(1)

In Decision C (2009) 5260 of 30 June 2009 in Case C 17/09 (3) (hereinafter referred to as the ‘opening decision’) the Commission approved for a limited period an injection of capital and an asset relief measure by the State of Baden-Württemberg and other public entities for the Landesbank Baden-Württemberg (hereinafter referred to as ‘LBBW’ or ‘the bank’). At the same time the Commission expressed doubts in the aforementioned Decision as to whether the asset relief measure is compatible with EU State Aid rules with regard to valuation und burden sharing and initiated a formal investigation procedure.

(2)

The opening decision was published in the Official Journal of the European Union (4). The Commission called on all interested parties to submit their comments. The Commission received no comments from the parties concerned.

(3)

On questions concerning the method of asset evaluation within the framework of the asset relief measure the Commission received technical support from external experts under contract to it (Duff & Phelps, Professor Wim Schoutens) and from technical experts in the European Central Bank (ECB).

(4)

On 9 October 2009 Germany presented the Commission with a restructuring plan for LBBW, which has been supplemented on several occasions with further details. The last details were sent on 3 December 2009.

(5)

There were a number of meetings, exchanges of e-mails and telephone conferences between the Commission and Germany.

(6)

On 3 December 2009 Germany gave a number of commitments concerning the implementation of the restructuring plan.

(7)

LBBW is a German Landesbank. Shareholders of the bank are the State of Baden-Württemberg with a share of around 35,5 %, the savings banks association of Baden-Württemberg with around 40,5 %, the city of Stuttgart with nearly 19 % and the Landeskreditbank Baden-Württemberg with almost 5 %. All the shareholders are either public entities or in state ownership.

(8)

LBBW is one of the few vertically integrated Landesbanks. The focus of the activity of LBBW and its subsidiaries is dealings with German enterprises (SMEs and larger enterprises) and private customers. LBBW offers Private Banking and functions as a city savings bank in Stuttgart. Other business fields of LBBW are real estate financing and financial markets. The bank also offers services and products for savings banks.

(9)

LBBW’s balance sheet amounted to EUR 448 billion at the end of June 2009. LBBW does not have a market share of more than [> 4] (*1) % in any of the domestic markets in which it is active. Locally, i.e. in its core regions, the market shares are somewhat higher. In the business customer sector they reach [< 15] % in Baden-Württemberg, [< 10] % in Saxony and [< 5] % in Rhineland Palatinate. In the private customer sector the market shares are [< 7] % in Baden-Württemberg, [< 2] % in Saxony and [< 1] % in Rhineland Palatinate. LBBW’s market share in financial markets is insignificant both in Germany and Europe-wide.

(10)

The Bank has been granted two aid measures: an injection of EUR 5 billion of Tier 1 capital and an impaired asset relief measure through the taking over of guarantees of over EUR 12,7 billion for two portfolios of structured securities amounting to EUR 35 billion in total (5). All shareholders participated in the capital injection in accordance with their respective levels of shares and indirectly in the impaired assets relief measure.

(11)

The injection of capital was carried out through a proportional increase in the share capital, whereby priority was given to a distribution of the new share capital in proportion to the existing share capital. The Bank is paying a total compensation of 10 % for the injected capital. It plans to repay the capital in five tranches each year from 2013 onwards.

(12)

The asset relief measure was granted in the form of guarantees which protect LBBW against losses and reduce the legally prescribed equity capital requirement for structured securities. The guarantees cover two different portfolios.

The first one, referred to as the ‘ABS portfolio’, consists of structured products with a volume of EUR 17,7 billion which are held directly by the bank. LBBW takes on the first-ranking risk (First Loss) for the ABS portfolio amounting to EUR 1,9 billion and Baden-Württemberg guaranteed the secondary-ranking risk (Second Loss) up to an amount of EUR 6,7 billion. According to information provided by Germany the real economic value of the portfolio on 31 March 2009 was EUR [15-16] billion and the market value was EUR 10,137 billion (6). The capital relief effect of the guarantee was EUR [1-2] billion.

The second one, referred to as the ‘Sealink portfolio’, relates to a loan of EUR 8,75 billion to a special purpose vehicle which holds a portfolio of structured products. In the Sealink portfolio the First Loss amounts to EUR 2,75 billion. It is covered by a guarantee of the Free State of Saxony which had been negotiated in the course of the takeover of SachsenLB by LBBW (7). Baden-Württemberg took over a Second Loss of EUR 6 billion with the result that there are no further risks of losses for LBBW. According to information provided by Germany the portfolio had on 31 March 2009 a real economic value of EUR [12-13] billion and a market value of EUR 8,006 billion. The capital relief effect of the guarantee was EUR [2,5-3,5] billion.

(13)

The two portfolios together have a market value of EUR 18,143 billion; their real economic value is around EUR [27-29] billion.

(14)

The guarantee was provided for an unlimited period and can be terminated by LBBW. LBBW undertook to pay an initial fee which is based on a capital relief effect of EUR 4,4 billion, on which an interest rate of 7 % p.a. is applied. For the first year the fee amounts to EUR 308 million; in subsequent years it will sink proportionally to the amount guaranteed and after a review during the restructuring procedure.

(15)

Germany has decided to adjust the guarantee compensation as follows. LBBW will pay retrospectively EUR 336 million per year. With that the compensation originally envisaged will be increased by EUR 28 million in the first year. This compensation is based on two different rates of interest: 6,25 % on the capital relief effect and 10 % on the part of the guaranteed value which exceeds the real economic value of the two portfolios. The capital relief effect has been corrected to EUR 4,476 billion.

(16)

The recapitalisation was necessary in order to offset heavy losses in 2008 and to cover the higher capital requirement. The asset relief measure became necessary when the value adjustments for large portfolios of structured securities drove the capital requirement steeply upwards and the regulatory capital requirements could no longer be met in the second quarter of 2009.

(17)

The restructuring plan envisages substantial changes to the LBBW business model. The basis for this is a clear focussing on LBBW’s regional core business and concentration on markets and customers for which a high degree of penetration and considerable cross selling effects are expected. The capital market activities and trading for its own account will be reduced. All in all LBBW is to be converted from a capital market and customer-induced financial services group which offers a full range of services and products into a commercial bank with a clear focus on German SME business customers and private customers, which also offers a number of corporate finance and selected investment banking products for its business and savings bank customers. As regards its geographic presence, LBBW will withdraw from abroad or reduce its foreign presence and concentrate on a few core regions in Germany.

(18)

The restructuring is geared towards the following central themes:

(19)

The restructured LBBW will consist of five core business areas: Corporates I (German SME business customers), Corporates II (large customers), Retail (private customers), Savings Banks, Real Estate (real estate financing) and Financial Markets (capital markets). In addition LBBW will also in future offer business-related services, in particular transaction banking, treasury and securities settlement and certain products for savings banks. LBBW’s foreign activities and foreign presence are to be considerably reduced, and the bank will concentrate its business activity on the three regional core markets of Baden-Württemberg, Rhineland-Palatinate and Saxony, in which it is active due to earlier Landesbank mergers.

(20)

Despite the moderate growth envisaged in the current plan the restructuring will have significant effects on LBBW’s balance sheet and profit and loss account, not only with regard to its composition, but also with regard to its total size. The Bank’s balance sheet and the impaired assets (risk-weighted assets) are expected to fall by [25-30] % or [30-35] % in comparison with 2008 by 2013 through the reduction of non-strategic activities and the sale of holdings. Compared with the figures for the end of 2008 the balance sheet total will fall by a total of EUR 182 billion or around 41 % and the impaired assets by EUR [80-90] billion or [45-50] % after the complete reduction of the stated business fields. Around [35-45] % of the reduction in the balance sheet total and more than 50 % of the reduction in the impaired assets are due to the exit from the credit substitute business (which to a large extent fell within the asset relief measure). Cuts in the remaining core business fields are between 25 % and 40 %.

(21)

In detail LBBW will dismantle the credit substitute business, sell holdings, close a considerable part of its foreign subsidiaries and representation offices, abandon entire product lines of its current corporate business, close down its brokered mortgage loan business, abandon strategic trading for its own account and avoid more complex financial market activities, restrict real estate financing to a few regions and selected types of properties, and concentrate its large customer business on Germany’s neighbours (8).

(22)

The major part of LBBW’s activities lies in its core business. Only around [6-8] % of the bank’s total impaired assets are allotted to the holdings and subsidiary companies as a whole. LBBW has agreed to considerable cuts in its portfolio of holdings. The book value of all the holdings which are to be sold in the course of the restructuring is around EUR 4,5 billion (as at 31 December 2008), which corresponds to more than 50 % of the total book value of the bank’s associated and subsidiary companies.

(23)

A considerable part of the planned sales relates to the bank’s core business, particularly holdings in companies in the savings banks financial group (Sparkassen-Finanzgruppe) (9):

(24)

In the course of the restructuring LBBW will cut around 2 500 of the core bank’s current 10 000 staff (full time equivalents in each case). It is assumed that the restructuring will not only reduce administrative costs, but also stabilise the profit situation as the more volatile business sectors will be abandoned.

(25)

The objective of the restructuring is a simpler, more transparent corporate structure in which fewer resources as a whole will have to be used for the administration of LBBW. The need for risk management and financial control will diminish as LBBW will abandon entire business areas and product lines, reduce its presence abroad and sell subsidiary and associated companies.

(26)

Existing business areas have been slimmed down and the services for savings banks are to be more clearly separated from other business areas, so that the results can be recorded more transparently. The assets from the credit substitute business which is to be wound up will be transferred to an internal restructuring unit and administered separately.

(27)

Important changes to the bank’s existing corporate governance structure go together with the restructuring. Firstly, the reference to the public service in the Landesbank Baden-Württemberg Act (Gesetz über die Landesbank Baden-Württemberg) will be changed in order to underline that LBBW will conduct all business in accordance with business management criteria. This principle will also be embodied in the LBBW articles of association, business policies and internal procedures. In order to give expression to the fact that LBBW will be run like a private business despite its public owners, LBBW will be converted from a company governed by public law into a public limited company. This change in legal form will be carried out in such a way as to ensure that the conversion into a public limited company is concluded by no later than December 2013. In addition important aspects of the voluntary German Corporate Governance Code will be introduced by the end of 2010.

