; and the appointment of Monitoring and Divestiture Trustees.

(20)

As recalled in recital 16, the Commission subsequently amended three of the commitments applicable to Citadele under the Parex Final Decision. That approval was based on new commitments undertaken by Latvia and Citadele to compensate for any distortion of competition.

(21)

Based on the report submitted on 29 August 2013 by the Monitoring Trustee (19) and based on documents and information submitted by Latvia since October 2013, it appears that Latvia has put into effect the following measures without prior notification to the Commission:

Table 2

Liquidity caps for Reverta as reflected in the Parex Final Decision

Table 3

Actual amounts of liquidity from which Reverta has benefited

In light of those developments and findings, the Commission has asked Latvia to provide additional information and explanations.

(22)

Latvia has confirmed through the submissions set out in recital 9 that those additional measures have already been put into effect.

(23)

Latvia has failed to comply with its commitment to divest the Wealth Management Business of Citadele by 30 June 2013 without a Divestiture Trustee, or by 31 December 2013 with a Divestiture Trustee, which was recorded in the Parex Final Decision (23). Therefore that commitment to divest the Wealth Management Business by those deadlines has been breached.

(24)

In its submissions of information regarding the un-notified aid which are mentioned in recital 9, as well as in the revised restructuring plan, the Latvian authorities submit that the Commission had been informed of the possibility of the maturity extension of the subordinated debt on a number of occasions. In consequence, Latvia considers that the longer maturity of the subordinated debt does not entail un-notified State aid.

(25)

More specifically, Latvia expresses the view that:

(26)

Moreover, Latvia has argued that the payment by Citadele of interest rates in excess of market conditions allays any State aid concerns that could exist.

(27)

Finally, Latvia notes that discussions […] are currently being held […].

(28)

Latvia explained that it provided Reverta with liquidity in excess of the support limits in the Parex Final Decision because the deposits from the State were not transformed into capital support by capitalising the principal of State treasury deposits to the extent that had been envisaged in that Decision. That transformation did not occur because after Reverta’s banking licence had been revoked the relevant Latvian legislation no longer required statutory capital to be maintained. The Parex Final Decision had mentioned capitalising LVL [40-110] million of principal in the base case, whereas in fact only LVL 12,4 million of principal was capitalised.

(29)

Latvia argues that capitalising less principal benefitted the State because:

(30)

Latvia states that the return of Citadele as a stand-alone entity to the private sector would have been put at risk if Citadele had divested the Wealth Management Business by 30 June 2013 as foreseen in the restructuring plan of 2010 or, in any event before Latvia had divested its stake in Citadele. Latvia claims that Citadele without the Wealth Management Business has no viable business model.

(31)

The Latvia has therefore requested the Commission to amend the Parex Final Decision in order to allow Citadele to retain the Wealth Management Business until after the entire bank passes to the private sector.

(32)

Such a request was first made in August 2012 in discussions between Latvia and the Commission before the Amendment Decision was taken. During those discussions the Latvian authorities ultimately decided not to request an extended deadline for divesting the Wealth Management Business.

(33)

Pursuant to Article 13(1) in conjunction with Article 4(4) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 108 of the Treaty on the Functioning of the European Union (26) the Commission may open a formal investigation procedure if it finds that doubts are raised as to the compatibility with the internal market of an unlawful aid measure (27).

(34)

Article 107(1) of the Treaty provides that, save as otherwise provided in the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods is in so far as it affects trade between Member States, be incompatible with the internal market.

(35)

As described in recital 21, Parex banka and subsequently Citadele and Reverta have obtained measures from Latvia in addition to the aid measures examined in the Rescue Decisions and the Parex Final Decision.

(36)

With regard to the subordinated debt, the fact that such a measure contains State aid was established in the first rescue Decision, when the Commission approved the issuance of subordinated debt with five years maturity as a compatible aid measure. The Commission decided at that time that a market economy investor would not have granted subordinated debt with a five-year maturity (28).

(37)

The measure which was in fact granted by Latvia in favour of Parex banka was identical with the measure approved by the Commission except for the fact that it had a longer maturity. As such, the measure which was in fact granted would also be State aid unless the longer maturity eliminated any advantage to Parex banka. However, subordinated debt with a seven-year maturity would give the borrower a greater advantage since the risk perceived by an investor for any given investment increases as the maturity of the investment is extended. When the subordinated debt with a seven-year maturity was granted, it would have been even less likely for a market economy investor to grant the subordinated debt under those extended terms than it would for it to have done so for five years. For that reason, the longer maturity of the subordinated debt represented an additional advantage for Parex banka compared to the form of the subordinated debt that was approved in the Rescue Decisions and the Parex Final Decision.

(38)

The maturity of the subordinated debt was later further extended by an additional 18 months. As the risk perceived by an investor for any given investment increases as the maturity of the investment is extended, a market economy investor would not have granted the subordinated debt under those extended terms in the absence of any countervailing payment fully offsetting the investor’s increased risk. For that reason, the longer maturity of the subordinated debt represents an additional advantage for Citadele compared to the form of the subordinated debt that was approved in the Rescue Decisions and the Parex Final Decision.

(39)

Latvia justifies granting subordinated loans with a longer maturity than approved by claiming that the Commission had been informed of a possible maturity extension through the restructuring plan and submissions of the Monitoring Trustee.

(40)

The Commission does not accept that argument. The possible need to extend the maturity of the subordinated loan was only incidentally mentioned, for information, by the Monitoring Trustee in previous monitoring reports (e.g. that of 30 June 2012) as an option under consideration by Latvian authorities. A mention of the possibility that additional aid may be granted by a Member State does not constitute or substitute for a formal notification of aid measures, within the meaning of Article 108(3) of the Treaty.

