(1)

The subject of these proceedings is the transfer, by the Land of Berlin, of Wohnungsbau-Kreditanstalt Berlin, with its assets, to Landesbank Berlin — Girozentrale. 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’).

(2)

By letter of 12 January 1993, the Commission asked Germany for information on the circumstances and reasons which had given rise to a capital increase in WestLB through the incorporation of the housing organisation Wohnungsbauförderanstalt (‘WfA’) and on similar increases in the own funds of the Landesbanks of other Länder. Germany replied in March and September 1993, providing a description of the transfer of Wohnungsbau-Kreditanstalt Berlin to Landesbank Berlin — Girozentrale. The Commission requested further information in November and December 1993, which Germany provided in March 1994. Berlin was explicitly mentioned in the first of the two requests.

(3)

By letters of 31 May and 21 December 1994, the Bundesverband deutscher Banken e.V. (‘BdB’), an association representing private banks established in Germany, informed the Commission that, as at the close of 31 December 1992, Wohnungsbau Kreditanstalt Berlin (‘WBK’) had been transferred, with its assets, to Landesbank Berlin — Girozentrale (‘LBB’), while the tasks previously assigned to WBK had been transferred to the recently set-up Investitionsbank Berlin (‘IBB’), which was operating as a division of LBB. This increased the own funds at LBB's disposal, and, in the BdB's view, distorted competition in LBB's favour since the parties had not agreed any remuneration which might be in line with the principle of the market-economy investor. 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)). The complaint also related to similar transfers of assets to Westdeutsche Landesbank, Norddeutsche Landesbank, Landesbank Schleswig-Holstein, Hamburger Landesbank and Bayerische Landesbank. In February and March 1995 and December 1996 several banks associated themselves individually with the complaint lodged by the BdB.

(4)

The Commission first examined the transfer of assets to WestLB. In Decision 2000/392/EC finally adopted in 1999 (2), it found that the difference between the remuneration paid and the normal market remuneration constituted state aid which was incompatible with the common market, and ordered its recovery. This decision was annulled by the Court of First Instance of the European Communities in a judgment handed down on 6 March 2003 (3) for not giving sufficient reasons as regards two of the factors used to calculate the appropriate remuneration, but it was confirmed in all other respects. At the same time as the decision in the present proceedings, and having been informed of an understanding between the complainant and all seven Landesbanks concerned, the Commission is adopting a new decision taking account of the Court's criticisms.

(5)

On 1 September 1999 the Commission sent Germany a request for information on the transfers of assets to the other Landesbanks, including LBB.

(6)

By letter of 8 December 1999, Germany submitted information on the transfer of WBK to Landesbank Berlin, which it supplemented by letter of 22 January 2001. Representatives of Germany and the Commission also discussed the question of the transfer and possible recovery of any aid in connection with the examination of restructuring aid to Bankgesellschaft Berlin (‘BGB’), to which Landesbank Berlin has belonged since 1994.

(7)

By letter of 2 July 2002, the Commission informed Germany of its decision to initiate the procedure laid down in Article 88(2) of the EC Treaty in respect of the aid.

(8)

After having requested, and been granted, an extension of the deadline, Germany submitted its comments and provided additional information by letter of 9 September 2002. Further questions were discussed at meetings with representatives of Germany on 27 September 2002.

(9)

The Commission decision to initiate the procedure was published on 4 October 2002 in the Official Journal of the European Communities (4). The Commission called on interested parties to submit comments. It received comments from a competitor and from the BdB, which it forwarded to Germany for its opinion in November 2002. Germany replied by letter of 16 December 2002.

(10)

At the Commission's request, Germany sent further details about the potential aid by letters of 22 and 27 January, 28 February and 19 August 2003.

(11)

By decision of 18 February 2004, the Commission approved the restructuring aid for Bankgesellschaft Berlin AG, to which LBB belongs. The decision also covered an agreement concluded on 23 December 2002 by the Land of Berlin and the BGB on the treatment of any claims to repayment brought by the Land of Berlin and arising out of the state aid case at issue here; this agreement was regarded as restructuring aid (5).

(12)

By letter of 7 April 2004 the Commission asked Germany for further information on all the Landesbank cases, which Germany sent on 1, 2 and 28 June respectively.

(13)

On 31 August 2004 Investitionsbank Berlin (formerly WBK) was hived off from LBB's assets. Germany sent the Commission detailed documentation on the related legal and other provisions on 25 August 2004.

(14)

On 27 September 2004 Germany submitted the draft of an understanding between the complainant (the BdB), the Land of Berlin and Landesbank Berlin, the signed version of which reached the Commission on 8 October 2004. This understanding covers the appropriate remuneration for the assets transferred to LBB on 1 January 1993. Similar understandings reached in five other cases involving transfers of assets to Landesbanks were also submitted to the Commission.

(15)

LBB was set up in 1990 and, at the same time, the West Berlin Savings Bank (Sparkasse der Stadt Berlin West) was transferred to it by way of universal succession. Shortly afterwards, the East Berlin Savings Bank (Sparkasse der Stadt Berlin) was also transferred to LBB. Since then, the savings bank business in the city of Berlin has been conducted by a separate, legally dependent division of LBB called ‘Berliner Sparkasse’.

(16)

LBB is a public-law institution (Anstalt des öffentlichen Rechts) for which the Land of Berlin bears institutional and guarantor liability. At the time of the transfer of WBK at the end of 1992, LBB was solely owned by the Land of Berlin and had a balance-sheet total of some DEM 85 billion and just under 7 000 employees. LBB is an all-purpose bank with business in personal and corporate banking (retail banking), real-estate financing and lending to the public sector. It also conducts business abroad. In 1992 its main line of business was the Berliner Sparkasse's retail business.

(17)

Since 1994 LBB has belonged to the BGB group, a group of institutions set up in that year by merging a number of credit institutions previously owned by the Land of Berlin. BGB is the holding company, with an atypical silent partnership which since 1994 has given it about 75 % of the assets and the profits of LBB, with the exception of the central Land promotion institution, IBB. In 1998 the Land, as LBB's guarantor, made over its claim to a share of LBB's profits to BGB; this made BGB the 100 % beneficial owner. The BGB group had a balance-sheet total of just under €190 billion in 2001, some €175 billion in 2002 and some €153 billion in 2003. LBB's balance-sheet total was some €87 billion in 2001, some €85 billion in 2002 and some €93 billion in 2003. The Land of Berlin currently holds about 81 % of the shares in BGB. Other shareholders are Norddeutsche Landesbank with around 11 % and Gothaer Finanzholding AG (Parion insurance group) with around 2 %. Some 6 % of the shares are dispersed among small shareholders.

(18)

In 2001 BGB found itself in serious difficulty, mainly as a result of high-risk real-estate transactions in the past; its own funds and core capital ratios were insufficient, which meant that supervisory measures might have to be taken by the Federal Banking Supervisory Authority (Bundesaufsichtsamt für das Kreditwesen — ‘BAKred’, now ‘BAFin’) (6). In August 2001 it received a capital injection of €2 billion, of which some €1,8 billion came from the Land of Berlin and was initially authorised by the Commission as short-term rescue aid. After new risks were identified, BGB received further assistance from the Land of Berlin, which, together with the capital investment, was notified to the Commission as restructuring aid and examined in detail by it (7).

(19)

On 18 February 2004 the Commission closed its investigation and approved aid with a total financial value of some €9,7 billion. Besides the capital injection and the extensive guarantees in the form of a ‘risk shield’, the decision also covered an agreement concluded on 23 December 2002 by the Land of Berlin and the BGB on the treatment of any claims to repayment brought by the Land of Berlin and arising out of the present state aid investigation (‘repayment agreement’) (8).

(20)

This agreement governs the undertaking given by the Land of Berlin that, in the event of a Commission decision requiring repayment in the present case, it would provide as a contribution to LBB's capital a reorganisation grant to the value necessary to prevent the threatened repayment requirement from forcing LBB or the BGB group, or both, to fall below the minimum capital ratios specified in the agreement (9). This measure was considered necessary in 2002 in view of the considerable risk represented by possible repayment to the restoration of the BGB group's profitability. It was not possible in the BGB decision to determine the precise financial value of the measure as the present proceedings had not yet been completed. For the purpose of assessing the restructuring aid under the competition rules, and in particular the appropriateness of the compensatory measures proposed by Germany to reduce the group's market presence, the theoretical ceiling for this measure was set at €1,8 billion.

(21)

To sum up, the repayment agreement was taken into account as additional aid to the BGB group in setting Germany's compensatory measures, although its scope was restricted to a situation where the Commission ordered repayment and where this resulted in the bank's capital ratios falling below the levels set in the agreement.

(22)

The restructuring of the Land of Berlin's banking holdings, which culminated in the setting up of the BGB group in 1994, began in 1990 with the setting up of LBB; the savings banks, first of West Berlin and then of East Berlin, were then transferred to LBB. In 1992 IBB was set up by, among others, the Land as a public-law institution within LBB which was independent in organisational and economic terms but had no authority to act in its own right; it was to act as the central promotion institution of the Land. WBK had until then been an independent public-law institution, with the Land of Berlin bearing institutional and guarantor liability for it. It had been assigned a task in the public interest, namely the provision and maintenance of housing. WBK was now to be transferred with its tasks to IBB, which was given broader promotion-related assignments, e.g. in the fields of infrastructure and environmental protection. The transaction took place on 31 December 1992: WBK was transferred to LBB, with all its assets, by way of universal succession.

(23)

This increased LBB's nominal capital by the former nominal capital of the WBK worth DEM 187,5 million. This amount was thereafter no longer attributed to IBB's assets. WBK's revenue reserves stood at DEM 1 905 800 million on 31 December 1992. These revenue reserves were and are shown as a special-purpose reserve for IBB.

(24)

BAKred set LBB's liable equity capital as at 31 December 1992 at DEM 3 127 714 million, which corresponded to an increase of DEM 1 902 714 million. BAKred took account of the DEM 187,5 million increase in nominal capital and of WBK's revenue reserves without the net profit for 1992. In the years that followed, IBB's liable equity capital in the form of the special-purpose reserve continued to grow.

(25)

The German Banking Act (Kreditwesengesetz, or KWG) was amended for the fourth time in 1993 in line with Council Directive 89/647/EEC of 18 December 1989 on a solvency ratio for credit institutions (10) (the ‘Solvency Directive’) and Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions (11) (the ‘Own Funds Directive’), which require banks to have a level of own funds equal to 8 % of their risk-adjusted assets. At least 4 percentage points of that amount must consist of what is termed core capital, or ‘tier 1’ capital, meaning capital items which are at the credit institution's disposal without restriction and immediately in order to cover risks or losses as soon as they arise. The core capital is of decisive importance because additional capital, or ‘tier 2’ capital, is accepted as underpinning for risk-bearing transactions only up to the amount of the available core capital. Under the fourth KWG Amending Act, German banks had to adapt their own funds to the new requirements by 30 June 1993.

(26)

According to Germany, the new rules were not the reason for WBK's transfer to LBB as the latter clearly met the new capital requirements even without WBK's revenue reserves. However, in the early 1990s a surge in growth was expected as a result of unification especially in Berlin, which would open up the potential for business expansion in the financial sector too. If banks wanted to increase their business volume significantly, a larger capital base was needed, especially in the light of the new solvency rules. The transfer of WBK gave LBB a considerably stronger capital base for its commercial, competitive lending business, allowing it to extend its operations significantly.

(27)

LBB paid or pays 0,25 % (12) on average for calling on IBB's special-purpose reserve, but only on the amount actually used. Payment is made not to the Land of Berlin, but to IBB. Account should be taken of the fact that the part of IBB's special-purpose reserve which could be used as liable equity capital was far higher than the amount actually used. Recourse was had to it for the first time in 1995.

(28)

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

(29)

The Commission took the view that the investigation in this case therefore had to examine whether the resources had been made available by the Land of Berlin on terms which a private investor — an ‘investor operating in a market economy’ — would also have found acceptable in providing funds to a private company. Such a market investor would not be prepared to provide funds in particular if a normal return could not be expected within a reasonable time from the capital invested.

(30)

In the Commission's view, a rate of 0,25 % on average payable on the sums actually used could hardly be regarded as appropriate remuneration for the Land, when even the long-term risk-free rate (for 10-year Federal bonds) was a good 7 % in 1992. The Commission also noted that the remuneration was not paid directly to the Land, but to IBB, which is a division of LBB even though, as a dependent public-law institution and central promotional institution for the Land, it operates as an organisationally and financially separate unit within LBB. Moreover, the sums used, as far as the Commission knew, lay well below the amounts of the special-purpose reserve available to LBB for use as liable equity capital. However, the increased equity base allowed LBB to expand its lending capacity and thus its business.

(31)

The Commission established in its preliminary assessment that the data regarding the amount of IBB's capital available for covering liabilities, the amount used and the remuneration paid were incomplete or even unavailable and took as an initial, provisional amount for the transferred and usable funds a figure of ‘approximately DEM 2 billion’.