(28)

Secondly, the functions of bodies such as the shareholders’ meeting, Supervisory Board and Board of Managing Directors will be redefined in order to achieve a clearer distribution of responsibilities and more transparency. The powers of the shareholders’ meeting will be restricted to the tasks which are typical of an annual general meeting under company law, in particular [as regards] rights relating to information and the taking of decisions on the use of profits. More extensive powers, which would allow improper influence on management, will be rescinded. Unlike the current situation the supervisory and monitoring functions of the Board of Managing Directors will be exclusively embodied in the Supervisory Board. Its influence on management decisions will be limited to those cases in which action is necessary under German company law or the Banking Act (Gesetz über das Kreditwesen). Responsibility for day-to-day operational management will clearly rest with the Board of Managing Directors, which reduces the possibilities of improper influence by the owners or their representatives.

(29)

Further measures reduce the scope for (political) [influence] and ensure that the bank will be exclusively run in accordance with business management criteria. In accordance with the aforementioned Corporate Governance Code half of the seats on the supervisory board allocated to LBBW’s shareholders, which currently only consists of representatives of the owners and employees, will be occupied by independent experts. All the members of the supervisory board will have to be subjected to an aptitude test (a ‘fit and proper’ test) which was recently prescribed by the banking supervisory authority for potential members of supervisory boards. During the restructuring phase until the end of 2013 the chairmanship of the supervisory board will be occupied by one of the independent members. The existing Supervisory Board Committees will be converted into a Risk Committee and an Audit Committee in accordance with the best governance principles for banks. Specialist qualification demands on the members of these committees are intended to ensure that these committees can fulfil their tasks in an optimum way.

(30)

LBBW presented a profit and loss plan including estimates of the return on equity (RoE) and sensitivity analyses on the basis of a realistic and a pessimistic scenario. According to the profit and loss projections LBBW will suffer an additional loss of around EUR [2] billion in 2009, reach the breakeven point in 2010 and 2011 (with […]) and make a profit of around EUR […] billion in 2013. The return on equity will be negative in 2009, slowly increase from 2010 to 2012 and be in double figures ([10-12] %) for the first time in 2013. The core capital ratio is estimated at around […] % for 2009 and 2010 and due to the massive reduction in risky assets will gradually rise to [9-10] %, so that LBBW can repay the state aid from 2013 onwards.

(31)

The most important figures in the restructuring plan are shown in the following table:

(32)

According to the baseline scenario 2009 will continue to be a difficult year and the gross domestic product (GDP) will shrink due to the continuing financial crisis. A gradual recovery is expected from 2010 onwards, with the result that the situation in the financial markets and the economy should fully return to normal. LBBW assumes that German GDP will fall by 6,2 % in 2009 and will rise by 1 % in 2010; it then expects a gradual rise in GDP growth to 2,5 % by 2013. A peak of 9,8 % unemployment is assumed for 2010, a continuing high level for 2011 and then a fall to 8,3 % in 2013. LBBW also expects low, slightly rising inflation, which will remain well below the ECB’s inflation targets. Despite the expansionary monetary policy of the central banks and the massive expansion in budget deficits, it is assumed that inflation will prove low below potential in view of growth in real terms.

(33)

On the basis of these assumptions LBBW is expecting the following effects on its core business. The profit situation in private customer business which is mainly driven by securities will continue to prove moderate. The provisions should fall considerably and presumably not rise again so quickly as private customers are expected to switch to safer forms of investment, above all deposits. New legal requirements and high product transparency will in all probability increase the pressure on margins. On the other hand, a greater contribution to profits is expected from the corporate customer business, above all SMEs. In view of the partial withdrawal of national and international competitors LBBW also sees opportunities to expand its function as a bank for SMEs and is expecting rising demand here in 2010. LBBW also assumes that the profit situation will be improved by cross selling, in particular through the sale of hedging instruments for interest rate, currency and commodities risks.

(34)

As far as large customers are concerned, LBBW is expecting in the medium term a rise in demand for credit and also a rise in demand not only for traditional equity capital and debt capital products but also for balance sheet restructuring measures. LBBW’s financial markets business is currently profiting from one-off effects and the extremely favourable financing conditions which are resulting from the availability of large amounts of money on favourable terms from the European Central Bank. In the medium term, on the other hand, LBBW assumes that market volume will be positive again when the volatility in the financial markets and economic developments return to normal. Specifically it is expecting moderate growth in structured capital market products and increased use of the capital market.

(35)

In view of these expectations LBBW’s dependence on opportunistic business will be reduced and there will be an increase in the share of more stable sources of income. Market risks will decline and the proceeds from trading for its own account will be replaced by commission income. The present relatively high credit risk concentration has already been reduced and will be further reduced.

(36)

In a pessimistic scenario in which the impaired assets for 2011, 2012 and 2013 are estimated to be more than 10 % higher than in the baseline scenario, the capital ratios would prove considerably lower than in the realistic scenario. Nevertheless the bank would still meet the regulatory capital requirements, as the tier 1 rate would at no point fall below 7 % and the total equity capital ratio would be at least 10 % each year. The bank has carried out additional stress tests to determine the anticipated losses from the corporate loans business, as this area could be particularly affected by the collapse in world trade due to the export focus of customers in its core markets. Although this would further worsen the capital ratios, the bank would still have a sufficient capital buffer.

(37)

LBBW has a diversified financing mix. It mainly finances itself through (i) savings banks and other financial institutions, (ii) mortgage bonds and other securities and (iii) liabilities of its customers. According to the restructuring plan the bank will not get into financing difficulties. In particular financing from state guaranteed debenture bonds, which are due by 2015, will not cause a financing gap under the plan, as the underlying assets will be reduced. The Bank has a considerable pool of eligible assets which it could resort to in the event of liquidity shortages. In addition analyses that have been carried out internally for the purpose of liquidity management and stress tests have shown that the bank could overcome a further downgrading of its rating even under adverse conditions without any liquidity problems.

(38)

Germany has undertaken that LBBW will implement the restructuring plan and has passed on the following commitments (with regard to the reduction of the balance sheet, impaired assets and sales) and behavioural undertakings:

‘The Federal German Government and LBBW hereby undertake to carry out the following measures to restructure LBBW:

[…]

The Federal German Government and LBBW promise that LBBW will observe the following behavioural undertakings:

Commitments concerning corporate governance:

Other commitments:

(39)

Germany is applying for approval of the restructuring plan. Germany does not dispute that the measures are State aid. However, Germany asserts that the measures are compatible with the internal market as restructuring State aid in accordance with Article 107(3)(b) TFEU after the adjustment of the compensation for the asset relief measure and the submission of undertakings.

(40)

In the opening decision the Commission expressed doubts about the compatibility of the original measure with the Communication on the treatment of impaired assets in the Community banking sector (12) (hereinafter referred to as the ‘Impaired Assets Communication’), in particular as regards the valuation and burden sharing. However, in the opinion of the Commission, the requirements of the Impaired Assets Communication regarding the eligibility of assets, the choice of management arrangement for impaired assets, transparency and disclosure and the guarantee fee were fulfilled.

(41)

The Commission’s doubts regarding the valuation concerned the method used and the assumptions by the LBBW experts in the calculation of the real economic value of the portfolios, which did not seem cautious enough to the Commission. Above all the assumptions concerning the likelihood of losses, the recovery rates, developments in real estate prices in some markets and the correlations were not conservative enough for the Commission. In addition the ABS portfolio had not been fully shielded.

(42)

The Commission consequently expressed doubts about the burden sharing (including compensation), as any correction to the real economic value would have immediate consequences for the valuation of the guarantee fee.

(43)

Under Article 107(1) TFEU any aid granted by a Member State or through state resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings is incompatible with the internal market, in so far as it affects trade between Member States.

(44)

The Commission has already established in its opening decision that the recapitalisation of LBBW and the asset relief measure are State aid. The aid element in the capital injection amounts to EUR 5 billion. According to the Impaired Assets Communication the amount of the aid in the asset relief measure corresponds to the difference between the transfer value of the assets and the market price. The transfer value corresponds to the nominal value of the portfolio less the First Loss. Assuming a market value of EUR 18,143 billion (EUR 10,137 billion and EUR 8,006 billion) and an economic value of EUR 27,915 billion (EUR 15,635 billion and EUR 12,280 billion), a total aid amount of von EUR 9,772 billion results for the asset relief measure.

(45)

The amount of the aid for the two measures together is around EUR 14,8 billion; this corresponds to more than 9 % of LBBW’s impaired assets.

(46)

Under Article 107(3)(b) TFEU the Commission may decide that aid is compatible with the internal market if it serves to ‘remedy a serious disturbance in the economy of a Member State’. The Commission stresses that there continues to be a danger of a serious disturbance in the economy in Germany and that measures to support banks are appropriate to counter this danger. The aid should therefore be investigated under Article 107(3)(b) TFEU.

(47)

The two measures were approved for a limited period in the opening decision on the basis of Article 107(3)(b) TFEU and the detailed Commission Communications (Communication on the application of State aid rules to measures taken in relation to financial institutions in the context of the current global financial crisis (13) (‘Banking Communication’), Communication on the recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition (14) (‘Recapitalisation Communication’), Communication on the treatment of impaired assets in the Community banking sector (15) (‘Impaired Assets Communication’) and the Communication on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (16) (‘Restructuring Communication’)). However, the Commission initiated an investigation as it continued to have objections under competition law concerning the asset relief measure. For this reason the Commission has to examine at the current stage of the investigation firstly whether the objections under competition law concerning the asset relief measure still exist and secondly whether the extension of the aid approved for a limited period is compatible with the internal market as restructuring aid.

(48)

The Commission examines asset relief measures in accordance with Article 107(3)(b) TFEU and on the basis of the Impaired Assets Communication (17). According to the Impaired Assets Communication measures which relieve the beneficiary bank from (or compensate for) the need to register either a loss or a reserve for a possible loss on its impaired assets and/or free regulatory capital for other uses are asset relief measures which need to be investigated using specific criteria to check whether they are compatible with the internal market. This investigation is carried out using the following criteria: (i) eligibility of the assets, (ii) transparency and disclosure, (iii) management of the impaired assets, (iv) suitability and consistency of the valuation method, (v) appropriateness of the compensation and burden sharing and (vi) need for the assessment of the restructuring plan by the Commission.