(41)

Latvia also contends that the recital 148 of the Parex Final Decision explicitly provided that the subordinated loans were expected to mature in the period 2015-18, thus envisaging a prospective extension of the subordinated debt.

(42)

The Commission does not share that interpretation. Recital 148 of the Parex Final Decision refers to the subordinated loans by legacy shareholders in Parex, and not to the subordinated loans granted by Latvia.

(43)

With regard to the liquidity support granted to Reverta , it was initially approved as part of the compatible State aid measures approved in the first rescue Decision, in the form of State deposits. At that time, the Commission noted that Parex banka lacked liquid collateral and that Latvia had deposited the funds, taking into account the bank’s liquidity needs, when no market investor was willing to provide liquidity in view of the fragile situation of Parex banka (29).

Following the Parex Final Decision (and the split in a good and a bad bank) the liquidity aid was subsequently transferred to Citadele and Reverta. The former has already repaid in full its share of the liquidity support, whereas the latter had to limit the amounts of liquidity support it received, as set out in recital 21(iii). However, the amount of liquidity support actually granted to Reverta exceeds even the worst case scenario level approved within the Parex Final Decision. That additional liquidity support provides a supplementary advantage for Reverta compared to the aid approved by the Rescue Decisions and Parex Final Decision. None of the other features of the liquidity support apart from its quantity have been altered and so the Commission concludes that the measure constitutes State aid.

(44)

None of those three additional measures (the seven-year subordinated loan; the 18-month extension; and the additional liquidity support) had been notified to the Commission. Latvia has therefore not complied with the standstill obligation under Article 108 of the Treaty.

(45)

Based on the facts that:

(46)

In line with the 2008 Banking Communication (30) which was in force when the subordinated loan was initially granted and when it was subsequently extended, in order for aid to be compatible, it had to comply with several conditions:

(47)

The objective of granting a subordinated loan qualifying as Tier 2 capital to Parex banka was to enable it to continue to satisfy the capital adequacy ratio and to ensure that it is sufficiently capitalised so as to better withstand potential losses, in order to avoid a serious disturbance in the Latvian economy.

(48)

In the first rescue Decision, the Commission noted that the subordinated debt for Parex banka was limited to the minimum necessary in scope and time. Among other elements, the limitation to the minimum necessary was based on the commitment of the Latvian authorities to grant subordinated debt with a maximum maturity of five years. In that regard, the Commission noted in that decision that the minimum maturity for the subordinated debt to qualify as Tier 2 capital under Latvian legislation was five years. The aid measure was therefore qualified as compatible.

(49)

The second and third rescue Decisions, the Parex Final Decision and the Amendment Decision did not alter the assessment of the first rescue Decision in that respect, concerning the limitation to the minimum necessary.

(50)

The Commission notes that Latvia has not brought forward arguments to demonstrate the compatibility of the aid stemming from the extended maturity of the subordinated loans.

(51)

Therefore, based on the information available to Commission at this time, the un-notified aid measure concerning the subordinated debt issued with a maturity of seven years instead of five years as initially approved cannot be qualified as compatible, considering that: a) the existing assessment is that a five-year maturity of the subordinated debt was what ensured limitation to the minimum necessary and b) no new arguments have been presented for justification of compatibility.

(52)

Equally, based on the information available to Commission at this time, the un-notified aid measure concerning the additional prolongation of the subordinated debt maturity by 18 months cannot be qualified as compatible, considering that: a) the existing assessment is that a five-year maturity of the subordinated debt was what ensures limitation to the minimum necessary and b) no new arguments have been presented for justification of compatibility.

(53)

The Commission invites Latvia and any interested parties to present it with additional elements relevant to whether the seven-year duration of the subordinated loan and its subsequent extension by 18 months constitutes aid which was limited to the minimum necessary.

(54)

The assessment of the restructuring plan in the Parex Final Decision was based on assumptions presented at that time regarding the expected inflows of liquidity into Reverta which would allow it to start repaying the liquidity support granted in the form of State deposits, up to a certain level (31).

(55)

The amounts expected to remain unpaid, as described in the Parex Final Decision, ranged from LVL […] million (the base case scenario) to LVL […] million (the worst case scenario). As explained in recital 21, the actual amounts from which Reverta has benefited have constantly exceeded those laid out in the Parex Final Decision.

(56)

The Commission notes that Latvia has not brought forward arguments to demonstrate the compatibility of the aid stemming from the additional liquidity support.

(57)

In view of this, and considering also the fact that the revised restructuring plan presented by Latvia includes numerous other adjustments compared to the plan approved through the Parex Final Decision, the Commission is not in the position at this time to qualify the additional liquidity support as compatible with the internal market. A more in-depth assessment of the impact the revised levels of liquidity support will have to be carried out, taking into account the revised restructuring plan in its entirety.

(58)

Pursuant to Article 16 of Regulation (EC) No 659/1999 the Commission may open a formal investigation procedure if aid is misused, i.e. if the beneficiary used aid in contravention of a decision taken pursuant to Article 7(3) of that Regulation.

(59)

In the Parex Final Decision (32) Latvia committed that Citadele would divest the Wealth Management Business by certain deadlines.

(60)

Latvia confirmed that the Wealth Management Business has not been divested within the agreed deadlines. This constitutes a breach of the terms of the Parex Final Decision and hence a misuse of the aid granted. The Commission invites Latvia and interested parties to comment on that conclusion and to present any elements which would allow the Commission to consider whether aid obtained by Citadele could be considered compatible with the internal market if the Wealth Management Business were not to be divested separately from Citadele.