(32)

However, the Commission acknowledged that the special-purpose reserve did not provide LBB with any liquidity because, under the Act of 25 November 1992 setting up IBB, WBK's revenue reserve, which now became a special-purpose reserve earmarked for IBB, was to be used in the first place to finance IBB's promotional work, notwithstanding its function as own funds within the meaning of the Banking Act, and LBB could not use the funds transferred directly for its banking business. In order to be able actually to expand its business, LBB therefore had to refinance the additional volume of credit in full on the capital markets, meaning that the Land could not expect the same return as a provider of liquid capital could.

(33)

As regards the calculation of a remuneration in conformity with the market-economy investor principle, the Commission stated that, at this stage, it intended to apply the methodology set out in Decision 2000/392/EC, while taking into account the specific circumstances of the case in question.

(34)

According to this methodology, the appropriate remuneration for the capital usable to underpin the bank's commercial business is calculated starting from the market remuneration for liquid ordinary capital investment. A premium or a discount is then applied, in order to take account of the particularities of the measure concerned (before investor taxes). So as to take into account the liquidity cost arising from the lack of liquidity of the capital investment in question, the net refinancing costs (total refinancing costs minus applicable taxes, in particular corporation tax) are deducted from this rate.

(35)

Germany had stated that in the years both before and after the transfer LBB was a high-return institution, with a return on equity stated to be 5,37 % in 1991, 13,5 % in 1992 and 30,83 % in 1993. The Commission commented that the basis for this calculation had not been clarified. Without further information, it was unable to assess this argument regarding the absence of any aid element in the measure. The German authorities had also argued that the Land of Berlin had secured proper remuneration for the function of IBB's capital as liable own funds for supervisory purposes on the basis of the Land’s sale to BGB of its silent partnership in 1994 and of its claim to profits in 1998, excluding IBB in both cases. However, further details had not been given.

(36)

The Commission summed up by stating that it lacked important information for a proper and sufficiently detailed assessment of the capital injection and the remuneration paid. In its decision initiating the formal investigation procedure, it therefore asked Germany to provide this information, including a full statement of all the resources transferred, the amount recognised as liable equity capital for LBB, the take-up and remuneration, the basis on which the remuneration was determined, the basis for the calculation of LBB's return on equity, updated figures and all the factors which, in Germany's opinion, ensured a normal market return.

(37)

However, on the basis of the information available, the Commission expressed serious doubts about whether the Land of Berlin had received a normal market remuneration or rate of interest for the transfer of some DEM 2 billion, almost all of which appeared to be available to LBB as a liable capital base and which placed it at an advantage over its competitors. The Commission drew the provisional conclusion that it was likely that competition was being, or might be, distorted and that, in view of the increasing integration in the financial services sector, trade between Member States was being affected. The measure therefore probably constituted state aid within the meaning of Article 87(1) of the EC Treaty. Since none of the exemption clauses contained in Article 87(2) and (3) of the EC Treaty were applicable to this case, the Commission supposed that, if aid were present, there was reason to doubt that it was compatible with the common market.

(38)

Since neither Germany nor any other legal or natural person had indicated that LBB provided services of general economic interest within the meaning of Article 86(2) of the EC Treaty, the Commission was unable to conclude that the aid could be approved under that provision. In the absence of any change in this situation, it assumed that this point would not be relevant for a final decision on an assessment of the measure at issue.

(39)

The Commission also explained that, in making its preliminary assessment and in accordance with Article 1(b) of Council Regulation (EC) No 659/1999 of 22 March 1999 laying down detailed rules for the application of Article 93 of the EC Treaty (13), it had assumed that, inasmuch as it constituted state aid, the measure was new and not existing aid. In this connection, it also referred to Article 15(2) of the above Regulation, pointing out that the limitation period had been interrupted by the actions described in the decision initiating the procedure, such as the Commission's letters dated 12 January, 10 November and 13 December 1993 and 1 September 1999, the decision initiating the procedure in this case, as well as the decision initiating the procedure and Decision 2000/392/EC closing the procedure in WestLB. Since the potential aid had not been notified and had been effective since its implementation, the Commission also found that the decision to initiate the procedure added nothing to the suspensory effect of the third sentence of Article 88(3) of the EC Treaty with regard to Germany's obligation to refrain from putting the measure into effect until such time as the Commission has reached a final decision.

(40)

In its comments, Germany began by outlining the reasons for the transfer of the former WBK (later IBB), stating that the Land’s objectives at the time were geared towards establishing a ‘strong banking group’ in the interests not only of the merged credit institutions but also of the Land as owner and of its banking sector. It again stressed that for LBB, unlike in the WestLB case, satisfying the capital ratios under the new solvency rules played no role in the transfer, as demonstrated by the fact that LBB did not have recourse to IBB's (formerly WBK's) liable equity capital until late 1995.

(41)

Germany confirmed that DEM 1,902714 million of LBB's liable equity capital determined by the banking regulator as at 31 December 1992 corresponded to the increase brought about by the transferred funds. DEM 187,5 million of that amount corresponded to the increase in LBB's nominal capital (14) and some DEM 1,715214 million corresponded to WBK's revenue reserves, without the net profit for the year of DEM 190,586 million. As at the close of 31 December 1992, so with effect on 1 January 1993, all WBK's responsibilities were transferred to IBB, which was itself transferred to LBB. The transferred capital and special-purpose reserve were available to LBB for use as liable core capital as at the close of 31 December 1992 or on 1 January 1993.

(42)

According to Germany, in the years which followed, IBB's special-purpose reserve continued to grow. However, it was not fully available to LBB since part of it was needed each year to underpin IBB's promotional activities. Germany submitted precise data for each year from 1993 to 2003 (which can be found in the table at paragraph 142).

(43)

With IBB's hive-off from LBB on 1 September 2004, the special-purpose reserve was transferred back to the Land of Berlin, and €1,1 billion of it was transferred to two silent partnerships held by the Land in LBB.

(44)

IBB's nominal capital of DEM 187,5 million incorporated at the time remained in the nominal capital of LBB. LBB was in turn sold to BGB in 1994 (75,01 % of the shares) and 1998 (24,99 % of the shares).

(45)

Germany also completed the other data. It again stated that only part of the special-purpose reserve had actually been used to cover liabilities. The amount taken up in this way, starting in December 1995, had varied between about DEM 212 million in 1995 and over DEM […] (*1) billion in recent years. The remuneration paid to IBB for the amounts used as of December 1995 (between a good DEM 1 million for 1995/96 and DEM […] million in 2001) was calculated monthly on the basis of an interest rate which ranged over the period from 0,2 % (1998) to 0,35 % (1996). The precise figures provided by Germany can be found in the table at paragraph 149.

(46)

As the basis for determining the remuneration for any use made of IBB's special-purpose reserve, Germany provided a management board resolution dating from June 1993. This resolution states that ‘… remuneration should be paid to Investitionsbank Berlin for this capital charge (take-up) in an amount equivalent to the cost of raising subordinated liable capital’. This resolution was given practical effect in 1995, when the remuneration was equated to a subordination premium. The reason given was that LBB could have raised alternative subordinated capital on the market which would have been fully available not only in its guarantee function but also in an earnings function.

(47)

However, since the IBB special-purpose reserve performed only a guarantee function, the difference between the interest rate for ordinary outside capital, which does not perform that function, and capital which also performs a guarantee function was set as the ‘price’ for the utilisation function. This premium was calculated in basis points by comparison with LIBOR (London Interbank Offered Rate) on the basis of specific terms or external market data for subordinated loans. The bases for the calculation and statistical data were attached.

(48)

Germany justifies the decision to require remuneration only for the part of the IBB special-purpose reserve actually taken up inter alia on the grounds that the reserve was available primarily to IBB and that, if it were insufficient, it was first LBB which was obliged to reduce its risk assets or raise subordinated capital on the market. As owner of IBB, the Land of Berlin was entitled to withdraw parts of the special-purpose reserve at any time.

(49)

Germany also commented in this connection that the liquidity of the special-purpose reserve was tied up in IBB's existing business and was not available to LBB for financing purposes. IBB had to underpin its lending itself with own funds and, in so doing, to have recourse to the special-purpose reserve. Germany stated that, in the light of these specific factors, WBK's assets could not be equated with freely available financial assets and that, therefore, only the guarantee function and thus the business expansion function were at issue.

(50)

Whether the remuneration was paid to the Land or to IBB was immaterial here since the Land as guarantor would, in any event, profit from both IBB and LBB, either through LBB's increase in value and distribution of profits or through inflows into IBB's special-purpose reserve, on which the Land had a claim.

(51)

Besides these comments on the direct remuneration, Germany also argued that it was not a factor, or not the only factor, in an investment decision and that ‘in accordance with the case law, … an investor who does not hold or seek to hold a significant share in the relevant company but who is interested in a rapid return on his investment must be distinguished from investors geared to the long term, such as holding companies’. The latter were interested in long-term return expectations and would also take account of strategic considerations.

(52)

As sole owner of LBB, the Land assumed at the time of the investment that it would benefit fully and directly from the increase in LBB's value brought about by WBK's transfer. Taking the assessment criterion applied by the Commission in Decision 2000/392/EC (15) as a basis, ‘a financial measure must be considered unacceptable to a market-economy investor if the financial position of the company is such that a normal return (in dividends and capital gains) cannot be expected within a reasonable period of time’. At issue, therefore, were the return expectations at the time of the investment decision.

(53)

Germany initially indicated that LBB's return-on-equity ratio was 13,5 % in 1992 and 30,83 % in 1993. These figures, submitted back in 1999, related to the ratio ‘earnings before (income) tax/equity capital shown in the balance sheet at the start of the same year’. However, in supplying these figures, Germany had not included IBB's special-purpose reserve in LBB's equity capital from 1993 onwards. At the Commission's request, this was corrected with the sending of data series covering a longer period. For the period 1985-1992 these figures gave an average return on equity of about 13 %.

(54)

Germany stated that these figures would fall within the range of values obtained by private German banks in the same period, but it did not initially provide data produced by a similar method for other banks. It subsequently submitted its own calculations based on the published profit and loss statements of 35 German banks (16). Taking ‘earnings before tax as a percentage of equity capital shown in the balance sheet at the start of the same year’, this gave an average return-on-equity ratio for these banks of around 11 % in 1992 and just under 13 % for the period from 1988 to 1992.

(55)

Germany also stated that, from a business point of view, earning capacity was a decisive factor in an investment decision and that, in the case of banks, it could best be derived from profit from ordinary business or from operating result as a percentage of equity capital shown in the balance sheet since extraordinary earnings and expenditure would then be excluded. In the years 1990-92 LBB faced extraordinary circumstances, in particular the integration of the East Berlin Savings Bank and the related setting up of its own pension scheme, at the same time as it had to pay a compensation fee for withdrawing from the Federal and Länder Pension Institution and to make provision for the general banking risks of the former East Berlin Savings Bank.

(56)

As regards obtaining methodologically comparable return-on-equity ratios for other banks in the same period, Germany stated that banks were required only as of 1993 to enter extraordinary result and profit from ordinary business separately in the profit and loss account, and that this cannot be compared with the pre-1993 method, when extraordinary income and expenditure were included, together with other items, under ‘other income and expenditure’ and therefore could not be identified precisely. For the period pre-1993, Germany submitted its own calculations. In the course of the proceedings Germany also made corrections and additions to the method for calculating LBB's return on equity, in order to render the figures for LBB comparable with the Bundesbank's official survey of German banks. According to Germany, this did not change the basic assessment that LBB's return on equity was in line with the average for the sector.

(57)

In Germany's view, all the data showed that, at the time of the capital injection, LBB had a high earning capacity. The Land of Berlin was the sole owner and would alone benefit from the bank's commercial success, whether in the form of dividends or an increase in value. In this respect, the Land would not have to share the expected increase in return with other shareholders and the almost ‘intra-group’ investment was sound conduct from the point of view of an investor operating in a market economy. The question of whether and how large a remuneration was paid by LBB for the capital injection was therefore irrelevant to an assessment of the transfer's market-economy status.

(58)

According to Germany, the Commission expressly laid down this assessment criterion in Decision 2000/392/EC: ‘Therefore, one way of ensuring an adequate return on the capital provided would have been to increase the Land’s participation in WestLB accordingly, provided that the bank's overall profitability corresponds to the normal rate of return that a market-economy investor would expect from his investment. This would have avoided the discussion of whether the 0,6 % rate of remuneration is appropriate. However, this course was not adopted by the Land (17).’

(59)

In this connection, Germany also stated that LBB's increase in value as a result of WBK's assets benefited the Land after LBB's incorporation into BGB. The transfer, undertaken in three stages in 1994 and 1998, of 100 % of the beneficial ownership in LBB to BGB was carried out on the basis of expert reports by various chartered accountants and one investment bank on the value of the Land’s silent partnership in LBB and on whether the quid pro quo — the BGB shares transferred, including in relation to other shareholders — equated to an acceptable market price. Germany provided relevant extracts from these reports and the related correspondence with the accountants. According to these documents, the value of LBB was set at some DEM 3,5 billion in 1993 (excluding IBB itself, but taking account of LBB's higher core capital ratio as a result of the special-purpose reserve) and, by a further expert, at just under DEM 6 billion at 31 December 1997.