(49)

In the opening decision the Commission established that the asset relief measure adopted for LBBW – apart from the criteria concerning the valuation method and the burden sharing including compensation – fulfils all the abovementioned criteria. However, Germany was able to essentially dispel these doubts through a number of amendment proposals.

(50)

As part of the investigation the Commission valued the portfolio with the support of internal Commission and external experts. The real economic value of the ABS portfolio is EUR [14-15] billion and is consequently below the value stated by LBBW by EUR [1-2] billion. On the other hand the real economic value of the Sealink portfolio was correct. The Commission’s doubts with regard to the valuation of the eligible assets have consequently been confirmed.

(51)

In the course of examining various asset relief measures various methods were proposed to the Commission which the banks concerned use to calculate the real economic value of a portfolio. In the case of structured credit products one possibility (the one selected by LBBW) consists of subjecting the assumptions regarding the counterparty risk, correlations und loan losses for the underlying assets to a stress test.

(52)

During the examination of the question of whether the assumptions were cautious enough, the Commission based its findings on other cases, in particular on LBBW’s Sealink portfolio and on studies by third parties. In doing this different assumptions were used depending on the asset class. In order to establish how these assumptions would affect the ABS portfolio, the Commission asked LBBW’s experts to evaluate a size-weighted random sample with 40 positions and the five largest positions once again on the basis of these assumptions.

(53)

Owing to the waterfall structure of the structured credit tranches, the use of the stress test assumptions produced very different effects. In the case of some asset classes, such as non-conforming loans in the United Kingdom, the portfolio tranches were particularly robust. Their real economic value consequently came very close to the market rate even in the case of cautious market rate assumptions, although their market value is generally below the nominal value. The situation was quite different with the tranches of some Commercial Mortgage-Backed Securities and Commercial Mortgage Obligations. With these asset classes the greatest discrepancies were not only between the two LBBW portfolios but also with regard to other cases. In the event, the evaluation of the random sample on the basis of these new, cautious assumptions produced a difference of EUR 143 million for a total random sample nominal value of EUR 1 559 million compared with the price obtained by the LBBW experts using their ‘baseline case’ model.

(54)

The Commission established the potential effects on the entire portfolio by extrapolation. In doing this it took account of a number of qualitative aspects of the random sample, in order to avoid any disproportionate strengthening of certain effects. According to the calculations the anticipated losses would be between EUR 2,9 billion and EUR 4,3 billion depending on the extrapolation method and correction factor.

(55)

Leaving aside certain portfolio-specific features which could have unjustified negative effects at portfolio level, the Commission comes to the conclusion that with the most balanced assessment the anticipated losses for the entire portfolio were EUR [3-4] billion. The real economic value is consequently estimated at EUR [14-15] billion, i.e. EUR [1-2] billion lower than in the notification.

(56)

According to the Impaired Assets Communication the banks should as far as possible themselves bear the costs associated with the impaired assets. The assets should therefore be transferred at a price which corresponds to the real economic value or lies below it. A write-down to the real economic value first has to be carried out for this or, in the case of a guarantee, a ‘First Loss’ clause must be included, according to which the first loss to be borne by the beneficiary bank corresponds to the difference between the book value and the real economic value.

(57)

In the current State aid case the asset relief measure was carried out without a previous write-down to the real economic value of the ABS portfolio. In order to ensure the requested burden sharing, however, LBBW promised to take on a First Loss which covers the initial losses from the guarantee portfolio amounting to a total of EUR 1.9 billion; in the meantime this amount has been fully written down.

(58)

As a result of the correction made by the Commission to the real economic value of the ABS portfolio, reducing it to EUR [1-2] billion lower than in the original valuation by the bank, the anticipated losses in the ABS portfolio are no longer offset in advance by a write-down or a sufficiently high first loss. For this reason, in order to ensure the compatibility of the measures with the rules on State aid under the Impaired Assets Communication, an additional write-down must be made which takes account of the fall in the real economic value or, the case of a guarantee for assets, a correction of the ‘transfer value’ (i.e. a rise in the attachment point) to the real economic value must be undertaken. Such a write-down would not be possible in this case for accounting reasons without changing the structure of the transaction, as the structured securities are protected from potential losses through the asset relief measure.

(59)

Consequently the transfer value is above the real economic value. In the event of an assumption of risk above the real economic value the criterion laid down in the Impaired Assets Communication of full ex ante burden sharing will not be fulfilled. Consequently the aid element in the asset relief measure is correspondingly larger and can only be approved if the measure is accompanied by the introduction of conditions allowing the recovery of this additional aid at a later stage (e.g. by means of a claw-back mechanism) or far-reaching restructuring (cf. paragraph 41 and section 5.2 of the Impaired Assets Communication).

(60)

With a claw-back mechanism the beneficiary bank normally repays the advantage arising from the higher assumption of risk at a later stage, i.e. it would have to repay the entire amount secured by the guarantee which exceeds the real economic value. If no full recovery (claw-back) is possible, far-reaching compensatory measures must be provided for.

(61)

In the case of a guarantee the recovery can be achieved through an appropriate compensation for the amount exceeding the real economic value. In the present case a compensation of 10 % p.a. is paid for the guarantee of EUR 1,5 billion. This compensation covers both the advantage arising from the capital relief for the guaranteed EUR billion 1,5 (current compensation rate 6,25 %) and the increase by 3,75 % (resulting in an overall amount of EUR 56,25 million p.a.) (18).

(62)

At first sight this increase may appear low. It should however be borne in mind that – as already pointed out – in the event of future losses the state guarantee only becomes effective if the first loss of EUR 1,9 billion has been fully utilised. It is consequently unlikely that the guarantee will be taken up before the State of Baden-Württemberg as guarantor of the State aid has formed substantial reserves for such payments from the fees paid by LBBW (19). As it is unclear when the potential losses determined by the Commission will occur, it may be that the fee payments will be sufficient to cover all the losses that may arise. The increase in the compensation consequently contributes to dispelling the Commission’s original doubts regarding burden sharing. In addition the scale and extent of the restructuring to be carried out by the bank and the compensating measures should sufficiently compensate for any inadequacies in the prescribed recovery. The Commission’s doubts regarding appropriate burden sharing could be dispelled on this point.

(63)

As the real economic value of the Sealink portfolio has been confirmed, no adjustments are necessary for this part of the arrangement.

(64)

In its opening decision the Commission established that the compensation paid by the beneficiary bank takes adequate account of the risk of future losses which exceeds the risk expressed in the real economic value in accordance with the Impaired Assets Communication. The compensation was calculated on the basis of an interest rate, which would have been used as a basis for a corresponding recapitalisation, in which the equity capital relief effect was used as a yardstick in accordance with the Impaired Assets Communication.

(65)

In view of the equity capital relief effect the compensation should however be reduced by 0,75 % to 6,25 % p.a. At least 50 % of regulatory equity capital must consist of tier 1 capital. According to the current legal provisions (20) the tier 2 capital must not exceed 100 % of the tier 1 capital. This means that the equity capital can consist 50 % of tier 1 capital and 50 % of tier 2 capital in order to meet the regulatory requirements. As according to the Recommendation of the European Central Bank of 20 November 2008 on recapitalisation measures a difference of 1,5 % exists between the price of tier 1 capital and tier 2 capital, a reduction of 150 basis points is appropriate (21). If according to the Recapitalisation Communication 7 % can be regarded as appropriate compensation for tier 1 capital without the supply of liquidity, the tier 2 capital should then be compensated for at a rate of 5,5 %. The average of both rates is 6,25 %.

(66)

On the basis of the above considerations LBBW has to pay a capital relief effect of EUR 4,476 billion at 6,25 % p.a., which corresponds to an amount of EUR 279,75 million p.a. Together with the recovery amount of EUR 56,24 million this produces a compensation amount of EUR 336 million p.a. which, in view of the aspects explained above, is proportionate.

(67)

The Commission has to examine the continuation of all the current rescue measures as restructuring aid. Examination of whether the restructuring aid is compatible with the internal market is carried out against the background of the financial crisis on the basis of the Commission’s Restructuring Communication. Although in previous decisions reference was made to the Community Guidelines on State aid for rescuing and restructuring firms in difficulty (22), the Commission has clarified in paragraph 49 of the Restructuring Communication that all aid which is notified to the Commission on or before 31 December 2010 will be examined as restructuring aid for banks on the basis of the Restructuring Communication rather than the Community Guidelines on State aid for rescuing and restructuring firms in difficulty.

(68)

As regards the necessity and range of a restructuring, it is not laid down in the Restructuring Communication under what conditions a bank may have to submit a restructuring plan, but reference is made to previous communications concerning this. The Commission holds the view that LBBW needs comprehensive restructuring as the aid prevented the closure of the bank by the banking supervisory authority and all in all corresponded to more than 2 % of the bank’s total impaired assets. This view is in accord with paragraph 4 of the Restructuring Communication and paragraph 55 of the Impaired Assets Communication.

(69)

Under the Restructuring Communication it must first be explained in the restructuring plan that the restructuring process which the beneficiary bank is subjected to is suitable to ensure the return to long-term viability. Secondly the amount of the aid must be limited to the minimum absolutely necessary and both the beneficiary and its shareholders should as far as possible participate in the restructuring with their own funds. Measures must be taken in order to limit distortions of competition which arise as a result of the fact that the market power of the beneficiary is artificially supported and in order to ensure the maintenance of a competitive banking sector. In addition questions relating to monitoring and procedural issues need to be clarified.

(70)

In an assessment of a restructuring plan under competition law the Commission ensures that the bank is in a position to restore its long-term viability without State aid (section 2 of the Restructuring Communication).

(71)

According to the Restructuring Communication long-term viability is ensured if the restructured bank is able to compete in the marketplace for capital on its own merits in compliance with relevant regulatory requirements. This involves the bank being able to cover all its costs und provide an appropriate return on equity, taking into account the risk profile of the bank. Long-term viability also requires that any State aid received is either redeemed over time, as anticipated at the time the aid is granted, or is remunerated according to normal market conditions, thereby ensuring that any form of additional State aid is terminated. The restoration of viability should above all be achieved through internal measures and on the basis of a credible restructuring plan. Furthermore the restructuring plan should identify the causes of the bank’s difficulties and the bank’s own weaknesses and outline how the proposed restructuring measures remedy the bank’s underlying problems. Restructuring requires a withdrawal from activities which would remain structurally loss-making in the medium term.

(72)

Firstly the restructuring initiated by LBBW on the basis of the restructuring plan submitted by Germany seems appropriate to restore LBBW’s viability. In the restructuring plan a tier 1 capital ratio of [9-11] % and a return on equity of [10-12] % are estimated for 2013. These figures – even under extreme stress conditions – would lie far above the regulatory level and would correspond to the market’s expectations of a bank with the risk profile of LBBW. According to the restructuring plan LBBW will be able to cover all its costs and start repaying the State aid in 2013. Furthermore there are no indications of any potential financing problems. LBBW’s liquidity proved to be stable during the crisis and the bank still has sufficient liquidity reserves. Future financing and financial costs have been examined.

(73)

Even with the application of the pessimistic LBBW scenario the bank would not need any further aid, the tier 1 capital ratio would not fall below 7,0 % during the restructuring and the tier 1 capital ratio would be [9-10] % in 2013, but the return on equity would only be [6-7] %. Even if the risk costs and the impaired assets were to rise further, the bank would still meet the regulatory requirements for capital resources.

(74)

LBBW’s revised business model is a decisive factor in ensuring that the restoration of viability is realistic. LBBW is to be converted into a commercial bank with a clear focus on German SMEs and private customers which makes a number of corporate finance and selected investment banking products available to some of its customers (corporate customers and savings banks. Its offering comprises good products which are used by a broad range of customers (these include bank relationships of many years). This should form a good basis for a sound commercial banking business and opportunistic transactions driven by the capital markets are in this way to be reduced.

(75)

The Commission examined the credibility of the restructuring plan on the basis of LBBW’s business results and up-to-date LBBW reports (including results in the management information system and risk management reports). In addition the Commission based its decision on risk assessments which were undertaken by the competent supervisory authority in accord with the detailed European directives and on reports by rating agencies. Planning and underlying assumptions were investigated for their compatibility with the most recent economic forecasts and with scenarios which the Commission had also referred to in other aid cases.

(76)

The restructuring plan takes account of the detailed information currently available and takes into account the fact that forecasts concerning future development can only be made to a limited extent. The assumptions concerning the further development of risks, results and capital basis appear sufficiently pessimistic. The risks arising from the large and relatively concentrated loan book – i.e. the greatest risks after the risk in connection with investment in structured securities – were limited by the asset relief measure and consequently treated appropriately. For the remaining risks arising from other securities and the loan book risks LBBW anticipates a clear rise in risk management for 2009 even compared with 2008. From 2010 onwards the risk costs will fall and a normal level will have been achieved by 2013. Nevertheless it is assumed that even under standardised conditions the LBBW’s risk costs will remain twice as high as the previous risk management and they will correspond to the risk costs of its peers.

(77)

In addition the restructuring plan does not assume a rapid recovery, but rather a considerable rise in risks and loan losses. The restructuring plan takes account of these aspects both through a higher risk management and with higher regulatory capital requirements due to risk migration and higher losses on results. This is the result of the joint calculations of the LBBW offices for risk management and lending and consequently the result of a combination of a model-based approach and the estimates of experts. While a slower recovery emerges from the models and, contrary to the estimates of the experts, a higher likelihood of losses is assumed, the experts hold the view that the losses are estimated as being too low in the models. The figures of both sides were adjusted accordingly. Furthermore both the historical comparisons and a comparison of the current plan parameters demonstrate a high degree of consistency with external economic indicators and show that the economic downturn effects have been taken into account in the plan.

(78)

It can also be seen from the restructuring plan that the risk costs for new business and loans will be considerably lower than up to now as the risks may be considerably reduced by the restructuring and the credit quality in the core business will be better. Thus, no further investments will be made in structured securities. The portfolios containing the greatest risk were the subject of asset relief measures which may be considered to be sufficient according to the Commission’s investigation results. No further losses should therefore be expected concerning these. Nevertheless LBBW expects a considerable rise in risk costs for the restructuring phase, where it is assumed that these costs will be higher than the current risk management. The expectations regarding the development of the credit risks are cautious.

(79)

While the projections for losses are conservative, the likelihood of losses – in particular for corporate business – is estimated to be lower than as assessed by the Commission. However, LBBW was able to demonstrate that the loss expectations are far above the historical data (for the last recession in Germany) and correspond to those of other banks with the same group of customers. Furthermore the bank emphasised the financial strength of these corporate customers compared to other companies in Europe and stressed the advantages due to its strong corporate relationships. In addition it demonstrated that the loss expectations for this particularly important market segment for LBBW’s overall credit risk correspond to those of its peers.

(80)

There is some uncertainty concerning the development of market risks, although investment in structured securities is no longer of importance as one of the largest risk drivers. Furthermore trading for its own account will be considerably reduced and the area of securities settlement will be directed at asset management and customer-focused business. In addition the range of traded products will be reduced and their complexity will be restricted. Appropriate account is therefore taken of market risk in the restructuring plan.

(81)

A further important aspect is developments in expenses. Thus LBBW assumes that it will be able to save 25 % in its administrative costs. Since the restructuring plan envisages a reduction in jobs of around 20 % and a slimming down of the structure, business fields and products, such projections are credible.

(82)

Despite a significant reduction in assets and business activities LBBW expects only a slight decline in income compared with previously. While the impaired assets will be reduced by around 30 %, it is assumed that 87 % of the 2009 income will be achieved. The composition of the income will change as the income from business with corporate customers will gain in importance. While it is also assumed that the bank’s financial markets business area will continue to produce profits, there will be income from fees instead of income from trading for its own account. All in all a more stable profit situation less dependent on the fluctuation of market prices is expected.

(83)

Secondly, in order to be appropriate to restore the bank’s profitability in accordance with the Restructuring Communication, the restructuring plan should identify the causes of the bank’s difficulties and the bank’s own weaknesses and outline how the proposed restructuring measures remedy the bank’s underlying problems. It is the view of the Commission that this is the case since the restructuring plan envisages the bank’s exit from the disproportionately extensive credit substitute business, and LBBW will reduce its capital market activities in both scope and complexity and it will reduce its foreign business in order to concentrate on its core competencies, which lie mainly in private customer business and in business with small and medium-sized customers in the regional markets.

(84)

Existing and potential weaknesses in the corporate governance structure must also be the subject of the restructuring plan. The Commission notes that the restructuring plan envisages fundamental changes to the legal status and corporate governance, with the result that LBBW will be less subject to improper influence by the shareholders and all in all better corporate governance will be ensured.

(85)

The measures being implemented will ensure that LBBW does not differ from its competitors either in its articles of association, business policy and internal procedures or with regard to the role and composition of its corporate bodies. There are sufficient safeguards to prevent business decisions being determined by other than economic considerations. In addition the quality of the corporate governance will be considerably improved. Moreover the roles of the various bodies (owners’ meeting, Supervisory Board and Board of Managing Directors) are more clearly and more consistently separated from each other; the Supervisory Board will gain in professionalism through the inclusion of independent experts in supervisory boards and the introduction of aptitude tests for all members.

(86)

Thus the bank and its shareholders have agreed on a corporate governance framework which fully corresponds to the requirements placed on private undertakings and envisages the implementation of the (voluntary) German Corporate Governance Code. In addition the strict application of business management principles will be introduced in the Landesbank Baden-Württemberg Act and in LBBW’s articles of association.

(87)

The current owners’ meeting is a potential source of improper influence with its wide-ranging powers and it is being converted into an owners’ or annual general meeting without scope for exerting influence. A clearer separation is envisaged between the tasks and responsibilities of the corporate management and the Supervisory Board. In accordance with the German Corporate Governance Code a third of the Supervisory Board are to be independent members. The suitability criteria introduced by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) which are intended to ensure that newly appointed members of supervisory boards have a minimum of expertise will apply to all members. During the restructuring an independent member will assume the tasks of the chairman of the Supervisory Board. The Audit Committee and the Risk Committee are in accordance with best governance principles for banks and contain even stricter suitability criteria. In order to provide some finality to these changes in corporate governance, LBBW will be converted from a public entity into a public limited company.

(88)

Moreover risk management concepts and procedures are being and have already been changed in order to further reduce the number of decisions which involve an assumption of risk but which are not taken in accordance with purely business principles. These measures will ensure as far as possible that corporate governance aspects will not endanger the future viability of the bank.

(89)

In addition there is no evidence that LBBW will continue business segments which would remain structurally in deficit in the medium term or which would expose the bank to risks which would not correspond to the quality of its risk management or its capital resources. The credit substitute business has been fully closed down, existing portfolios are being dissolved, trading on its own account is to be considerably reduced, and credit risk – in particularly the concentration risk in LBBW’s core business segments – will be subject to stricter review and is also to be considerable reduced. All in all the LBBW’s profit and risk profiles will become more transparent and simpler.

(90)

LBBW has learned its lessons from the crisis and has made a number of changes to its business strategy and its risk management which should make it less susceptible in future. These include focussing on business segments in which it has particular expertise and many years of credit relationships and reducing the concentration risk.

(91)

Considered on the whole the LBBW restructuring plan is therefore appropriate for restoring the long-term viability of the bank.

(92)

According to section 3 of the Restructuring Communication aid should be limited to the minimum necessary and an appropriate own contribution to restructuring costs should be provided. It can be seen from the restructuring plan that LBBW envisages appropriate burden sharing in accordance with the Restructuring Communication, with the result that moral hazard is avoided.

(93)

The restructuring plan does not contain any elements which could lead to the assumption that the aid exceeds the coverage of the costs necessary for the restoration of viability. The aid received is necessary to ensure that LBBW in the baseline case has sufficient capital buffers and will be able in an unfavourable scenario to meet the regulatory capital requirements. LBBW has not received more capital.

(94)

In addition it is excluded due to scarcity of resources and the ban on acquisitions promised by Germany that State resources will be used for the acquisition of company shares or new investment.

(95)

As envisaged under paragraph 24 of the Restructuring Communication, LBBW bears part of the costs of its restructuring by paying an appropriate compensation for the capital injection and the asset relief measure.

(96)

Furthermore LBBW is making a contribution towards the restructuring through far-reaching sales (including the sale of units which are important for its business model).

(97)

As the shareholders have injected capital into the bank pro rata to their respective shareholding, the burdens are at least equitably distributed among the groups of shareholders.