(60)

Germany also suggested, in the alternative, that the method used by the Commission in Decision 2000/392/EC was faulty in that it assumed comparability with liquid ordinary capital investment. This approach failed to take account of the particularities of the transaction at issue in these proceedings. It was proper to use comparable equity instruments as a basis for calculating even the starting amount. While this might be difficult, as the Commission had explained in the WestLB case, the difficulties would not be overcome by using a completely unsuitable equity capital instrument, almost as a ‘way around’ the problem.

(61)

It was also mistaken to use average return as a benchmark. Only a return below the range available to investors for assessment purposes was no longer acceptable to a private investor. Lastly, it was erroneous to deduct only net refinancing costs instead of total refinancing costs. Any tax savings by the company were immaterial from the investor's point of view. A further consideration showed that this approach was unacceptable since with non-liquid provision of capital the earnings function of the capital was still available to the investor and could be re-invested by him to obtain at least the risk-free rate of interest, and he would thus achieve ‘double’ earnings.

(62)

Germany also argued that the limitation period had expired (pursuant to Article 15(1) of Regulation (EC) No 659/1999) and that the Commission therefore had no power to order recovery of any aid. The basic resolution on WBK's transfer had been adopted on 16 June 1992, i.e. more than ten years before the decision initiating the investigation procedure was served on 4 July 2002. The resolution expressed the basic intention to merge the Land’s bank holdings and WBK into one holding company (later BGB), provided that WBK's promotional activities could continue and that the assumption of sovereign tasks and the tax exemption were guaranteed. The resolution had been in the public domain since then, and the Commission had been informed of its date in 1999.

(63)

In a number of decisions, the Commission had already taken the declaration of intent by the relevant body, even subject to conditions, as marking the point at which the aid was implemented. This was also the position adopted by the Commission in the decision on rescue aid for BGB (18), even though the resolution concerned, adopted on 22 May 2002, had still required the approval of Parliament and of the Commission.

(64)

Moreover, in Germany's view, the limitation period had not been interrupted pursuant to the second sentence of Article 15(2) of Regulation (EC) No 659/1999, which states that only action taken by the Commission can interrupt the period. The first such Commission action was the letter regarding the initiation of the procedure dated 4 July 2002, and not the requests for information, which were not measures taken by the Commission or the relevant Commission Member. Account should moreover be taken of the fact that the limitation period existed in the interests of legal certainty, not only in relations between the Commission and the Member States but also for the recipients of state aid. As Germany was asked for the first time in the decision initiating the procedure to forward a copy of the letter to the aid recipient, which it did on 9 July 2002, the limitation period was interrupted only as of that date. Since the measure subject to state aid monitoring was the resolution of 16 June 1992, it constituted, if it were aid at all, existing aid pursuant to Article 15(3) of Regulation (EC) No 659/1999.

(65)

After the decision initiating the procedure had been published in the Official Journal (19), the Commission received comments from the Berliner Volksbank (‘BV’) and the Bundesverband deutscher Banken (‘BdB’) in October and November respectively.

(66)

The BV took the view that the transfer of WBK was aid because the capital had been made available on terms which a market-economy investor would not have accepted. Payments were made by LBB to IBB, which was itself managed as a division of LBB; moreover, the agreed interest rate of 0,25 % lay well below the normal market rates, as illustrated by Decisions 2000/392/EC (WestLB), 95/547/EC (20) and 98/490/EC (21) (Crédit Lyonnais), where a likely return on capital of at least 12 % was taken as a basis. This aid led to a serious distortion of Community-wide competition, but with particularly serious consequences in Berlin, where BGB, including LBB (and Berliner Bank and Berliner Sparkasse), led the market in personal and corporate retail banking. By comparison, BV was a small competitor with market shares of 5-7 % and was thus particularly affected by the negative impact of the aid. It closed its statement by calling on the Commission to order recovery of the aid.

(67)

The BdB began by stating that the proceedings at issue formed part of a series of investigations by the Commission involving the transfer of Land housing promotion institutions to the Landesbanks, which carried on competitive business. In LBB's case too, contrary to the statements by Germany, the higher own funds requirements under the Solvency Directive were decisive. Evidence that this was the case were the timing of the transfer and the comments by the relevant Member of the Land Government at the time, who referred to the European own funds requirements, which were expected to become stricter. In this respect, there was no relevant difference in state aid terms between the transfer of WBK to LBB at issue here and the transfer of WfA to WestLB, which meant that the method used by the Commission in Decision 2000/392/EC could be applied here.

(68)

The BdB went on to comment that it was not only the special-purpose reserve which was at issue here but also the transfer of WBK's capital of DEM 187,5 million, which was assigned to LBB's subscribed capital; this constituted a financial advantage as it influenced the rating and the terms for raising external capital. However, of much greater significance was the increase in core capital recognised for supervisory purposes as a result of the transfer. As this had been available in full as liable capital, despite the special-purpose reserve's being used primarily for promotional activities, its purpose was not the issue. The key factor was the economic advantage of the business expansion function, especially since the core capital had powerful leverage (lending capacity increased by 12,5 times for 100 % risk-weighted assets such as lending to companies and by 25 times for 50 % risk-weighted assets such as loans to public authorities). If additional capital were raised, with a core capital of (hypothetically) €1 billion and a risk weighting of 50 %, loans amounting to as much as €50 billion could be given.

(69)

For the calculation of what constituted a normal market remuneration, the BdB referred to the tried-and-tested method applied by the Commission in Decision 2000/392/EC and the benchmark of 12 % for a normal market return, to which, in a second stage, premiums and discounts had been applied to take account of the particularities of the transaction. In any event, neither the 0,25 % paid to IBB nor the sale to BGB of the silent partnership and the claims to profits in 1994 and 1998 could be regarded as normal market remuneration.

(70)

For one thing, it was not appropriate for payment to be made only on the amount taken up and, for another, IBB belonged to LBB, with the result that LBB had almost paid itself, rather than the Land. Moreover, Germany's argument that the guarantee function of the special-purpose reserve had been properly remunerated by the establishment of an atypical silent partnership holding in LBB for BGB in 1994 was not convincing, since important data on values were not available and, in principle, it was erroneous to confine the assessment to the aid donor's point of view. Of relevance to the state aid assessment was the transfer of WBK to LBB on 31 December 1992, the advantages conferred thereby on LBB and the resulting distortions of competition, and not whether the aid debt had been discharged subsequently. Moreover, the transfer of LBB to BGB was an internal transaction since BGB was also majority-owned by the Land. The same applied to the transfer to BGB of the remaining claims to 24,99 % of profits in 1998. In any event there had been no complete abolishment of the aid element since 1998.

(71)

Subsequently, and a long time after the period for submitting comments laid down in Regulation (EC) No 659/1999 had expired, the BdB supplemented these remarks, stating in particular that the sales value calculated for LBB and for the silent partnership in LBB for the purpose of setting up BGB had not included IBB, with the result that the guarantee function of IBB's special-purpose reserve could not, in the BdB's view, have been taken into account in the sales value of the silent partnership in LBB.

(72)

On the limitation period of ten years pursuant to Article 15(1) of Regulation (EC) No 659/1999, the BdB stated that it had begun only with the Act establishing IBB on 31 December 1992 and could have come to an end at the earliest on 31 December 2002. However, the period had been interrupted pursuant to Article 15(2) of Regulation (EC) No 659/1999 by action taken by the Commission. This provision was broad in scope and covered any action taken by the Commission in connection with its investigations, including requests for information. A basis for the further interpretation of this provision was Regulation (EEC) No 2988/74 of the Council of 26 November 1974 concerning limitation periods in proceedings and the enforcement of sanctions under the rules of the European Economic Community relating to transport and competition (22), pursuant to which interruption is linked to ‘action taken … for the purpose of the preliminary investigation or proceedings in respect of an infringement’. For the rest, Germany had itself asked the Commission to wait for clarification of the issues in WestLB and, for that reason alone, could not invoke the limitation period.

(73)

In its comments dated 16 December 2002, Germany essentially referred to its own comments on the decision initiating the procedure and its argument that no state aid was involved in this case. Otherwise, it restricted itself to a brief response to the individual points made in the two sets of comments.

(74)

Regarding the BV's and the BdB's classification of WBK's transfer as aid, Germany stated that it was not enough to look only at the monthly remuneration. Rather, reference values such as — depending on the capital injection — return (on a loan), including collateralisation, dividends or capital growth should be considered. However, in the relevant period (1992/93) LBB was an institution with high earning capacity, and the transfer of WBK's assets to LBB's liable equity capital was therefore a sound business decision. WestLB and LBB, contrary to what was claimed by the BdB and the BV, were therefore in no way comparable with one another. Apart from this, it was inappropriate for the BdB to speak of the method used in WestLB as tried and tested in view of the (at the time) pending court proceedings in that case.

(75)

Contrary to what was argued by the BdB, it was undisputed and clearly stated in the decision initiating the procedure that, besides the use of the special-purpose reserve's guarantee function by LBB, the transfer of WBK also increased LBB's equity capital shown in the balance sheet by DEM 187,5 million and that this amount had been recognised as liable equity capital for supervisory purposes. The question of the extent to which equity capital shown in the balance sheet conferred a financial advantage did not arise here, unlike in WestLB, since it was not necessary to distinguish between recognised and unrecognised parts of the capital. No aid was involved in the increase in equity capital shown in the balance sheet or the transferred reserves (see paragraphs 40 to 64).

(76)

Moreover, it was erroneous to assume that, with a hypothetical core capital of €1 billion, loans totalling €50 billion could be made. Whereas it was undisputed that IBB's special-purpose reserve performed a guarantee function and a business expansion function on account of its recognition for supervisory purposes, the advantage was confined to the amount actually taken up by LBB. The hypothetical leverage of 1:50 was also groundless.

(77)

In applying the principle of the market-economy investor, the analysis should be geared to an investor in a comparable situation. In the case at issue, the Land as investor decided to tie the special-purpose reserve's liquidity into IBB's operations and not to make it available to LBB in its financing capacity. The Land’s objective with respect to this capital was its own return (see paragraphs 40 to 64). Moreover, only the Land continued to have a claim on IBB's special assets, even after LBB's transfer to BGB. It was therefore also wrong to claim that the remuneration which LBB paid to IBB was paid to itself. Moreover, it was usual for a market-economy investor to assign remuneration claims to third parties, especially when the third party was a company or an asset wholly owned by that investor.

(78)

Lastly, with respect to the BV's comments on its market share relative to that of BGB, Germany stated that BV had a larger market share in Berlin than it had indicated. It was the second-largest credit institution and its market shares had to be 60-70 % of those of BGB; as regards deposits by private customers alone, it had some 1/3 of BGB's market share.

(79)

On 7 October 2004, Germany informed the Commission of the outcome of an understanding between the complainant (the BdB), the Land of Berlin and LBB. Notwithstanding their remaining fundamental legal positions, the parties had agreed on what they themselves regarded as suitable parameters for determining an appropriate remuneration for WBK's assets. The parties asked the Commission to take account of this understanding in its decision.

(80)

First, the parties determined, on the basis of the approach detailed in Decision 2000/392/EC, a minimum remuneration for WBK's special-purpose reserve of 10,19 %. As the Land of Berlin was the sole owner, no further premium, such as to allow for the lack of voting rights, was agreed. A discount of 3,62 % was then applied on account of the capital's lack of liquidity (on the basis of the risk-free interest rate taken as gross refinancing costs, with some 50 % in corporation tax plus a solidarity surcharge deducted to determine net refinancing costs). This produced an appropriate remuneration of 6,57 %.

(81)

The understanding makes no mention of any remuneration for the part of WBK's assets not available for LBB's competitive business.

(82)

For IBB's nominal capital of DEM 187,5 million transferred to LBB's nominal capital no discount on the basis of refinancing costs was calculated as this capital constituted liquid funds. As the nominal capital had been transferred to BGB in two stages in 1994 and 1998, the parties agreed that remuneration should be paid for it only up to these two points in time (proportionally in each case).

(83)

The parties were unable to agree on whether any increase in LBB's value as a result of the transfer should be taken into account. In the Landesbank's view, an increase in value had been achieved by the transfer of LBB in 1994 and 1998.

(84)

Germany stated that the relevant date with respect to any limitation period applicable to recovery was 16 June 1992 when the Berlin Land Government adopted a resolution establishing a Berlin bank holding company. However, this resolution, which is in the Commission's possession, laid down only that ‘Berlin's bank holdings will be restructured’. It provided for the ‘establishment of the Berliner Banken-Holding AG, which would bring together under its roof the Landesbank Berlin-Girozentrale, Berliner Bank AG and the … Berliner Pfandbrief-Bank’. It did not bring about a transfer of assets.

(85)

The measure at issue, namely the transfer of WBK's assets to LBB, was completed only at the close of 31 December 1992. The economic effect of the measure, i.e. the increase in LBB's equity capital and the resulting increase in its lending capacity, therefore kicked in only on 1 January 1993. In the present case, no state aid can have been granted before that date.

(86)

Even if the date on which the measure was awarded were none the less fixed as 16 June 1992, several months before the date of the transfer, it cannot be assumed, as argued by Germany, that the Commission's powers to recover the aid are subject to the limitation period laid down in Article 15(1) of Regulation (EC) No 659/1999. Germany takes the view that the decision of 4 July 2002 initiating the procedure was the first Commission action to interrupt the limitation period, among other reasons because in that decision Germany was asked for the first time to forward a copy of the letter to the aid recipient.