(98)

Due to the prohibition on appropriating reserves for the servicing of coupons for tier 1 and tier 2 instruments, the lower-ranking capital owners are also contributing to the restructuring of LBBW. According to paragraph 26 of the Restructuring Communication a bank should not use State aid to pay compensation for own resources if there are insufficient profits. Germany has undertaken that financial instruments will only be serviced in the next three years if no appropriation of reserves is necessary for this. It is consequently ensured that compensation for own resources will only be made in the event of sufficient profits and that no State aid will be used for payments to shareholders.

(99)

According to section 4 of the Restructuring Communication measures to limit distortions of competition due to State aid play an important role, as they are necessary to prevent any continuation of competitive distortions which were caused by excessive risk-taking and unsustainable business models. Such measures should be tailor-made for the specific problems of the markets in which the beneficiary bank is active after the restructuring. The type and nature of such measures are focussed on two criteria: firstly, according to the level of the aid and the conditions and circumstances under which the aid has been granted and, secondly, according to the characteristics of the market or markets in which beneficiary bank will be active.

(100)

In accordance with paragraph 31 of the Restructuring Communication the Commission assesses the level of the aid and the resultant distortions of competition by taking account of the amount of the aid both absolutely and in relation to the bank’s impaired assets. The aid in this case amounts to EUR 14,8 billion and comprises a recapitalisation of EUR 5 billion and EUR 9,8 billion of aid in the form of capital relief. The amount of the aid after completion of the measures amounts to more than 9 % of the impaired assets. The capital equivalent of the measures amounts to [40-50] % of LBBW’s own resources (situation as at 30 June 2009). As the beneficiary bank has consequently received a high level of aid, far-reaching measures are necessary to limit any distortions of competition due to State aid.

(101)

In addition, with regard to the scope and extent of the measures to limit the distortions of competition due to State aid, the scale of the beneficiary bank’s own contribution and burden sharing should be taken into account. In view of the above finding that its own contribution and burden sharing were appropriate, no additional far-reaching measures are necessary. In order to limit any distortions of competition, Germany has undertaken both to take structural measures and to comply with a number of behavioural obligations.

(102)

As part of the structural measures LBBW will reduce its balance sheet by a total of 41 % compared with the balance sheet as at 31 December 2008 through the reduction of non-strategic activities and the sale of holdings. The existing impaired assets will be reduced by [40-60] %.

(103)

It is envisaged that a large number of subsidiaries at home and abroad will be sold along with the sale of holdings in companies which are in common ownership by the public credit institutions in Germany and which are highly important for cooperation between the public credit institutions. LBBW has agreed to considerable cuts in its portfolio of investments. The sales involve, inter alia the only LBBW company which can issue […] in […], units which are part of LBBW’s core business (namely the holdings in the companies of the ‘S’ financial group) and the European LBBW subsidiaries […] and LBBW Luxembourg, which serves German core customers outside the German market. Germany has undertaken that LBBW will ensure that the value of the units to be sold will not be affected by the fact that customers or staff will be lured away from these units. The proper management of the sales will be fully monitored and checked in detail by a sufficiently qualified expert (trustee). The sales must be carried out by no later than the end of the restructuring period. Otherwise a divestiture trustee will be appointed who will be responsible for the management of the sales […].

(104)

A considerable part of these reductions results from the abandonment of the credit substitute business.

(105)

Additional measures to dispel any objections under competition law regarding the characteristics of the markets in which the beneficiary bank will be active after the restructuring (cf. paragraph 32 of the Restructuring Communication) are not necessary. This is justified by the low market presence of the restructured bank. In principle LBBW has a strong market presence only in its core region of Baden-Württemberg. Its systemic importance does not lie in its strong position as a domestic credit provider but is justified by its interconnection with other banks and institutional investors. For this reason no additional measures are necessary to ensure and restore a competitive market. However, the Commission considers it positive that LBBW also envisages sales in its core markets. The planned reduction in the core business areas should open up more business opportunities for competitors in the core regions and may be regarded as a further element in the comprehensive restructuring.

(106)

In addition to these far-reaching structural measures LBBW has promised to comply with a number of behavioural obligations. These commitments go beyond the mere obligation to dispense with aggressive marketing. Germany has undertaken that in its core markets, i.e. in the German SME and private customer business in Germany, LBBW must not offer more favourable conditions than the conditions of the most favourable of its ten most important competitors by market share for three years. LBBW should therefore not be able to offer better terms than competitors which have not received any State aid.

(107)

In addition LBBW has agreed to a ban on acquisitions under which the bank may not acquire any competing undertaking. This prevents aid-financed inorganic growth of LBBW. In addition the commitment that a double-digit return on equity will be sought and that reference interest rates which involve no distortions due to guarantor liabilities will be used for new business means that the risk and the likelihood of competition on price rather than performance with competing banks which have not received any State aid will be reduced.

(108)

Moreover greater transparency will be ensured through a new corporate structure in which the business segment to be wound up is clearly separated from the core business areas and through a redifferentiation and separation of the various business segments. Through a considerable reduction in capital market business there will be fewer opportunities to conceal any unsatisfactory operating results in the credit business, with the result that market discipline will improve and potential distortions of competition will be reduced.

(109)

In view of this bundle of measures the Commission has reached the conclusion that sufficient precautions have been taken to limit any distortions of competition despite the high level of aid for LBBW.

(110)

In accordance with section 5 of the Restructuring Communication the Commission must be regularly presented with detailed reports so that it can investigate whether the restructuring plan is being properly implemented. The first report should be presented to the Commission no later than six months after approval of the restructuring plan. In order to examine whether the restructuring plan is being properly implemented, Germany will appoint a trustee responsible for monitoring and submitting a progress report each year. The first report must be presented in May 2010. The Commission therefore comes to the conclusion that proper monitoring of the implementation of the restructuring plan is ensured.

(111)

It is the practice of the Commission to allow a Member State to adjust the commitments in the event of extraordinary circumstances (23). If it is objectively justified, the Commission will therefore agree on the request of Germany to extensions in the implementation deadlines or the annulment and/or replacement of individual measures or all the measures it has committed to.

(112)

In view of the modifications made by Germany on 3 December 2009 the Commission comes to the conclusion that the asset relief measure is in accord with the Impaired Assets Communication and consequently in accordance with Article 107(3)(b) TFEU is compatible with the internal market. The objections under competition law set out by the Commission in the opening decision of 30 June 2009 have been dispelled with this modified measure.

(113)

Secondly the Commission comes to the conclusion that the restructuring measures are appropriate to restore the long-term viability of LBBW, that they ensure sufficient burden sharing and that they are suitable and appropriate to make up for the distortions of competition due to the aid measures in question. The submitted restructuring plan for LBBW fulfils the criteria of the Restructuring Communication, with the result that the restructuring measures may be deemed to be compatible with the internal market in accordance with Article 107(3)(b) TFEU. The capital injection and the guarantees, as envisaged in the restructuring plan, can therefore be approved,

(1)

By Decision of 18 December 2008 (2) (hereinafter ‘the recapitalisation Decision’), the Commission concluded that the EUR 3,5 billion recapitalisation of KBC provided by the Belgian Federal government (3) (hereinafter ‘the first recapitalisation’) was compatible with the common market as rescue aid on the basis of Article 87(3)(b) of the Treaty for a period of six months. The Commission in its Decision also required the submission of a plan by the Belgian authorities within six months.

(2)

On 22 January 2009, the Flemish government and KBC announced a further strengthening of KBC’s capital base through a EUR 2 billion recapitalisation by the Flemish government. The Flemish government (4) furthermore committed to provide an additional stand-by facility of EUR 1,5 billion (hereinafter together called ‘the second recapitalisation’).

(3)

On 14 May 2009, the Belgian Federal government (5) and KBC announced that they reached an agreement concerning an asset relief measure (hereinafter ‘the State Protection measure’) to cover KBC’s exposure to Collateralised Debt Obligations (hereinafter ‘CDOs’). The Commission received information on the second recapitalisation and the State Protection measure on 18 May, 8 June and 12 June 2009.

(4)

The Belgian authorities submitted a restructuring plan for KBC on 18 June 2009 with regard to the first recapitalisation.

(5)

The Belgian authorities notified the second recapitalisation and the State Protection measure on 19 June 2009.

(6)

On 30 June 2009, the Commission approved the second recapitalisation for a period of six months, subject to the submission of a restructuring plan, and temporarily approved the State Protection measure. At the same time, it opened the procedure under Article 88(2) of the Treaty with regard to the valuation and other aspects of the State Protection measure (hereinafter ‘the opening Decision’) (6).

(7)

The opening Decision was published in the Official Journal of the European Union (7) and interested parties were requested to submit their comments on the aid. In the opening Decision, the Commission required the Belgian authorities to submit an amended restructuring plan that would also take into account the second recapitalisation and the State Protection measure by 30 September 2009. The Commission received no comments from interested parties.

(8)

As regards the State Protection measure, the Belgian authorities submitted additional information on 3 July, 21 August, 2, 4, 22, 25 and 30 September and 13, 16 and 20 October 2009.

(9)

The restructuring plan was discussed between the Belgian authorities and the Commission services in a series of meetings on 23 July, 6, 18 and 27 August, 9, 10, 14, 15 and 23 September 2009.

(10)

The Belgian authorities submitted information concerning the restructuring plan on 2, 4, 10, 11, 16, 17, 22, 24, 25, 28 and 30 September, 1, 16, 19 and 21 October and 3, 4 and 6 November 2009.

(11)

On 4 November 2009, the Belgian authorities informed the Commission that for reasons of urgency they exceptionally accept that this Decision is adopted in the English language.

(12)

The KBC Group NV (hereinafter ‘KBC’) is the holding company of KBC Bank NV, KBC Verzekeringen NV and KBL European Private Bankers (hereinafter ‘KBL EPB’). KBC is an integrated bancassurance group, catering mainly for retail customers, small- and medium-sized enterprises (hereinafter ‘SMEs’) and private banking clientele. KBC is one of the main financial institutions in Belgium. Besides its activities in Belgium, Central and Eastern Europe, KBC is present in Russia, Romania, Serbia, several Western European countries including Ireland and to a lesser extent in the United States of America and Southeast Asia.