(87)

The Commission rejects this view. Article 15(2) of Regulation (EC) No 659/1999 refers to ‘any action’ taken by the Commission and not merely to a formal decision initiating the procedure. In the present case, the various steps taken by the Commission, in particular its various requests for information referring to LBB, and at any rate its request of September 1999, suffice to interrupt the limitation period. It is not necessary for LBB to have been aware of the steps taken by the Commission. In its judgment of 10 April 2003 in Case T-366/00 Scott SA v Commission (23), the Court of First Instance ruled that the mere fact that the aid recipient was not aware of the existence of the Commission's requests for information does not have the effect of depriving them of legal effect vis-à-vis the aid recipient. The Commission is not obliged to warn potentially interested persons, including the beneficiary of the aid, of the measures which it is taking in respect of unlawful aid before it initiates the administrative procedure. The Court accordingly found that the relevant requests for information constituted, under Article 15 of Regulation (EC) No 659/1999, a measure interrupting the limitation period before that period expired, even though the aid recipient was not at the time aware of the existence of such correspondence (24). Moreover, it seems unlikely that LBB was unaware of the Commission's request for information when Germany replied to it in December 1999.

(88)

In conclusion, the Commission has the power in this case to order recovery of any aid.

(89)

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

(90)

The transfer was decided on by the Land of Berlin in order to increase LBB's capital by transferring to it the public-service institutions WBK/IBB, whose guarantor and owner the Land was. The transfer increased LBB's liable equity capital recognised for supervisory purposes by letter of 24 February 1993 by some DEM 1,9 billion. DEM 187,5 million of that amount corresponded to an increase in LBB's nominal capital by the nominal capital of the former WBK (25) and some DEM 1,715 billion to WBK's revenue reserves (without the net profit for 1992 of just under DEM 200 million), which from that point on were shown as a special-purpose reserve belonging to IBB and continued to grow each year.

(91)

The transfer of some DEM 1,9 billion and its recognition as core capital for supervisory purposes significantly increased LBB's lending capacity and thus its scope for expanding its competitive business. With a risk weighting of 100 % for all claims (e.g. from loans to non-banks) and without any further raising of additional capital, the business expansion potential theoretically lies at 12,5 times the additional liable equity capital (in this case just under DEM 24 billion). It is not possible to give a precise figure for this potential in individual cases, as it depends on customer structure, strategic planning and unforeseeable external influences. However, the question of whether and how a credit institution employs new own funds is not a matter for this investigation.

(92)

Irrespective of the fact that IBB still needed part of the funds to underpin its promotion activities, the transferred assets were recognised by the supervisory authority and could thus be used by LBB, which was competing with other credit institutions, to cover its liabilities. There is therefore no doubt that this case involves the transfer to LBB of state resources which were such as to give it an economic advantage over its competitors to the extent that the resources concerned were not obtained on market terms.

(93)

In order to verify whether the transfer of state resources to a publicly-owned undertaking favours the latter and is therefore liable to constitute state aid within the meaning of Article 87(1) of the EC Treaty, the Commission applies the ‘market-economy investor principle’. The Court of First Instance has accepted and developed this principle in a number of cases, most recently in its judgment of 6 March 2003 regarding a similar transfer to WestLB (26).

(94)

According to the market-economy investor principle, no state aid is involved where funds are made available on ‘terms which a private investor would find acceptable in providing funds to a comparable private undertaking when the private investor is operating under normal market-economy conditions’ (27). In contrast, the undertaking is being favoured within the meaning of Article 87(1) of the EC Treaty if the proposed remuneration arrangement and/or the financial position of the undertaking is such that a normal return on investment cannot be expected within a reasonable period of time.

(95)

Article 295 of the EC Treaty lays down that the system of property ownership in the various Member States must not be affected. However, this cannot justify any infringement of the Treaty's competition rules.

(96)

Germany claims that, because of the constraints imposed by the special purpose assigned to the WBK 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 those assets. Germany therefore argues that any remuneration for the transfer, i.e. any additional return on WBK's capital, is sufficient to justify the transfer in the light of the market-economy investor principle.

(97)

This line of argument cannot be accepted. It may be true that WBK's transfer to LBB, which subsequently allowed LBB to use part of WBK's capital for underpinning its competitive business, was the commercially most sensible use. However, as soon as public funds and other assets are used for commercial, competitive activities, the normal market rules must be applied. This means that the State, once it decides to assign public-purpose assets to a commercial use, must demand a remuneration in line with normal market conditions.

(98)

The key question, as formulated by the Court of First Instance in its judgment in WestLB with reference to the previous case law, is whether, in similar circumstances, a private investor operating in normal conditions of a market economy and of a comparable size to that of the bodies operating in the public sector could have been prompted to make the capital contribution in question (28). Lastly, as the Court also points out with reference to other case law, ‘the comparison between the conduct of public and private investors must be made by reference to the attitude which a private investor would have had at the time of the transaction in question, having regard to the available information and foreseeable developments at that time’ (29). This makes it clear that the assessment must focus on the time of the investment and on the expectations which an investor might reasonably, i.e. on the basis of the available information, have had at that time. These expectations essentially relate to the likely return.

(99)

The Land of Berlin was the sole shareholder of LBB (and of WBK). Even if this circumstance should make it possible to depart from an approach which takes account only of the fixed, agreed rate of remuneration (on average 0,25 % on the part of the special-purpose reserve used by LBB as of December 1995), in the present case ownership by the Land of Berlin cannot be used to justify the low direct remuneration.

(100)

To cite the Land’s ownership as justification, there would have to be an adequate business plan, expert valuation or assessment of the likely return from the investment at issue. None was produced at the time. The Commission therefore has no means of verifying the Land's statements.

(101)

The Commission accordingly takes the view that, in this case, the appropriate return must be established on the basis of the direct market return.

(102)

In principle, remuneration is payable on the entire value of the transferred assets. This approach was applied in Decision 2000/392/EC and upheld by the Court of First Instance. As BAKred directly recognised the full amount as core capital, the funds were available to LBB to cover liabilities from 1 January 1993 onwards, except for the amount required each year for the promotion-related business itself. The capital needed to underpin the promotion-related business and which LBB could not use has to be deducted from the amounts which grew each year from then on.

(103)

The values for the WBK/IBB special-purpose reserve and for the capital needed for IBB's promotion-related business varied, or continually increased, as of early 1993. They are shown in the table at paragraph 142.

(104)

The nominal capital of WBK/IBB worth DEM 187,5 million and transferred to LBB's nominal capital was liquid capital. 75,01 % of LBB's shares were sold to BGB in 1994, and the remaining 24,99 % in 1998 at a price of DEM 1,5 billion. The nominal capital was therefore attributed to BGB as of 1998.

(105)

There are therefore three bases for calculating an appropriate remuneration: first, the liquid capital of DEM 187,5 million for 1993, with a value of DEM 46,9 million (corresponding to 24,99 % of shares) for the years 1994 to 1997; second, the special-purpose reserve and third, the funds needed for the promotion-related business. As the same minimum return applies to the first two elements, they can initially be considered together in what follows.

(106)

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

(107)

In establishing an appropriate remuneration, it is important to determine to which other equity instruments the transfer of WBK's assets may be compared since market remuneration differs from one instrument to another. For the purposes of their understanding, the BdB, the Land and LBB assume that it can be compared to a share capital investment.

(108)

The Commission likewise takes the view that the transfer most closely resembles a share capital investment. For the nominal capital, this can undisputedly be assumed to be the case and does not require any further discussion here. However, it also applies to the special-purpose reserve, which was equally recognised by BAKred as core capital.

(109)

In this connection, it should be noted that the relatively broad range of innovative equity instruments now available to credit institutions in several countries did not exist in Germany back in 1993 when it was decided to transfer WBK to LBB. Some of these instruments have been developed in the meantime, while others already existed but were not accepted in Germany. It would therefore be inappropriate to compare the special-purpose reserve to such innovative instruments, most of which have developed in the meantime and some of which are available only in other countries.

(110)

The Commission also takes the view that it is not appropriate to compare the special-purpose reserve recognised as core capital to a silent partnership contribution when determining the appropriate remuneration, precisely because the transfer did not take the form of a silent partnership contribution but of a special-purpose reserve. BAKred too recognised the transfer as a reserve and not as a silent partnership contribution pursuant to Section 10 of the German Banking Act. The fact that the German supervisory authority treated the capital made available as a reserve suggests that it resembles share capital rather than a silent partnership.

(111)

Moreover, the risk that the transferred capital might at least partially be lost in the event of insolvency or liquidation is no less than the risk associated with a share capital investment since WBK's assets make up a considerable part of LBB's equity capital and LBB used it extensively for many years to cover risk-bearing assets.

(112)

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 (30).

(113)

Apart from the nominal capital of DEM 187,5 million, the transfer of WBK's assets did not provide LBB with initial liquidity. LBB therefore faced additional funding costs equal to the amount of the capital if it was to raise the necessary funds on the financial markets to take full advantage of the business opened up by the additional capital, i.e. to expand risk-adjusted assets by 12,5 times the capital amount (or to maintain existing assets at that level) (31).

(114)

Because of these extra costs, which do not arise in the case of other forms of injected equity capital, the appropriate remuneration must be reduced accordingly. A market-economy investor could not expect to be remunerated in the same way as for a cash injection.

(115)

The Commission does not believe that the entire refinancing 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 LBB because of the special nature of the capital transferred. Overall, the Commission accepts that LBB incurs additional ‘liquidity costs’ to the extent of ‘refinancing costs minus corporation tax’.

(116)

In the negotiations on their understanding, the parties, as in the Hamburgische Landesbank case, in which the transfer took place at the same point in time, took as a basis the long-term risk-free rate of 7,23 %. They also agreed to assume a flat 50 % tax rate (32). This produces a net refinancing rate of 3,62 % and thus a corresponding liquidity discount. This discount applies only to the special-purpose reserve.

(117)

A market-economy investor bases his return expectations on historical average returns, which generally also give him an idea of what the company's future performance is likely to be, as well as on the conclusions he draws from an analysis of the company's business model for the period of the investment, the strategy and quality of its management and the prospects for the economic sector concerned. Companies in need of capital have to convince potential investors that, over the long term, they will be able to earn at least the average rate of return that can be expected of companies with a comparable level of risk and operating in the same economic sector. If a company cannot fulfil these expectations of an at least average return, the investor will refrain from investing in it and will consider investing in another company which offers better prospects for the same risk.

(118)

There are various methods of determining an appropriate minimum return. They range from differing variants of the financing approach to the Capital Asset Pricing Model (CAPM) method. For the purposes of describing the various approaches, it is helpful to distinguish between two components, namely the risk-free return and a project-specific risk premium: the appropriate minimum return for a high-risk investment = the risk-free base rate + a risk premium for the high-risk investment. The appropriate minimum return on a high-risk investment can therefore be described as the sum of the risk-free rate of return and the additional risk premium for assuming the specific investment risk.

(119)

Accordingly, the basis for any return determination is the existence of a default-risk-free form of investment with an assumed risk-free return. The expected return on fixed-rate securities issued by state issuers (or an index based on such securities) is usually taken to determine the risk-free base rate since such securities represent a form of investment with comparatively little risk. The various methods differ, however, when it comes to determining the risk premium:

(120)

The CAPM is the predominant method of calculating investment returns in the case of large listed companies. However, since LBB 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.

(121)

Germany generally takes a critical view of the use of the CAPM. In the end, the parties none the less used it as a basis in their understanding, obtaining an appropriate rate of remuneration for the transfer of the nominal capital and the special-purpose reserve to LBB of 10,19 %.

(122)

Using the CAPM, the parties applied a risk-free base rate of 7,23 % at 31 December 1992 for LBB, on the assumption that WBK's assets were to be made available to LBB on a permanent basis. The parties thus decided not to use a risk-free rate obtaining on the market on a given reference date for a fixed investment period at the time of the transfer (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 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 10-year Federal bonds. The index series used in the present case contains the relevant year-end levels of the REX10 Performance Index after 1970. The parties then calculated the rate of return per annum, which reflects the trend tracked by the REX10 Performance Index in the period 1970 to 1992 and, in this way, arrived at the risk-free base rate of 7,23 % (at 31 December 1992).

(123)

Since the contribution was to be made available to LBB on a permanent basis, the method of determining the risk-free base rate seems appropriate in this specific case. Moreover, the REX10 Performance Index is a generally recognised data source. The risk-free base rate calculated by the parties thus appears appropriate here.

(124)

The beta factor of 0,74 was estimated on the basis of a KPMG report, of which the Commission has a copy, on adjusted beta factors for all listed credit institutions in Germany. In the light of the report and of LBB's business profile, this beta factor may be regarded as appropriate.

(125)

The Commission also regards the market-risk premium of 4,0 % as acceptable. 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 the return on government bonds, was applied on several occasions in the proceedings leading to Decision 2000/392/EC. The expert reports relating to that case applied margins of around 3 % to 5 %, depending on the method used, the reference period and the underlying data. For example, one report commissioned by the BdB calculated alternative figures of 3,16 % and 5 %, while another, commissioned by WestLB in the same case, arrived at calculations of 4,5 % and 5 %, and Lehman Brothers, which was also working for WestLB, calculated a rate of 4 %. Against this background, the Commission here sees no reason to depart from the market-risk premium used in the understanding. On the basis of the CAPM, the Commission has no doubt that the minimum remuneration determined by the parties can be regarded as appropriate.

(126)

Accordingly, it sets the minimum remuneration at 10,19 % per annum (after corporation tax and before investor tax).

(127)

It must be examined whether there are grounds for adjusting the minimum remuneration calculated. Based on the approach used in the other Landesbank cases, the following three particularities of the transaction may justify such a premium: 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 lack of fungibility of the assets.

(128)

As in the other proceedings, the Commission does not consider a premium to be justified in relation to the last two aspects. Nor is it possible to apply a premium in relation to the failure to issue new shares with voting rights given that the Land of Berlin owned 100 % of the voting shares.

(129)

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

(130)

In view of all of the above observations, the Commission comes to the conclusion that a normal market minimum remuneration for the capital and the special-purpose reserve would have been 10,19 % per annum. On account of the lack of liquidity in the special-purpose reserve, 3,62 % should be deducted from this figure for net refinancing costs.

(131)

The amounts needed for the promotion-related business were also of material value to LBB and their 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 LBB.

(132)

In WestLB (33), Germany considered a rate of 0,3 % per annum before tax to be an appropriate starting rate. Since WestLB and LBB are fundamentally comparable and for want of any other points of reference, the Commission assumes that this rate corresponds to the remuneration which LBB would have had to pay on the market in the early 1990s for a bank guarantee in its favour.

(133)

However, the grounds cited for increasing the starting rate in Decision 2000/392/EC do not apply here. In that Decision, a premium of a further 0,3 % per annum was added to the above-mentioned rate of 0,3 % per annum (before tax) because first, bank guarantees are normally associated with certain transactions and limited in time (which was not the case in WestLB) and second, the amount of DEM 3,4 billion made available to WestLB exceeded what was normally covered by such bank guarantees.

(134)

An increase in the rate of 0,3 % to take account of the particularly extensive scope of the ‘guarantee’ seems unnecessary for an annual amount of some DEM 170 to 350 million. Raising the rate on account of the fact that WBK's assets were in principle available to LBB without restriction is also of doubtful value for the same reasons as those for which no premium was applied to the remuneration for the capital available for competitive business since the Land was entitled to withdraw the assets from LBB and indeed did so at the end of August 2004.

(135)

The guarantee premium counts as an operating expense for LBB and therefore reduces taxable profit. The remuneration for WBK's assets is paid out of profits after tax. The rate of 0,3 % must therefore be adjusted for the tax rate. As in relation to the refinancing costs, the Commission, here in LBB's favour, assumes a uniform overall tax rate of 50 %. Consequently, it sets a rate of 0,15 % per annum after tax.

(136)

The Commission accordingly regards 10,19 % per annum after tax as an appropriate market remuneration for the nominal capital, 6,57 % per annum after tax for the part of the special-purpose reserve which could be used by LBB to underpin its commercial activities and 0,15 % after tax for the amounts needed for the promotion-related business but still shown as equity capital in the balance sheet.

(137)

On the basis of the above assessment criteria and remunerations for the various types of capital transferred, the amounts shown in the table at paragraph 142 should be paid as appropriate remuneration for the individual elements and years.

(138)

Against these amounts should be set the elements of remuneration agreed at the time of the investment, which, in the Commission's view, consist only of the agreed remuneration in varying amounts (see table at paragraph 142) on the take-up of the special-purpose reserve. Other elements, such as the increases in value put forward by Germany, or the dividend payout of DEM 238 million in 1993, cannot be offset against the appropriate remuneration.

(139)

Germany argued that the increases in value achieved by the sales in 1994 and 1998 and the dividend payout of DEM 238 million should be deducted from the remuneration owed. However, payments made or increases in value achieved after the investment cannot be taken into account when applying the principle of the market-economy investor, who, on the basis of the information available to him at the time of the investment, either expects an appropriate return or agrees a direct remuneration. Dividends or increases in value which cannot be calculated in advance are not relevant. Nor is it relevant whether proceeds derive from an increase in value achieved through a sale. Lastly, it is not clear why the dividend payout of DEM 238 million should have been made on the basis of the transferred special-purpose reserve; at most, proportional account could be taken of the payment based on the ratio of the special-purpose reserve to the rest of LBB's own funds.

(140)

Germany also claimed that one reason for the transfer was the potential synergies to be achieved, rather than an increase in equity capital for LBB. Since these synergies neither reduce the usability of the transferred capital for LBB nor increase LBB's costs from the transfer, they should also not influence the level of remuneration for the equity provided which a market-economy investor can demand from the bank. Even if there were an actual benefit accruing to the Land as a result of synergies, any competitor would have been forced by competition to pay to the Land on top of the appropriate consideration for the equity provided, a ‘remuneration’ in the form of such benefits for the financial instrument. The Commission therefore takes the view that any synergy effects do not constitute remuneration paid by LBB for the transfer of WBK.

(141)

The difference between the agreed remuneration of about 0,25 % per annum and the appropriate remuneration of 6,57 % per annum (for the part of IBB's special-purpose reserve which can be used for competitive business) or 10,19 % per annum (for WBK's nominal capital) and 0,15 % per annum (on the part of the capital which is equivalent to a bank guarantee) accordingly constitutes state aid within the meaning of Article 87(1) of the EC Treaty.

(142)

The aid element is therefore made up as follows:

(143)

With IBB's hive-off from LBB on 1 September 2004, the special-purpose reserve was transferred back to the Land of Berlin, and €1,1 billion of it was transferred to two silent partnerships held by the Land in LBB. This brought the advantage at issue to an end as at 1 September 2004.

(144)

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

(145)

Landesbank Berlin carries on regional and international banking business. It defines itself as an all-purpose commercial bank, central bank for the savings banks and the bank of the Land and its municipalities. Despite its name, tradition and legally stipulated tasks, LBB is much more than a mere local or regional bank.

(146)

These facts clearly show that LBB offers its banking services in competition with other European banks outside Germany and, since banks from other European countries are active in Germany, inside Germany.

(147)

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

(148)

It is clear, therefore, that aid given to LBB distorts competition and affects trade between Member States.

(149)

On the basis of all these considerations, it can be stated that the transfer of WBK's capital is caught by all the criteria laid down in Article 87(1) of the EC Treaty and therefore that it involves state aid within the meaning of that Article. On this basis, an assessment must be made as to whether that aid can be considered compatible with the common market. It should be pointed out that Germany did not invoke any exemption clause with regard to possible state aid elements in connection with the transfer of assets.

(150)

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

(151)

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

(152)

Since the economic survival of LBB 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 LBB 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.

(153)

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

(154)

Article 86(2) of the EC Treaty, which allows exemptions from the Treaty's state aid rules under certain conditions, is in principle also applicable to the financial services sector. This has been confirmed by the Commission in its report on Services of general economic interest in the banking sector (35).

(155)

Germany has not argued that any advantage conferred on LBB by the transfer of WBK's assets was merely compensation for the costs incurred by LBB in the performance of its public-service tasks. In the Commission's view, it is clear that the transfer was carried out in order to enable LBB to meet the new capital requirements, and not to compensate it for public-service tasks.

(156)

Since no exemption from the principle of the ban on state aid pursuant to Article 87(1) of the EC Treaty applies, the aid in question cannot be found compatible with the Treaty.

(157)

The transfer of WBK's assets cannot be regarded as being covered by the existing state aid scheme for ‘institutional liability’ (Anstaltslast) and ‘guarantor liability’ (Gewährträgerhaftung).

(158)

First, Gewährträgerhaftung is a default guarantee offered to creditors in the event that the bank's assets are no longer sufficient to satisfy their claims, and this is not the case here. The capital injection is not intended to satisfy LBB's creditors and the bank's assets have not been exhausted.

(159)

Nor does Anstaltslast apply. Anstaltslast requires the guarantor to provide LBB with the resources it needs to function properly for as long as the former decides to maintain it in existence. However, at the time of the capital injection, LBB 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 LBB in business. The conscious economic calculation by the Land as joint owner also enabled LBB to seize future opportunities in its competitive business. The ‘necessity requirement’ for Anstaltslast does not apply to such a normal economic decision by the Land. In the absence of another applicable existing 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.

(160)

The aid resulting from the transfer of WBK/IBB on 1 January 1993 cannot be found compatible with the common market under either Article 87(2) or (3) of the EC Treaty or under any other provision of that Treaty. The aid is therefore declared incompatible with the common market and must be discontinued. The aid element must be recovered by Germany,

(1)

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

(2)

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

(3)

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

(4)

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

(5)

The Commission decision to initiate the procedure was published in the Official Journal of the European Communities (2). The Commission invited interested parties to submit their comments on the measure. It received comments from WestLB (19 May 1998), the Association Française des Banques (26 May 1998), the British Bankers' Association (2 June 1998) and BdB (4 June 1998). By letter of 15 June 1998 it forwarded them to Germany for its reaction, which it duly received by letter of 11 August 1998 after an extension of the deadline.

(6)

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

(7)

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

(8)

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

(9)

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

(10)

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

(11)

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

(12)

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

(13)

On 6 March 2003 the Court of First Instance delivered a ruling (4) annulling the challenged decision and ordering the Commission to pay the costs of the applicants and to bear its own costs and Germany and the BdB to bear their own costs.

(14)

The Court annulled the Commission decision on the ground of insufficient justification of two points regarding calculation of the appropriate remuneration. Firstly, the annulment was based on the reasons stated for the remuneration for liquid equity capital as the starting point for the calculation, for which the Commission had set a rate of 12 % per annum (after corporation tax and before investor taxes). Secondly, it was based on the reasons stated for the top-up for this remuneration, for which the Commission had set a rate of 1,5 % per annum (after corporation tax and before investor taxes). These points apart, the Court confirmed in full the Commission decision.

(15)

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

(16)

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

(17)

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

(18)

During the relevant period for this decision, i.e. from the injection of Wfa on 31 December 1991 to the splitting up of WestLB on 1 August 2002, which ended the state aid situation, WestLB was a public-law institution (Anstalt des öffentlichen Rechts) under the law of the Land of North Rhine-Westphalia. On 31 December 1991 its recognised own capital amounted to DEM 5,1 billion. By law, three functions had been assigned to WestLB: it acted as central bank for the local savings banks in North Rhine-Westphalia and, since 17 July 1992, also as the central institution for savings banks in the Land of Brandenburg; it was engaged in the issuing of debt instruments and the handling of financial transactions for its public shareholders (state-bank function); it operated as a normal commercial bank in its own right. Irrespective of special provisions of the Land, WestLB was subject to banking supervision under the German Banking Law (Kreditwesengesetz).

(19)

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

(20)

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

(21)

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

(22)

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

(23)

Furthermore, under special legal provisions, WestLB, unlike private banks but in the same way as other public credit institutions, was able, until it was split up in August 2002, to conduct mortgage banking and building and loan association business under one organisational roof along with its other operations. It ranked therefore, during the relevant period until it was split up, as one of Germany's most comprehensive all-purpose banks.

(24)

On the other hand, WestLB did not operate a dense network of retail branches. This market segment was covered by the local savings banks, for which WestLB acted as the central institution.

(25)

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

(26)

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

(27)

By the law of 2 July 2002, the Land of North Rhine-Westphalia split up WestLB as of 1 August 2002 (with retroactive effect under the accounting rules to 1 January 2002) into a public-law parent company, Landesbank Northrhein-Westfalen, and a private-law subsidiary, WestLB AG. WestLB AG took over the commercial activities of the former WestLB, while Landesbank Northrhein-Westfalen took over its public activities. According to Germany, WestLB AG is legally identical to WestLB and is to be considered the debtor for the entire recovery claim (5). Wfa was incorporated into Landesbank Northrhein-Westfalen at the time of the split-up and therefore withdrawn from the commercial activities taken over by WestLB AG. The rules of Landesbank Northrhein-Westfalen also stipulated that Wfa's capital cannot be used to underpin the mortgage bonds business remaining within the Landesbank and that, in future, a remuneration of 0,6 % per annum was to be paid to the Land in respect of a possible liability function.

(28)

Wfa was founded in 1957 and operated until 31 December 1991 as a public-law institution (Anstalt des öffentlichen Rechts). As such, it was an independent entity with a nominal capital of DEM 100 million (EUR 50 million) and the Land of North Rhine-Westphalia as the sole shareholder. Under Section 6(1) of the former North Rhine-Westphalia Law on the promotion of housing (Wohnungsbauförderungsgesetz) (6), Wfa devoted itself exclusively to the promotion of housing by granting low-interest or non-interest-bearing loans. On account of its non-profit character, it was exempt from corporation tax (Körperschaftssteuer), property tax (Vermögenssteuer) and tax on business capital (Gewerbekapitalsteuer).

(29)

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

(30)

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

(31)

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

(32)

Under Council Directive 89/647/EEC on a solvency ratio for credit institutions (7) (‘Solvency Ratio Directive’) and under the Own Funds Directive, banks must have own funds equivalent to at least 8 % (8) of their risk-adjusted assets and risk-bearing off-balance-sheet transactions (9). These Directives necessitated amendments to the German Banking Law which took effect on 1 January 1992. The new requirements entered into force on 30 June 1993 (10). Until that date German credit institutions were obliged to have own funds equivalent to 5,6 % of their risk-adjusted assets (11).