(13)

For 2008, total assets on the balance sheet of KBC amounted to EUR 355,6 billion and EUR 178,3 billion in risk-weighted assets (hereinafter ‘RWA’) terms (8). It recorded a loss of EUR 2,5 billion in 2008. The market value of KBC has fallen significantly, from EUR 23 billion on 1 August 2008 to EUR 11,8 billion on 23 October 2009. KBC employs 56 716 people worldwide, 19 196 of whom are in Belgium and 31 947 of whom are in Central and Eastern Europe and Russia. KBC has 8,2 million customers in Central and Eastern Europe and Russia (2007 estimates). More detailed information on KBC is provided in section 2.1 of the opening Decision.

(14)

Following 2008 third quarter losses of EUR 906 million, resulting mainly from the bank’s exposure to its CDOs, Icelandic banks, Lehman Brothers and Washington Mutual, KBC needed to strengthen its capital base. This lead to the first recapitalisation of EUR 3.5 billion by the Belgian authorities in December 2008, described in more detail in section 3 of the first recapitalisation Decision of 18 December 2008 (9).

(15)

On 15 January 2009, Moody’s rating agency announced that it had revised certain key assumptions in its rating of corporate synthetic CDOs. As a result, it decided to downgrade several categories of CDOs, although it did not specify which CDOs were affected. Following that announcement, KBC’s share price came under severe pressure. Consequently, KBC decided to fully write-down all non-super senior CDO notes (10) in its portfolio originated by KBC Financial Products, a full subsidiary of KBC (hereinafter ‘KBC FP’) and to strengthen its capital base by means of a second recapitalisation measure subscribed entirely by the Belgian authorities. Section 2.2 of the opening Decision (11) describes the circumstances which led to the recapitalisation by the Belgian authorities and section 2.3.1 of that Decision describes the details of the agreement in more detail.

(16)

The restructuring of the monoline insurer Municipal Bond Insurance Association (hereinafter ‘MBIA’), the reinsurer of a significant part of KBC’s CDO portfolio (EUR 14,4 billion), in March 2009, increased KBC’s counterparty risk and exposure to MBIA. Furthermore, the increased volatility of credit spreads, which had a direct negative impact on the mark-to-market valuation of the CDOs, led to negative value adjustments of EUR 3,8 billion in KBC’s accounts for the first quarter of 2009. In order to avoid any further negative impact of the CDO portfolio on KBC’s profit and loss account in the future, KBC reached an agreement with the Belgian authorities on 14 May 2009 on a State Protection measure for its super-senior CDO portfolio. Section 2.2 of the opening Decision (12) describes the circumstances which led to the creation of the State Protection measure by the Belgian authorities and section 2.3.2 of that Decision describes the details of the agreement between the Belgian authorities and KBC.

(17)

KBC has benefited from three aid measures from the Belgian authorities; two recapitalisations and the State Protection measure.

(18)

The first recapitalisation took the form of an injection of EUR 3,5 billion in total of core Tier-1 capital through Yield Enhanced securities issued by KBC and fully subscribed by the Belgian authorities. The issue price is EUR 29,50 per security.

(19)

Those perpetual securities will produce a coupon payable each year equal to the higher of:

(20)

The coupon will only be paid if a dividend is paid on the ordinary shares, provided that KBC’s capital adequacy position is and remains satisfactory both before and after the payment in the opinion of the Belgian Banking, Finance and Insurance Commission (hereinafter ‘CBFA’) (13). The securities are deeply subordinated, ranking pari passu with the ordinary shares.

(21)

There are two redemption scenarios, both of which are at the initiative of KBC. In the first scenario, KBC has the right to redeem all or some of the issued securities at a price of EUR 44,25 per security (being 150 % of the issue price), plus payment of any accrued interest, any time after the issue date. In the second scenario, at any time after 3 years, KBC can require the Belgian authorities to convert its stake into ordinary shares on a one-for-one basis. If KBC triggers that conversion option, the Belgian authorities have the choice to opt for the alternative redemption of the securities plus payment of accrued interest. More information on the first recapitalisation is contained in section 3 of the recapitalisation Decision.

(22)

The second recapitalisation took the form of a capital injection of core Tier-1 capital by the Belgian authorities in the form of securities. The terms of the agreement are practically identical to the first recapitalisation except that the securities are not convertible into ordinary shares, and can only be redeemed at 150 % of the issue price (see section 2.3.1 of the opening Decision).

(23)

The Belgian authorities have granted protection against realised credit losses on KBC’s CDO portfolio for a period corresponding to the maturity of each CDO (14). The total portfolio has a nominal value of EUR […] (*1) billion. The State Protection measure only covers the super-senior tranche of 15 specific CDOs, which total EUR 20 billion (15). That exposure consists of EUR 14,4 billion of super-senior and class A notes hedged with (MBIA), and EUR 5,5 billion of super-senior, super-mezzanine and class A notes retained by KBC (16).

(24)

The State protection does not cover the equity, junior and majority of the mezzanine tranches of the CDOs. The tranches outside the scope of the State Protection measure amount to EUR 3,9 billion. Losses in those tranches, which KBC will have to bear in full, need to be realised before the more senior guaranteed tranches are affected and the State Protection measure is triggered.

(25)

In addition, KBC has already provisioned for significant mark-to-market losses. In its 2009 first quarter accounts, which were published at the same time as the State Protection measure, KBC had written-down the value of the CDOs covered by the State Protection measure from EUR 23,9 billion to EUR 14,7 billion (17). KBC came to that result by writing-down almost all the equity, junior and mezzanine notes of the CDOs to zero as well as carrying out some value adjustments of the super-senior notes in the CDO portfolio. In total, those write-downs amounted to approximately EUR […].

(26)

The State Protection measure on the EUR 20 billion super-senior notes is structured in three tranches (see Chart 1 in recital 31 for the structure of the measure). The first tranche is constituted by a first loss amounting to EUR 3,2 billion which is entirely borne by KBC. That loss does not include losses on the equity, junior and mezzanine tranches mentioned in recital 24. If those losses were included, the first loss would be approximately EUR 7,1 billion.

(27)

The second tranche of the transaction starts at EUR 16,8 billion and deals with the next EUR 2 billion of losses. In case of losses within this range (hereinafter ‘Equity Range’), the Belgian authorities undertake to provide capital to KBC in the form of new KBC shares at market value (18) or hybrid securities. The capital provided by the Belgian authorities will cover up to 90 % of the losses in the Equity Range (EUR 1,8 billion). In other words, the Belgian authorities have committed to providing a standby equity facility to KBC that can be triggered by specific losses on KBC’s CDO portfolio. The triggering events are defined separately for each CDO, that is, the equity injection option applies on transaction basis (19).

(28)

The attachment point (that is, the starting point) of EUR 16,8 billion is based on parameters which would enable KBC Bank to maintain a core Tier-1 ratio above 8 % and KBC Insurance a solvency ratio above 150 %. Therefore, the parameters were initially not based on a valuation of the portfolio.

(29)

The Equity Range is subject to several conditions. Firstly, KBC maintains the option to not call upon the equity injection and therefore to opt out from the equity issuance to the Belgian authorities. Secondly, if KBC calls upon the Belgian authorities for capital to cover its losses in the Equity Range and the Belgian authorities as a result acquire more than 30 % voting rights, which could require them to launch a mandatory takeover bid, the Belgian authorities will have the option to subscribe to hybrid capital instead. That hybrid capital would be remunerated in approximately the same manner as the securities already issued to the Belgian authorities and would be convertible into ordinary shares, at the option of the Belgian authorities, at the market price at the time of their issue (20). Thirdly, in the event that the Belgian authorities decide to sell their shares to a third party, KBC has the right of first refusal in relation to that sale and can purchase those shares at market price.

(30)

The third tranche starts at EUR 14,8 billion (hereinafter ‘Cash Range’). The Cash Range is effectively a guarantee by the Belgian authorities to compensate KBC in cash for part of the losses occurring in that tranche. Accordingly, any losses on the CDO portfolio exceeding EUR 9,1 billion (EUR 3,9 billion losses in the equity, junior and mezzanine tranches, EUR 3,2 billion first loss and EUR 2 billion Equity Range in the super-senior tranche) will be split between the Belgian authorities and KBC. The Belgian authorities will in that case assume 90 % (EUR 13,3 billion) of the losses and KBC will assume 10 % (EUR 1,5 billion).

(31)

As with the equity injection option, the guarantee will apply on a transaction basis. As there are covered instruments relating to 15 CDOs (each a single transaction), there are thus effectively 15 guarantees (21). As a result, each of the 15 synthetic CDOs has a different attachment point and therefore a different expected loss. Consequently, the CDOs need to be assessed individually and the guarantee provided will be individual for each CDO (that is, there will not be a single guarantee on the aggregated portfolio). That specific structure was necessary to achieve a perfect match between the mark-to-market value of the guaranteed portfolio and the mark-to-market value of the guarantee with a view to removing profit and loss volatility caused by the fluctuation in value of the CDOs, the ultimate aim of the measure.

Chart 1

Structure of the State Protection Measure

(32)

As regards the Equity Range, KBC pays for the right to an equity injection (hereinafter ‘underwriting fee’). The underwriting fee is set at 650 basis points (hereinafter ‘bps’) per annum. Therefore, as the Equity Range amounts to EUR 1,8 billion, the fee will cost KBC approximately EUR 120 million for each year that it is not exercised, or EUR 718 million in total.

(33)

As regards the Cash Range, the aggregate cost of the cash guarantee will amount to approximately EUR 1,33 billion, to be paid in 12 semi-annual instalments (hereinafter ‘guarantee fee’). That fee will be equal to the expected loss on the third tranche (22), in the event that the outcome of portfolio corresponds to the average between the base scenario and the stress scenario (23) and a MBIA Credit Valuation Adjustment of 67,5 %.

(34)

In total, KBC shall pay a fee of approximately EUR 2,04 billion to the Belgian authorities, resulting from the underwriting fee (EUR 718 million (24) and the cash guarantee (EUR 1,33 billion (25). Both fees are payable in twelve equal semi-annual instalments, beginning in December 2009 and ending in June 2015.

(35)

On 18 June 2009, a restructuring plan for KBC was submitted by the Belgian authorities as a follow-up to the first recapitalisation which was approved by the Commission on 18 December 2008 for a period of six months. The plan contained a preliminary analysis of KBC’s business, KBC’s future strategy, measures to restore viability and repayment of the State measures.

(36)

The restructuring plan, however, did not meet the criteria set out in the Restructuring Communication (26) as it did not take into account the second recapitalisation and the State Protection measure. Furthermore, the plan did not provide a detailed business plan and did not include measures limiting the distortion of competition.