(33)

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

(34)

Furthermore, the amount of own funds limits a bank's exposure to large risks. At the time of Wfa's transfer, the German Banking Law (Section 13) stipulated that no single loan granted may exceed 50 % of a bank's own funds and that the total of such loans exceeding 15 % of own funds may not be higher than eight times the bank's own funds. An amendment of the German Banking Law in 1994 to bring it into line with Council Directive 92/121/EEC (12) reduced the maximum loan to 25 % of a bank's own funds and stipulated that the sum of single loans exceeding 10 % of a bank's own funds may not be higher than eight times the total of own funds (13).

(35)

Moreover, Article 12 of the Second Council Directive 89/646/EEC of 15 December 1989 on the coordination of laws, regulations and administrative provisions relating to the taking up and pursuit of the business of credit institutions (14) limits the size of qualifying holdings in other credit and financial institutions. Furthermore, a special provision in the German Banking Law (Section 12), not based on Community legislation but found in other Member States, limits the total amount of long-term investments, including holdings in non-financial enterprises, to the total amount of the bank's own funds.

(36)

German banks had to adapt to the new capital requirements by 30 June 1993. The own funds cushion of many Landesbanks, including WestLB, was already comparatively weak before transposal of the Solvency Ratio Directive into German law. According to test calculations made by Deutsche Bundesbank in December 1991 on the basis of the provisions of the Directives, the Landesbanks had an average solvency ratio of 6,3 %, compared with the 8 % required from 30 June 1993 (15). Therefore, there was an absolute need for these institutions to raise new capital in order to avoid restrictions on their business expansion and indeed to maintain their current level of activities. If a bank cannot demonstrate the necessary level of own funds, it will be ordered by the supervisory authorities to take immediate action to comply with the solvency rules either by raising additional capital or by reducing risk-adjusted assets.

(37)

Private banks had to satisfy additional demand for own funds on the capital markets. Public banks could not move in the same direction since public shareholders decided not to privatise (even in part) their credit institutions. Yet, the generally tight budgetary situation meant that the public shareholders could not undertake cash injections of capital (16). Instead, other solutions were found to provide additional capital. In the case of WestLB, the Land decided to transfer Wfa to WestLB in order to strengthen the latter's own funds base. Similar transactions were carried out by some other Länder in favour of their respective Landesbanks.

(38)

On 18 December 1991 the Parliament of North Rhine-Westphalia passed the Law governing the promotion of housing (Gesetz zur Regelung der Wohnungsbauförderung) (17), Article 1 of which ordered the transfer of Wfa to WestLB. The transfer became effective on 1 January 1992.

(39)

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

(40)

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

(41)

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

(42)

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

(43)

On the occasion of the transfer, WestLB's owners amended the covering agreement (Mantelvertrag) and agreed that the assets earmarked for housing promotion must always be preserved, even if WestLB suffered losses that absorbed the original capital. Internally, Wfa's capital should be subordinate in its liability only to WestLB's remaining equity. It was clarified in the agreement that WestLB owners' ‘institutional liability’ (Anstaltslast) also covered Wfa's special reserve. If WestLB were to be wound up, the Land would have a priority claim on Wfa's capital. It was also stated in the agreement that the increase in WestLB's equity base through the integration of Wfa constituted an act in money's worth (geldwerte Leistung) by the Land and that the annual remuneration for this act should be agreed on by the owners once the first financial results for the years from 1992 onwards were available (18). This was done in a protocol note to the covering agreement dated 11 November 1993. Notwithstanding the internal agreement to guarantee Wfa's assets and the internal subordination of Wfa's capital, no distinction is made in WestLB's external relationships between Wfa's housing promotion activities and its function as a provider of own funds to WestLB. The transferred assets are fully and instantaneously available to WestLB to cover losses or, in the event of bankruptcy, to cover creditors' claims.

(44)

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

(45)

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

(46)

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

(47)

WestLB's competitors also opposed the merger of the monopoly-like Wfa and WestLB because they feared that WestLB would be able to take advantage of information gathered in the housing promotion field to acquire new customers for its commercial business. The competent authorities have undertaken to ensure that distortions of competition are not caused by such proximity, in particular by separating the housing promotion division from the commercial divisions of WestLB in terms of personnel, information, etc (19).

(48)

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

(49)

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

(50)

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

(51)

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

(52)

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

(53)

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

(54)

On the basis of this valuation, BAKred finally accepted on 30 December 1992 DEM 4 000 million (EUR 2 050 million) as WestLB's original own funds within the meaning of the German Banking Law. Neither the amount shown in WestLB's balance sheet — DEM 5 900 million (EUR 3 020 million) — nor the amount accepted as original own funds has been changed since then.

(55)

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

(56)

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

(57)

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

(58)

Table 1: Capital requirements and own funds of WestLB and Wfa (based on data provided by the German authorities)

(59)

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

(60)

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

(61)

On 31 December 1991 the solvency ratio of the WestLB group was 5,8 %, i.e. 0,2 percentage point above the minimum. One year later, after the Wfa's capital had been accepted by BAKred, the ratio was about 8,1 %, including Wfa's risk-adjusted assets. If the asset transfer had not taken place and the group had increased its non-housing-related risk-bearing assets as it actually did, the group's solvency ratio would have fallen to 5,3 %, or 0,3 percentage point below the minimum level required at the time.

(62)

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

(63)

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

(64)

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

(65)

However, since a bank's assets are normally not 100 % risk-adjusted, the actual credit volume capacity was increased by a greater amount. At the end of 1993 the WestLB group's risk-adjusted assets (including Wfa's business) amounted to DEM 148 600 million (EUR 76 000 million). The balance-sheet total came to DEM 332 600 million (EUR 170 100 million). This indicates an average risk weighting of 45 % (20). Given a constant risk structure, the DEM 2 500 million (EUR 1 280 million) of original own funds available permitted a total expansion (or coverage of existing business) of about DEM 69 400 million (EUR 35 500 million) on the basis of the 8 % threshold laid down in the EC Banking Directives. Since the increase in original own funds allowed WestLB to raise further additional own funds (up to an amount equal to the original own funds), its actual lending capacity was indirectly increased even further.

(66)

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

(67)

As regards the supervisory restrictions on individual large loans, the 50 % threshold stipulated by the former German Banking Law was equivalent to about DEM 2 500 million (EUR 1 280 million) before the acceptance of Wfa's capital. After acceptance of Wfa's capital and a DEM 100 million (EUR 50 million) allocation to reserves from profits, the threshold rose to nearly DEM 4 600 million (EUR 2 350 million). The 15 % threshold stipulated for large loans, which in total may not be higher than eight times the bank's own funds, was equivalent to about DEM 760 million (EUR 390 million) at 31 March 1992. One year later, i.e. after the acceptance of Wfa's capital, the threshold had risen to nearly DEM 1 400 million (EUR 720 million). WestLB's capacity to grant such large loans was increased by DEM 32 000 million (EUR 16 400 million) (i.e. eight times the increase of own funds) as a result of the transfer of Wfa (21).

(68)

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

(69)

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

(70)

The remuneration for the capital provided was finally fixed at an annual rate of 0,6 %. It must be paid by WestLB from profits after tax, giving a pre-tax burden of around 1,1 % for WestLB (22). It is payable only if profits are made.

(71)

The basis for this remuneration is the capital of Wfa recognised by BAKred as original own funds, i.e. DEM 4 000 million (EUR 2 050 million). The remuneration is paid only on the part of this capital not needed by Wfa to underpin its housing promotion activities. This part, available for WestLB to underpin its commercial business, amounted to DEM 2 500 million (EUR 1 280 million) after the new capital requirements entered into force and has been increasing since then (23).

(72)

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

(73)

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

(74)

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

(75)

BdB argued that, like any other original own funds, the recognised original own funds of DEM 4 000 million (EUR 2 050 million) can be used to underpin business and, at the same time, to raise additional own funds for solvency reasons. Thus, by way of the transfer, the Land enabled WestLB, which was operating at the very edge of its equity base, to avoid reducing its business activities and even to expand those business activities open to risk. Furthermore, the amount by which the own funds exceed actual requirements also influences the funding costs on the financial markets. According to BdB, a market-economy investor would not inject capital into his company if its financial results had been consistently poor for years and there were no signs of a considerable improvement, i.e. no indications that a higher return could be expected in the future.

(76)

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

(77)

As regards the appropriate method of calculating a comparison of returns on equity, BdB submitted that historical return rates should be calculated as an arithmetic average, not as a compound annual growth rate. The latter method implies that the investor reinvests dividends and takes the additional income from these reinvestments into account for the calculation. However, the way in which dividends are reinvested cannot influence the original investment decision but has to be considered as a new, separate decision. A method based on an arithmetic average should therefore be used.

(78)

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

(79)

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

(80)

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

(81)

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

(82)

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

(83)

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

(84)

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

(85)

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

(86)

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

(87)

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

(88)

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

(89)

As already mentioned, BdB suggested that the appropriate remuneration should be paid on the total accepted amount of DEM 4 000 million (EUR 2 050 million). However, it claimed in its observations that not only this amount, recognised by BAKred as original own funds, but also the excess amount of DEM 1 900 million (EUR 970 million), which cannot be used to underpin business but is nevertheless shown as equity in the balance sheet, benefited WestLB. Rating agencies and investors did not look at the accepted original own funds but at the total equity shown in the balance sheet, as the latter formed the basis for commercial estimates of what was available to cover losses. This amount therefore increased WestLB's credit standing, and a remuneration comparable to a guarantee premium should be paid for it.

(90)

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

(91)

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

(92)

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

(93)

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

(94)

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

(95)

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

(96)

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

(97)

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

(98)

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

(99)

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

(100)

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

(101)

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

(102)

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

(103)

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

(104)

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

(105)

WestLB also submits that the figures presented by BdB on the return on equity of German banks are not correct for several reasons. On account of specific stock exchange developments, the investment period used by BdB for the calculation led to particularly high returns. The arithmetic average used by BdB did not provide correct results as the compound annual growth rate method should be used for such calculations. BdB included in its calculations investment periods which were not relevant for an investment decision in 1992 and, because it took into account all possible holding periods, it counted individual years several times over. The banks used by BdB for computing an average rate of return on equity for large German banks could not be compared to WestLB because of differing core businesses. According to WestLB, the average return on equity of 16,6 % presented by BdB falls to 5,8 % after adjustment for all these factors.

(106)

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

(107)

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

(108)

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

(109)

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

(110)

Germany submitted that the transaction does not include any elements of state aid for WestLB within the meaning of the EC Treaty. The Land of North Rhine-Westphalia received an appropriate remuneration which corresponded to the terms of the market. Nor did the transaction constitute state aid for the other shareholders of WestLB as the preservation of the shareholder structure after Wfa's transfer was justified by the appropriate remuneration paid by WestLB. Furthermore, the tax exemptions for Wfa do not include elements of state aid for WestLB because they did not affect the commercial business of the bank.

(111)

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

(112)

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

(113)

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

(114)

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

(115)

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

(116)

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

(117)

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

(118)

However, the transaction can also be justified on the basis of the market-economy investor principle as a measure which would also have been taken by a private owner. By virtue of being earmarked for a special purpose, the capital cannot be compared to a normal equity injection and the transfer constitutes the commercially most sensible and efficient utilisation of Wfa's capital. The Land has optimised the value of Wfa's assets by the transfer. If Wfa is compared to a private, non-profit-making entity (e.g. a foundation), the private owner of such an entity would have acted in the same way in order to put the assets, which cannot be used for any other purpose, to a commercial use.

(119)

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

(120)

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

(121)

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

(122)

Germany submitted that WestLB paid an appropriate remuneration for the transferred assets. The fact that a remuneration would have to be paid by WestLB for the capital provided had always been regarded by the Land as a prerequisite for the transfer. The level of and basis for assessing such remuneration was intensively discussed between the parties involved. Since it was not yet clear in 1991 what amount would be accepted by BAKred as original own funds, a remuneration was fixed only in principle, but not in detail, at the time of the transfer. The actual level of 0,6 % was fixed in 1993 after negotiations with the other owners of WestLB (24). Germany did not provide the Commission with any documents explaining how this figure was determined. Instead, it argued that the decisive factor from a state aid point of view was not the considerations on which the rate was based but only the result, which was said to be appropriate. The fixed remuneration was to be paid from distributable profits, i.e. before any dividends were paid. If, owing to a lack of profits, the remuneration was not paid in any one year, there was no right to recovery payments in future years (25). The figure of 0,6 % corresponds to pre-tax costs of about 1,1 % for WestLB.