(37)

On 30 June 2009, the Commission approved the second recapitalisation for a period of six months and temporarily approved the State Protection measure. At the same time, the Commission gave the Belgian authorities three months (until 30 September 2009) to develop a substantiated restructuring plan, which would take into account all State measures in favour of KBC.

(38)

The Belgian authorities submitted the final restructuring plan on the due date. The plan addresses the substantive issues of viability, burden-sharing and limiting distortion of competition. As KBC is organised into 5 different business units, Belgium (Retail), Central and Eastern Europe and Russia (hereinafter ‘CEE-R’), Merchant Banking, Europe Private Banking and Shared Services, the restructuring plan is designed along these lines.

(39)

According to the restructuring plan, KBC will become a smaller, more focused group, withdrawing from risky activities and countries where it has a limited market presence. KBC will only retain activities that deliver sustainable results on a stand-alone basis. It will also retain its bancassurance model. Within the bancassurance model, KBC will focus on retail, private, SME and mid-cap customers and will primarily concentrate on six countries (27). KBC will continue to focus on CEE-R. It also will reduce its overall risk profile, volatility and leverage.

(40)

The restructuring plan submitted by the Belgian authorities provides that KBC’s balance sheet will decrease on a pro forma (28) basis by 20 % in RWA terms and by 17 % on a total asset basis. Viability measures, which are the rundown of the KBC FP portfolio, amount to […] % of the total balance sheet while divestments amount to […] % of the total balance sheet.

(41)

The restructuring plan provides that KBC will divest several entities. In its business planning of these divestments, KBC has assumed that the sale prices […]. All sales are expected to happen within […].

(42)

The Belgian authorities have submitted a base and a stress scenario with the aim of demonstrating KBC’s ability to achieve long-term viability.

(43)

In the base case, it is assumed that GDP will contract in its main markets in the period 2009-2010 followed by a relatively quick recovery in 2011. Equity prices are expected to recover in 2009 or 2010, depending on local market conditions.

(44)

[…]

(45)

KBC expects to meet its internal capital targets in the base case throughout the projection period (2009 to 2013), with Tier 1 at 8,8 % in 2009 and above 10 % thereafter. The composition of KBC regulatory capital will increasingly be dominated by own funds as a result of the proceeds of the divestments which will improve the quality of KBC regulatory capital. In a base case, KBC will first generate surplus capital (when actual capital exceeds internal capital targets of a Tier 1 ratio of 10 %) in 2011. It will therefore start to repay the principal part of the State capital from 2012 onwards.

(46)

The Belgian authorities have also submitted a stress scenario. Similar to the base case, GDP will contract in the period 2009-2010, rising thereafter. However, the subsequent economic recovery will be very weak. For example, this scenario predicts that Belgian real GDP will suffer a cumulative fall of […] % between 2008 and 2011, and will not have regained its 2008 level by the end of 2013.

(47)

[…]

(48)

In the stress scenario, KBC expects to be able to meet its internal capital targets in the stress case throughout the projection period. Its Tier 1 ratio will be […] % in 2009 and will remain above […] % from 2010 onwards. This reasonably benign evolution of capital ratios is to due to the fact that the balance sheet of KBC is expected to contract significantly in the stress scenario, since economic activity and hence demand for loans will be much reduced. It will start to generate limited amounts of surplus capital from […], largely due to a sharp fall in RWA rather than profit growth, […].

(49)

In the restructuring plan, the Belgian authorities have also described KBC’s liquidity position. As of end 2008, KBC had a loan to deposit ratio of 88 %. In the crisis to date, it has not suffered from liquidity problems, and has not had to resort to any State funding guarantee scheme. It has a relatively limited reliance on funding from capital markets. In terms of its funding structure, 64 % of its debt instruments were of duration of longer than 1 year. That funding structure is projected to remain fairly stable over the next few years, with a moderate fall in reliance on wholesale funding. The divestment of some of the entities […] will furthermore strengthen its liquidity position.

(50)

KBC is one of the top 3 banks in Belgium, and would usually be second or third in terms of its market share of most banking activities. It holds […] % of deposits, generates […] % of loans and accounts for […] % of investment fund business, […] % of life and […] % of non-life insurance.

(51)

The Belgian authorities propose that KBC would retain the majority of its activities in Belgium and remain an integrated bancassurance provider. According to the Belgian authorities, these activities are well-integrated under the KBC brand and form part of its core business model.

(52)

However, the restructuring plan provides that KBC will sell Centea (agent based banking) and Fidea (agent based insurance). Centea represents between […] % and […] % of the Belgian market in most product segments while Fidea represents around 2 % of the Belgian insurance market. These sales will reduce the RWA of the Belgian banking unit by 16 % (EUR 3,8 billion).

(53)

According to the restructuring plan, KBC will retain its presence in 5 (out of 9) countries where it is already well-established. Those countries are, in order of market share in traditional banking (lending and deposits); Czech Republic (22 %), Slovakia (10 %), Hungary (9 %), Poland (4 %) and Bulgaria (3 %). KBC also has insurance operations in each of these countries, in line with the bancassurance model.

(54)

KBC will cease its activities in Serbia (market share of KBC 1 %), Russia (1 %), Romania ([…] %, only insurance and leasing activities) and Slovenia ([…] % – KBC has minority stake in the business concerned). KBC will sell its operations in other countries where its market share is relatively small or its operations are not in line with the bancassurance model. It will also sell a Polish consumer finance subsidiary (Zagiel), which was not fully integrated in its Polish operations. Those sales will take place over […], except the Russian activity which is not foreseen until […]. The RWA of the CEE-R banking unit will decrease by 11 % (EUR 4,4 billion).

(55)

Furthermore, KBC intends to list 40 % of its banks in the Czech Republic (ČSOB) and Hungary (K & H), which are currently 100 % -owned subsidiaries of KBC. It will list them on the local stock exchanges.

(56)

As regards merchant banking, the restructuring plan provides that KBC will dispose or run-off significant parts of its Merchant Banking Business Unit. As a result, RWA will decrease by […] % (EUR […] billion) in that business unit. KBC FP, the entity that generated all the CDOs, will be run-off over time. KBC will sell its activities in the United Kingdom, […], as well as the Antwerp Diamond Bank, its […], […], […], […] and KBC Private Equity.

(57)

KBC will retain the activities which are necessary to service its core SME and corporate clients, mainly Belgian. These are activities such as fundraising and currency transactions. KBC will retain its corporate banking business, foreign branches that are necessary to service local corporate customers with activities abroad, KBC Securities, Market and Assurisk (reinsurance).

(58)

In accordance with the restructuring plan, KBC will sell all the businesses in its European Private Banking unit. KBC intends to sell these activities in […]. This will reduce RWA by EUR 5,7 billion.

(59)

Given the nature of this business unit, the restructuring plan provides that KBC will maintain most activities. KBC will keep activities such as asset management, trade finance, leasing and consumer finance. KBC will divest several activities, such as […], in amongst others […]. As a result of the divestments, RWA will decrease by approximately EUR […] million.

(60)

In order to both repay the State and maintain 10 % Tier-1 capital, the restructuring plan contains the following financial restructuring measures:

Total capital raised as a result of the above measures is envisaged to be around EUR […] billion, mainly achieved by.

(61)

As regards the repayment of the Belgian authorities, the restructuring plan provides that, KBC, in a base case, will start to pay coupons from 2011 onwards, meaning that the Belgian authorities would receive EUR 600 million. The reimbursement of the principal amount of the recapitalisations will start once KBC has reinforced its capital position through the divestments and the financial restructuring (from 2012 onwards). As the repayment of the nominal amount of the recapitalisation progresses, the remuneration of the Belgian authorities through the coupon payments declines. KBC plans to start the repayment in 2012 (EUR […] billion) and estimates that the capital injections will be completely paid back […] in the base case.

(62)

The Belgian authorities commit, within the limits of their respective competences, to ensure KBC’s compliance with the commitments listed in recitals 63 to 77 inclusive.

(63)

With regard to the duration of these behavioural commitments, the Belgian authorities commit that, without prejudice to the possibility for the Commission to grant an exemption, notably on the basis of a sufficiently reasoned request from the Belgian authorities, the behavioural commitments listed in recitals 63 to 77 inclusive apply for a duration of […] years from the date of the Commission’s decision or, until the nominal amounts subscribed to by the Belgian authorities, on 19 December 2008 and on 20 July 2009 respectively, have been redeemed, whichever is earlier (29).

(64)

The Belgian authorities commit that KBC shall endeavour to maintain its lending policy to the real economy in countries where it has retail operations. The credit provided by KBC will be on commercial terms.

(65)

They further commit that KBC will maintain its solvency ratio of core Tier-1 at minimal […] % and its basic own funds at […] % (30).

(66)

With regard to a ban on acquisitions, the Belgian authorities commit that KBC will refrain from acquiring control, as defined by Council Regulation (EC) No 139/2004 of 20 January 2004 on the control of concentrations between undertakings (the EC Merger Regulation) (31), of financial institutions. KBC will moreover refrain from acquiring control of businesses other than financial institutions if such an acquisition would slow down the repayment of the amount of EUR 7 billion of core Tier-1 Yield Enhanced securities to the Belgian authorities as planned in the restructuring plan that was notified to the Commission on 30 September 2009 and approved by this Decision. Notwithstanding that prohibition, KBC may acquire businesses if it obtains the Commission’s approval, in particular if it is considered essential to safeguard financial stability or competition in the relevant markets.

(67)

The Belgian authorities commit that KBC will adhere to the following price leadership ban:

(68)

The Belgian authorities also commit that KBC will refrain from mass marketing invoking the measures as an advantage in competitive terms.

(69)

With regard to the limitation of KBC executive remuneration, the Belgian authorities commit that:

(70)

The Belgian authorities commit that KBC will endeavour to ensure, for the benefit of the Belgian authorities, an overall return on the securities subscribed by them of minimum 10 % p.a.

(71)

The Belgian authorities commit to re-notify the first recapitalisation under Article 88(3) of the Treaty if either of the following situations arises which make it less likely that the overall return in excess of 10 % p.a. is achieved:

(72)

In the same vein, the Belgian authorities commit to re-notify the second recapitalisation under Article 88(3) of the Treaty if the following situation arises which makes it less likely that the overall return in excess of 10 % p.a. is achieved:

(73)

Unless in either of the scenarios described in recitals 71 and 72 it can be shown that the non-payment of dividends is caused by normal market events or that despite the non-payment of dividends, the overall return will nevertheless be in excess of 10 % per annum, the Commission, without calling into question the capital injection, which has been declared compatible with the common market, can in the context of the renotification, in particular require additional behavioural constraints.