(123)

The following table shows the payments made by WestLB to the Land as remuneration for the capital transferred:

(124)

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

(125)

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

(126)

The studies state that the return on an equity instrument is determined by its risk profile. The higher the risk, the higher the risk premium, i.e. the interest spread that has to be paid over secure government bonds. In analysing the risk profile, three elements are therefore particularly important: the arrangements for current interest payments, the investor's position in the event of current losses and his position in the event of liquidation or bankruptcy. The studies describe various features (26) of several equity capital instruments on the market (ordinary shares, dormant holdings, profit participation certificates, perpetual preferred shares, trust preferred securities and subordinated bonds) and compare them to Wfa's capital. According to the studies, Wfa's capital can best be compared to profit participating certificates, perpetual preferred stock and dormant holdings (27). Of the instruments mentioned above, trust preferred securities and perpetual preferred shares are not accepted in Germany. According to the studies, at the end of 1991 the following capital instruments qualifying as original own funds were available in Germany: ordinary shares, preferred shares (Vorzugsaktien) and dormant holdings (Stille Beteiligungen).

(127)

The studies stress that Wfa's assets would be available for WestLB's creditors in the event of WestLB's bankruptcy (liability function — Haftungsfunktion). At the same time, WestLB can offset losses without limitations against Wfa's special reserve (loss compensation function — Verlustausgleichsfunktion). The internal agreements and the earmarking of Wfa's assets are of no relevance in this connection. However, internally the special reserve is subordinate in its liability to the other equity of WestLB and this internal situation would be decisive for the decision of an investor.

(128)

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

(129)

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

(130)

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

(131)

The studies conclude that the risk premium for Wfa's special reserve should be below that for profit participation certificates and dormant holdings as well as below that for perpetual preferred shares. A historical margin before tax of between 1,0 % and 1,2 % is quoted for profit participation certificates, one of between 1,1 % and 1,5 % for dormant holidays and one of between 1,5 % and 2,0 % for perpetual preferred shares (28). For Wfa's special reserve a remuneration of 1,1 % is calculated for the years 1993 to 1996 (29). For 1992 a rate of 255 % is quoted (30). Synergy effects should also be taken into account. The studies conclude that the remuneration paid by WestLB was too high in 1992 and appropriate for the years 1993 to 1996.

(132)

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

(133)

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

(134)

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

(135)

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

(136)

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

(137)

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

(138)

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

(139)

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

(140)

The exemption of Wfa from property tax (Vermögenssteuer), tax on business capital (Gewerbekapitalsteuer) and corporation tax (Körperschaftssteuer) is provided for in the German tax system. Wfa and other public-law entities are exempt because they do not compete with taxable financial institutions but are used by the State to pursue certain objectives. Because of the tax savings, the State has to provide fewer funds for Wfa's activities. WestLB is fully taxed on its income (and thus also on the commercial activities underpinned by Wfa's capital) and does not receive any financial advantage from Wfa's exemptions because the amount accepted as original own funds is not increased as a result. Even if the tax exemptions were to lead to an increase in accepted capital, WestLB would not benefit as it would then have to pay an adequate remuneration on any additional amount.

(141)

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

(142)

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

(143)

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

(144)

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

(145)

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

(146)

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

(147)

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

(148)

Germany submits that the return calculations provided by BdB (and taken from an outside expert's opinion) are incorrect and supports this view by reference to a study commissioned by WestLB. According to this study, the main errors are a wrong calculation method (arithmetic average instead of compound annual growth rate) and the use of irrelevant investment periods. After adjustment for these errors, the return of 16,86 % before tax for large private banks in Germany comes down to 7,0 %. Furthermore, the five German private banks taken into consideration cannot be compared to WestLB because of their differing business emphasis. Taking banks which are comparable, the return on equity falls to 5,8 %. Furthermore, the study for BdB is said to use an unrepresentative reference period, viz. 1982-92, which includes two market rallies. Shortening the reference period would thus further lower the return figures.

(149)

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

(150)

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

(151)

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

(152)

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

(153)

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

(154)

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

(155)

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

(156)

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

(157)

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

(158)

Lastly, a premium of 0,3 % is added because no new voting rights were granted.

(159)

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

(160)

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

(161)

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

(162)

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

(163)

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

(164)

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

(165)

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

(166)

In its 1997 annual report, WestLB defines itself as a universally and internationally active commercial bank, as a central bank for the savings banks and as the bank for the Land and the municipalities. It describes itself as a European banking group in the wholesale banking sector with activities in the important financial and economic centres around the world. Its presence abroad is concentrated in Europe, where it has subsidiaries, branches and representative offices in all major countries. WestLB is present in over 35 countries worldwide.

(167)

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

(168)

These facts clearly show that WestLB offers its banking services in competition with other European banks outside Germany and, since banks from other European countries are active in Germany, inside Germany. This has been confirmed by the observations of the bankers' associations of two Member States. It is clear, therefore, that aid given to WestLB distorts competition and affects trade between Member States.

(169)

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

(170)

In deciding whether elements of state aid are involved in a financial measure taken by a public owner of an enterprise, the Commission applies the market-economy investor principle. This principle has been applied by the Commission in many cases and has been accepted and developed by the Court in several decisions (31). It allows the Commission to bear in mind the specific circumstances of each case, e.g. to take into account certain strategies of a holding company or group of companies or to distinguish between the short- and long-term interests of an investor. The market-economy investor principle will also be applied in the case at hand.

(171)

According to the principle, no state aid is involved if funds are made available on ‘terms which a private investor would find acceptable in providing funds to a comparable private undertaking when the private investor is operating under normal market economy conditions’ (32). In particular, a financial measure must be considered unacceptable to a market-economy investor if the financial position of the company is such that a normal return (in the form of dividends and capital gains) cannot be expected within a reasonable period of time (33).

(172)

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

(173)

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

(174)

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

(175)

Restructuring aid for firms may be granted only in cases where a restructuring plan restores the firm's viability, i.e. leads to a ‘normal’ rate of return that allows the aided firm to continue by its own efforts, because this ‘normal’ market rate of return is acceptable to a market-economy investor. In cases where such matters have been brought before the Court, it has never called into question the fact that the Commission required not only a break-even situation or a token return but also a full ‘normal’ market rate.

(176)

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

(177)

The adequacy of the likely return on capital depends in turn on what a market-economy investor can expect from similar investments with a similar exposure to risk. It is evident that a constantly underperforming enterprise showing no signs of recovery is not viable in the long term. New investors would decline to meet the company's demand for further capital and existing investors would eventually disinvest, even accepting a loss, if necessary, in order to reallocate their capital to more profitable investments. Thus, in a communication to the Member States on the application of the state aid rules to public undertakings, the Commission stated that, when comparing the actions of the State with those of a market-economy investor, ‘in particular when a company is not making a loss’, it would evaluate the financial situation of the company at the time an additional capital injection is proposed (34).

(178)

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

(179)

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

(180)

Furthermore, as already indicated above, a distinction must be drawn between existing and new investments because the starting points for the investment decision in question are different, but not the basic principles. In the case of an existing investment, the investor might be more willing to accept a lower (or even negative) return in the short run if he expects the situation to improve. Certainly, an investor might also increase his investment in a firm with low profitability. However, he would not do so unless he expected an improvement in the situation and a reasonable return in the long term. If, on the other hand, he expects the combination of risk and return to be poorer than in comparable firms, he will consider terminating his investment. In the case of a new investment, the investor may be less willing to accept lower profitability from the very outset (35). However, as already stated, the principles are the same in all decision-making situations: the return expected in the long run from the investment (taking into account the risk and other factors) must at least be equal to that from comparable investments. Otherwise, the company will not be able to find the necessary funds and will therefore not be viable in the long run.

(181)

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

(182)

With respect to the probable behaviour of a market-economy investor, it is of no relevance that other banks also had to raise additional capital as a consequence of the stricter rules of the Solvency Ratio Directive. The Directive does not impose any obligation on banks to raise additional capital. It merely stipulates a minimum ratio of capital to risk-adjusted assets, i.e. it establishes a legal presumption of what is necessary for a bank's viability. In other words, a market-economy investor might have urged his bank to restructure its risks in order to comply with the new solvency rules instead of increasing the bank's capital. Such step would directly reduce the bank's volume of business and hence its market presence.

(183)

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

(184)

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

(185)

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

(186)

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

(187)

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

(188)

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

(189)

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

(190)

It should be pointed out here that the complexity of the case and the lack of directly comparable transactions on the free market make this judgement a rather difficult one. Therefore, the Commission devoted a considerable amount of time to gathering information and analysing the case. Furthermore, it arranged for an outside expert to deliver an opinion on the transaction and on the remuneration that can be regarded as corresponding to market terms. Only on the basis of all the data available and after a careful examination has the Commission finally drawn its conclusions and come to the present decision.

(191)

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

(192)

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

(193)

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

(194)

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

(195)

The Commission's consultants based their assessment on the assumption that, at the time of the transfer, the value of Wfa was established by the Land and WestLB at DEM 5 900 million (EUR 3 020 million) and that a market-economy investor would therefore, in principle, seek a remuneration in respect of that figure, regardless of any later developments such as the acceptance of the capital (or only part of it) as original own funds by BAKred. The only decisive factor for the fixing of a remuneration for a capital investment is the circumstances obtaining at the time of the investment decision, and not subsequent events. However, the Commission's consultants also accept that the transaction would have taken a different course if normal commercial practice had been followed.

(196)

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

(197)

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

(198)

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

(199)

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

(200)

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

(201)

The complainant originally claimed that the transaction at issue constituted a state guarantee by the Land of North Rhine-Westphalia for WestLB's debt. But WestLB shows the assets transferred as equity capital in their accounts and BAKred accepted an amount of DEM 4 000 million (EUR 2 050 million) as original own funds within the meaning of the Own Funds Directive, of which DEM 2 500 million (EUR 1 280 million) can be used by WestLB to underpin its commercial business. Consequently, a coherent appraisal of the financial measure in the light of Article 87(1) of the EC Treaty calls for its principal classification as a capital injection and for payment of an appropriate remuneration. The very same financial measure cannot be regarded as a capital injection under banking supervisory rules and as a guarantee under the EC Treaty's state aid rules. This principal classification does not, however, rule out the possibility that the Commission might, because of its particularities, liken part of that equity which cannot be used by WestLB in the same way as ‘normal’ equity to a guarantee for the purpose of calculating an appropriate remuneration.

(202)

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

(203)

In the Commission's opinion, it is, in fact, difficult to liken Wfa's transfer to any instrument available on the market at that time because of its special nature. The transfer might resemble certain instruments in some respects, but there are also enough differences compared with each instrument to assign only a limited value to this comparison. Furthermore, the studies submitted by Germany are not really comprehensive because they leave out several relevant instruments such as non-voting shares.

(204)

It should be borne in mind that the instruments used for the comparison by Germany normally provide a bank with only a very limited part of own funds. They are additional instruments, supplementing the ‘basic equity capital’, which consists mainly of share capital and open reserves. By contrast, Wfa's capital boosted WestLB's own funds for solvency purposes from DEM 5 090 million (EUR 2 600 million) to DEM 9 090 million (EUR 4 650 million), i.e. by 80 %. Taking into account only the increase of DEM 2 500 million (EUR 1 280 million) usable by WestLB to underpin its commercial business, this still represents an increase of 50 %. Hybrid instruments were usually issued up to a maximum of 20 %. It would not have been possible to increase WestLB's capital in the same way — and on a permanent basis — by one of the instruments compared (36).

(205)

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

(206)

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

(207)

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

(208)

As to the two instruments which, as the closest benchmarks, play the central role in the comparison undertaken by Germany, namely perpetual preferred shares and profit participation certificates, a number of specific points should be stressed. Perpetual preferred shares constitute original own funds (core capital) in some countries but are still not accepted in Germany. Profit participation certificates constitute only additional own funds, whereas Wfa's capital qualifies as original own funds. The latter is therefore of much greater use to WestLB because it can be used to raise additional own funds (such as profit participation certificates) up to the same amount in order to increase the bank's own funds. Moreover, if profitable years followed loss-making ones, profit participation certificates would be replenished before Wfa's capital. In addition, Wfa's capital is available to WestLB without any time limitation, while profit participation certificates are usually issued for a period of ten years. It is also worth recalling the enormous, atypical size of the capital injection and that the ranking in the event of losses must be seen in this context. Since the share of Wfa's capital is rather large, it will be used relatively quickly when major losses occur.

(209)

For all these reasons, the Commission is of the opinion that, because of the peculiarities of Wfa's capital, the comparison with hybrid equity instruments submitted by Germany is not a suitable way to determine the appropriate remuneration to be paid for Wfa's capital (37).

(210)

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

(211)

The arguments of Germany and WestLB on the liquidity costs can, in principle, be accepted. A ‘normal’ capital injection into a bank provides it both with liquidity and with an own funds base which it requires for supervisory reasons to expand its activities. In order to use the capital in full, i.e. to expand its 100 %-risk-adjusted assets by a factor of 12,5 (i.e. 100 divided by a solvency ratio of 8) of the capital provided, the bank must refinance itself on the financial markets 11,5 times over. Put simply, the difference between 12,5 times the interest received and 11,5 times the interest paid minus other costs of the bank (e.g. administration) gives the profit on the equity (38). Since Wfa's capital does not provide WestLB with initial liquidity because the assets transferred and all the income of Wfa remain earmarked by law for housing promotion, WestLB faces additional funding costs equal to the amount of the capital if it is to raise the necessary funds on the financial markets in order to take full advantage of the business opportunities opened up by the additional capital, i.e. to expand risk-adjusted assets by 12,5 times the capital amount (or to maintain existing assets at that level) (39). Because of these extra costs, which do not arise in the case of normal equity capital, the appropriate remuneration must be reduced accordingly. A market-economy investor could not expect to be remunerated in the same way as for a cash injection.

(212)

However, in the Commission's view and contrary to the opinion of WestLB and Germany, the entire refinancing interest rate does not have to be taken into account. Refinancing costs constitute operating expenses and 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 WestLB because of the special nature of the capital transferred. Overall, the Commission accepts therefore that WestLB incurs additional ‘liquidity costs’ to the extent of ‘refinancing costs minus tax’.

(213)

There are no doubt different ways of calculating the appropriate remuneration for the amount of DEM 2 500 million made available. However, as will be shown, all the methods for calculating the remuneration for capital made available apply the same basic principles. Taking these basic principles, the Commission here carries out the calculation in two stages: first, it determines the minimum remuneration that an investor would expect for a (hypothetical) investment in WestLB's capital. It then examines whether, in view of the particularities of the transaction at issue, the market would have agreed on a premium or a discount and, if so, whether it can produce a sufficiently robust quantification of that amount.

(214)

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

(215)

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

(216)

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

appropriate minimum return on a risky investment

=

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

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

(217)

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

minimum return on capital

=

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

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

(218)

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

(219)

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

(220)

The following table summarises the findings of these studies. If the methods mentioned above for deriving the expected return on a risky investment are applied, the following minimum returns on an investment in the share capital of WestLB are obtained:

Associés en Finance (1999)

First Consulting (1999)

Schulte Mattler (1999)

BdB (1999)

Lehman Brothers (1997)

Ernst&Young (1995/1997)

10,00 %

12,54 %

12,21 % - 14,51 %

12,54 %

11,32 %

16,86 %

0

5

10

15

20

(221)

The studies and opinions submitted come to the conclusion that a minimum return for a (hypothetical) investment in the share capital of WestLB at the relevant time ranges from 10 % to 13 % (40). Only two studies arrive at a much higher figure. In the discussions between the complainant BdB, the Land of North Rhine-Westphalia and WestLB in July 2004, the parties agreed on a rate of 10,19 % as the appropriate remuneration. This figure falls within the market range just identified. Deviating from its first WestLB decision in 1999, which set a minimum of 12 %, the Commission has therefore decided to use the rate of 10,19 % per annum as the appropriate market remuneration for an investment in the share capital of WestLB at 31 December 1991. As a result, the Commission determines a rate of 10,19 % per annum (after corporation tax and before investor tax) as the appropriate minimum remuneration for the transfer of Wfa's capital.

(222)

During the proceedings, WestLB first claimed that its refinancing costs on the basis of its financial structure at the time of the transfer were 9,2 %. Subsequently, refinancing rates of 7,0 % and 7,5 % were suggested in several documents and at several meetings by WestLB and Germany (41). In the understanding, the parties agreed, on the basis of the long-term risk-free basic interest rate at 31 December 1991 determined by them, to use a rate of 7,15 %. They also agreed to apply an overall tax rate of 50 %. Accordingly, the parties arrived at a net refinancing rate of 3,57 % for the part of Wfa's capital available to underpin commercial business, resulting in a liquidity discount.

(223)

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

(224)

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

(225)

The Commission has therefore decided in this case to take as a basis the long-term, risk-free interest rate of 7,15 % at 31 December 1991 determined by the parties as the minimum gross refinancing costs. Assuming an overall tax rate of 50 % (42) at the time of the investment, it arrives at a net refinancing rate and thus at a liquidity discount of 3,75 % per annum for Wfa's capital that was available for underpinning commercial business.

(226)

In practice, when remuneration is determined, atypical circumstances which depart from a normal investment in the share capital of the company concerned generally give rise to discounts or premiums. It must therefore be examined whether the particularities, and especially the specific risk profile of the transfer of Wfa's capital, constitute grounds for adjusting the minimum remuneration of 10,19 % — determined above — which a private investor would expect for a (hypothetical) investment in the capital of WestLB and whether the Commission can produce a methodically robust quantification of that adjustment. In this connection, three aspects should be considered: first, the non-issuance of new shares in the company with the associated voting rights; second, the exceptional volume of the asset transfer; and, third, the non-marketability of the assets.

(227)

The Land did not obtain any additional voting rights through the transfer. By forgoing voting rights, an investor renounces a say in decisions taken by the bank's board. If the Land's voting rights had been increased, it would have possessed more than 70 % of those rights, moving from being a minority (with 42 % of shares) to a majority shareholder. To compensate for this acceptance of a higher risk of loss without a corresponding increase in influence over the company, a market-economy investor would demand a higher remuneration (even if the potential risk were cushioned by internal agreements with the other shareholders). This is clearly so in the case of non-voting preference shares. A higher remuneration is demanded as well as preferential ranking for forgoing voting rights. On the basis of the higher remuneration for preference shares compared with ordinary shares and in agreement with the complainant BdB, the Land of North Rhine-Westphalia and WestLB, which, after their discussions in July 2004, consider a rate of 0,3 % per annum (after tax) as appropriate remuneration, the Commission considers a premium of at least 0,3 % per annum (after corporation tax) to be appropriate.

(228)

The size of the amount transferred and its effect on WestLB from the point of view of the Solvency Directive have already been mentioned. Through the transfer of Wfa's capital, WestLB's core capital doubled without any acquisition or administration costs. In the present case, however, the large volume of Wfa's capital was viewed as an indication — albeit not sufficient on its own — that the transfer was akin to an injection of share capital. To that extent, applying a top-up (premium) in respect of the volume of Wfa's transfer would inadmissibly allow for this aspect twice over. Thus, in the present case and departing from its position as expressed in the first WestLB decision, the Commission rejects the idea of a premium for the volume of Wfa's capital.

(229)

Lastly, attention must be drawn to the non-marketability of the assets, i.e. the impossibility of withdrawing the invested capital at any time from the company. Normally, an investor can sell an equity instrument on the market to third parties, thereby terminating his investment. To be more precise, a normal transfer of capital takes place as follows: The investor brings in assets (either in cash or in kind) which are entered on the assets side of the balance sheet. As a rule, these are matched on the liabilities side by a tradable interest registered in the name of the investor and taking the form, in the case of a limited company for example, of shares. The investor can sell these shares to a third party. He cannot withdraw the assets he originally brought in as these now form part of the net worth of the company and are no longer at his disposal. But by selling the shares he can realise their economic countervalue. His assets have thereby become marketable. Because of the special circumstances surrounding the transfer of Wfa's assets, this option was not available to the Land. Nevertheless, departing from the first WestLB decision, the Commission does not see any grounds for a further top-up. Although the Land did not have the possibility of trading the assets freely and receiving the economic countervalue, it always had the possibility, at least in principle, of withdrawing Wfa's capital from WestLB by law and reinvesting in other institutions offering higher returns.

(230)

Overall, the Commission considers a premium of at least 0,3 % per annum (after tax) to be appropriate for forgoing additional voting rights (43).

(231)

In the case of shares, the remuneration depends directly on the performance of the company and is expressed mainly in the form of dividends and a share in the increased value of the company (e.g. expressed by share price increases). The Land receives a fixed remuneration the level of which should reflect these two aspects of remuneration for ‘normal’ equity injections. It could be argued that the fact that the Land receives a fixed remuneration instead of one directly linked to WestLB's performance constitutes an advantage which justifies a reduction in the rate of the remuneration. Whether such a fixed rate actually constitutes an advantage as compared with a variable, profit-linked rate depends on the company's performance in the future. If the performance deteriorates, a fixed rate benefits the investor but, if it improves, it places him at a disadvantage. However, actual developments cannot subsequently be used to assess the investment decision. It should also be borne in mind that, in the event of losses, no remuneration is paid at all and a decision on cumulative recovery payments is a matter for WestLB. The fixed nature of the rate accordingly does not benefit the investor in such a way that he would have agreed to a reduction in the remuneration. In aggregate, the Commission believes that the rate of remuneration should not be reduced for this reason.

(232)

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

(233)

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

(234)

During the Commission's preliminary investigations, negotiations took place between the complainant and WestLB with a view to finding a solution, i.e. to establishing on a common basis a remuneration regarded as being in line with the market, without recourse to the procedure laid down in Article 88(2) of the EC Treaty. These negotiations were not successful. During them, however, WestLB proposed that, in the event of its liquidation, the Land should be granted the right to receive, in addition to the existing fixed remuneration of 0,6 %, an appropriate consideration for the increase in value of WestLB due to the additional business made possible by the transfer of Wfa, i.e. the Land would be given an additional share in WestLB's open and hidden reserves. This fact suggests that the value to WestLB of the transferred capital actually exceeded the agreed remuneration. However, no such share in the break-up value was agreed. Nor would a market-economy investor accept such a hypothetical remuneration since, in the case of a perpetual company like WestLB, he would never be able to encash it; it would thus have no value.

(235)

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

(236)

As already mentioned, the equity of DEM 3 400 million (EUR 1 740 million) is also of material value to WestLB and its economic function may be compared to that of a guarantee. A market-economy investor would demand an appropriate remuneration in return for exposing himself to a risk of this sort.

(237)

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

(238)

The German authorities claim that the real reason for the transfer was to achieve potential synergies and not to increase WestLB's equity. It might be true that a discussion on the efficiency of housing promotion had already begun in the 1970s. However, despite this lengthy debate, the transfer did not take place until 1991, when WestLB's capital requirements forced its public owners to take such action. It is clear from the documents — especially the relevant material on the Transfer Law, such as the grounds of the law and the minutes of the parliamentary debates — that the actual purpose of the transfer was to provide WestLB with the equity base needed to comply with the new solvency rules. Synergy effects were seen as a positive (side-)effect but were certainly not the main driving force behind the transaction at that time.

(239)

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

(240)

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

(241)

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

(242)

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

(243)

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

(244)

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

(245)

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

(246)

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

(247)

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

(248)

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

(249)

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

(250)

Table 5: Calculation of the aid element

(251)

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

(252)

WestLB was subject to neither property tax (Vermögenssteuer) nor tax on business capital (Gewerbekapitalsteuer) on the transferred capital. Furthermore, the profit from Wfa's activities remained exempt from corporation tax (Körperschaftssteuer) after the transfer. According to Germany, these tax provisions are not intended to favour and do not favour WestLB over other taxable persons.

(253)

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

(254)

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

(255)

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

(256)

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

(257)

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

(258)

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

(259)

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

(260)

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

(261)

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

(262)

Article 86(2) of the EC Treaty, which allows exemptions from the state aid rules of the Treaty under certain conditions, is, in principle, also applicable to the financial services sector. This has been confirmed by the Commission in its report on ‘Services of general economic interest in the banking sector’ (45). However, it is clear that the transfer was effected in order to allow WestLB to comply with the new own funds requirements and with no regard to any services of general economic interest. Furthermore, Germany did not claim that the transfer of Wfa was designed to indemnify WestLB for the provision of certain services of general economic interest. Therefore, this exemption clause does not apply either in the case at hand.

(263)

Since no exemption from the principle of the ban on state aid pursuant to Article 87(1) of the EC Treaty applies, the aid in question cannot be found compatible with the Treaty.

(264)

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

(265)

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

(1)

The subject of these proceedings is the transfer of three Land trust agencies (Landestreuhandstellen (‘LTS’)) to Norddeutsche 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’).

(2)

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 organisation Wohnungsbauförderanstalt (‘WfA’) 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.

(3)

Germany replied by letters dated 16 March and 17 September 1993. The Commission requested further information by letters of 10 November and 13 December 1993, to which Germany replied by letter of 8 March 1994.

(4)

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

(5)

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 complainant, 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 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 — Girozentrale, Landesbank Schleswig-Holstein — Girozentrale, Hamburgische Landesbank — Girozentrale and Landesbank 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 (4). 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)

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

(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. 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.

(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 in Hanover, Braunschweig, Magdeburg 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.

(16)

NordLB was formed in 1970 by the union of four publicly owned credit institutions (Niedersächsische Landesbank, Braunschweigische Staatsbank (including Braunschweigische 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 ownership 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 %, Sparkassenbeteiligungsverband Sachsen-Anhalt (‘SBV’) 6,66 %, and Sparkassenbeteiligungszweckverband Mecklenburg-Vorpommern (‘SZV’) 6,66 %.

(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.

(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 [...] (*1) % in 2003.

(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 took over the administration of the promotion-related 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 construction. In particular, it promotes the construction and modernisation of owner-occupied homes and rented homes and the purchase and acquisition of owner-occupied homes.

(25)

The Land agriculture trust agency (LTS-Agrar) administers public loans and grants to promote agriculture, in particular agricultural investment and forestry measures.

(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 and is recognised as a financial intermediary under the Joint European Venture (JEV).

(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 (5) (the ‘Solvency Directive’) and Council Directive 89/299/EEC of 17 April 1989 on the own funds of credit institutions (6) (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 items which are at the credit institution's disposal without restriction and immediately in order to cover risks or losses as soon as they arise. In determining the total own funds available to a bank for supervisory purposes, the core capital is of decisive importance because additional capital, or ‘tier II’ capital, is accepted as underpinning for risk-bearing transactions only up to the amount of the available core capital.

(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 (7).

(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.