(74)

As regards the remuneration of the alternative securities under the State Protection measure, the Belgian authorities commit that the coupon that will be payable on the alternative class of core capital securities to be issued by KBC if the Belgian authorities were to acquire more than 30 % voting rights under the Equity Range of the State Protection measure, shall be equal to […].

(75)

The Belgian authorities also commit that KBC or any of its subsidiaries shall not engage in the origination of Collateralized Debt Obligations (‘CDOs’) (32). It is understood that securitisation transactions which are not caught by this definition of CDOs fall outside the scope of this commitment. This is for instance the case for securitisation transactions for purposes of management of regulatory capital or credit risk or to raise liquidity.

(76)

With regard to coupon payments and call options on hybrid capital, unless the Commission otherwise agrees to an exemption, the Belgian authorities commit that:

(77)

Finally, the Belgian authorities have committed that KBC will organise the management rights of the Belgian authorities in respect of the guaranteed portfolio under the State Protection measure, in such a way that the interests of the Belgian authorities as the guarantor will be duly guaranteed while preserving a suitable level of flexibility for KBC to react swiftly to changing market circumstances and to make the relevant adjustments and choices as appropriate. The legal documentation of the guaranteed portfolio provides for safeguards to protect third party investors, super senior counterparties and therefore, by extension, the Belgian authorities against possible conflicts of interest in the management of the guaranteed portfolio. In addition to the safeguards under the original legal documentation, the agreement with the Belgian authorities governing the State Protection measure will in particular provide for the right of the Belgian authorities to monitor the management of the guaranteed portfolio. Where appropriate, the Belgian authorities will be granted consent rights to further protect its interests.

(78)

The Belgian authorities have furthermore committed, within the limits of their respective competences, to use their best endeavours to ensure KBC’s compliance with the commitments listed from recitals 79 to 97 inclusive.

(79)

KBC will take the necessary steps for the divestment of the entities or assets (hereinafter ‘Divestment Business(es)’) as listed in recital 80 to be implemented by the time mentioned. Such a divestment shall be deemed implemented when a binding agreement has been entered into by KBC to sell […] in the entity or asset concerned. A legally binding agreement is an agreement which cannot be rescinded unilaterally by KBC and intends to create a legal relationship on which each party can rely and which, in case of termination of the agreement by KBC, would lead to a liability of KBC to the other party. That legally binding agreement may still be subject to a number of customary conditions precedent such as approval by the relevant supervisory authorities.

(80)

As regards the divestment businesses, the Belgian authorities commit that KBC will divest the following entities by […]:

(i)

(ii)

(iii)

(iv)

(v)

(vi)

(vii)

(viii)

(81)

With regard to preserving the value of the divestment businesses, the Belgian authorities commit that KBC will ensure that:

(82)

The Belgian authorities commit that KBC shall exercise its best efforts to support the buyers of the Divestment Businesses in migrating to appropriate infrastructure for the ongoing operation of the Divestment Businesses. […].

(83)

From the date of this Decision until implementation of the divestment, the Belgian authorities commit that KBC shall preserve the economic viability, marketability and competitiveness of the Divestment Businesses in accordance with good business practice and shall minimise as far as possible any risk of loss of their competitive potential. KBC shall carry on the Divestment Businesses as a going concern in the ordinary and usual course as carried on before the date of this Decision.

(84)

The Belgian authorities commit that no acts which might have a significant adverse impact on the Divestment Businesses shall be carried out by KBC. […].

(85)

As regards the prospective buyer(s) of Centea and Fidea, the Belgian authorities have provided the commitment that KBC shall ensure that:

(86)

Furthermore, the Belgian authorities commit that KBC shall make the necessary arrangements to ensure clear identification of the Centea and Fidea businesses and start to prepare their separation from businesses that are integrated in KBC into distinct and separately saleable entities immediately after the Commission’s decision. Without prejudice to the value preservation commitments as set out in recitals 81 to 83 Centea and Fidea will be managed as distinct and saleable entities from the date of the Commission’s Decision. To ensure that all management decisions between the date of this Decision and the implementation of the divestment are in the best interests of Centea and Fidea with a view to ensuring their continued economic viability, marketability and competitiveness, KBC shall appoint a hold separate manager (34) for each of these businesses and shall ensure that the hold separate manager operates independently. That hold separate manager can be the current CEO of those businesses. The hold separate manager will manage these divestment businesses (Centea and Fidea) in their best interest, in common consultation with KBC, as monitored by the Monitoring Trustee.

(87)

A monitoring trustee will be appointed who is to report on a six monthly basis to the Commission on compliance by the Belgian authorities and by KBC with the commitments listed in recitals 78 to 86 The monitoring trustee shall be independent, possess the necessary qualifications and shall not be subject to a conflict of interests throughout the exercise of his mandate

(88)

No later than one month after the adoption of this Decision, the Belgian authorities shall submit a list of one or more persons, as agreed with KBC, whom they propose to appoint as the monitoring trustee(s) to the Commission for approval. The Commission shall have the discretion to approve or reject the proposed trustee(s) based on the criteria outlined in recital 87. If the Commission rejects all proposed trustee(s), KBC and the Belgian authorities will, within one month of being informed of the rejection, propose new candidates which again need to be approved or rejected by the Commission. If all further proposed trustee(s) are rejected by the Commission, the Commission shall nominate a trustee, whom KBC shall appoint, or cause to be appointed, in accordance with a trustee mandate approved by the Commission.

(89)

Where appropriate and on the basis of a sufficiently reasoned request from the Belgian authorities and KBC and taking into consideration the views of the monitoring trustee, the Commission may:

(90)

Any such requests shall be sent to the Commission at the latest two months prior to the target date.

(91)

If the divestments have not been achieved by the relevant target dates and no later than one month after the ultimate non-extendable target date, and if no alternative measures have been approved by the Commission, the Belgian authorities shall submit a list of one or more persons, as agreed with KBC, whom they propose to appoint as the divestiture trustee(s) to the Commission for approval. The divestiture trustee shall be independent, possess the necessary qualifications and shall not be subject to a conflict of interests throughout the exercise of his mandate. The Commission shall have the discretion to approve or reject the proposed divestiture trustee(s). If the Commission rejects all proposed divestiture trustee(s), KBC and the Belgian authorities will, within one month of being informed of the rejection, propose new candidates which again need to be approved or rejected by the Commission. If all further proposed trustee(s) are rejected by the Commission, the Commission shall nominate a trustee, whom KBC shall appoint, or cause to be appointed, in accordance with a trustee mandate approved by the Commission.

(92)

The Belgian authorities commit that KBC shall grant necessary and reasonable powers of attorney to the divestiture trustee:

(93)

The Commission shall authorize, subject to it having taken into consideration reasonable alternatives as proposed under the review arrangements as set out in recital 89, the divestiture trustee to sell the Divestment Businesses concerned […]. The divestiture trustee shall include in the sale and purchase agreement(s) such customary and reasonable terms and conditions as are appropriate for an expedient sale. The divestiture trustee shall organize the sales process in consultation with KBC so as to ensure a divestment under the best possible conditions, subject to its obligation to divest […] in the trustee divestiture period under the conditions set out in recitals 91 and 92.

(94)

In addition, all fees and expenses of the monitoring and divestiture trustees will be borne by KBC.

(95)

The Belgian authorities commit that KBC will take the necessary steps for the run-down of the business portfolios of the entities listed hereunder to be completed by the target dates as set out for each of these entities. From the date of this Decision until the completion of the run-down, KBC will respect a stand-still with regard to the amount of RWA (35) represented by these business portfolios. Concerning this commitment, ‘stand-still’ means that KBC will not enter into any new business in these business portfolios and that KBC’s management decisions with regard to the business portfolios can only have a neutral or decreasing effect on the amount of RWA attributed to these business portfolios at the time of this Decision. KBC will not be obliged to divest or otherwise dispose of portfolio items or to terminate existing contracts under conditions that would result in a loss or a liability for KBC. KBC will thus run-down the following business portfolios:

(i)

(ii)

(iii)

(96)

The Belgian authorities commit that KBC will carry out the listings of ČSOB (Czech Republic) and K & H bank (Hungary) […].

(97)

The Belgian authorities commit that KBC provides the Commission with detailed reports on a six-monthly basis through the Belgian authorities. The reports will contain information on the recapitalisation measures (as mentioned in point 40 of the Recapitalisation Communication (36), the functioning of the State Protection measure (as mentioned in Annex IV to the Impaired Asset Communication, hereinafter ‘IAC’ (37), and the restructuring plan (as mentioned in point 46 of the Restructuring Communication (38). The first report, combining all that information, will be submitted to the Commission no later than six months after the date of this Decision.

(98)

The Commission recalls that in this case, it opened the formal investigation procedure on the State Protection measure regarding the valuation, remuneration, burden-sharing and asset management arrangements on 30 June 2009.

(99)

Regarding the valuation, the Commission had expressed doubts about the underlying assumptions and methodology used by the experts. In particular, the Commission saw a need to verify the correlation assumptions of the Asset Backed Securities (hereinafter ‘ABS’) and of the corporate debt, the traceability of the house price assumptions and corporate default levels (recital 83 of the opening Decision).

(100)

As the remuneration paid by KBC is also dependent on the valuation of the CDO portfolio, the Commission concluded in recital 93 of the opening Decision that further assessment of the matter was necessary. For the same reasons, the Commission expressed doubts whether the State Protection measure provided for sufficient burden-sharing (recital 88 of the opening Decision).

(101)

Regarding the asset management, the Commission concluded in recital 80 of the opening Decision that it had insufficient information to conclude whether the arrangements foreseen by the Belgian authorities fulfil the requirements laid down in the IAC.

(102)

The Commission notes that no comments from interested third parties have been received with regard to the opening Decision on the State Protection measure.

(103)

The Belgian authorities indicate that they have reviewed the Commission’s Decision of 30 June 2009 in which the Commission decided to initiate the procedure laid down in Article 88(2) of the Treaty in order to verify the conditions of the IAC regarding valuation (including the valuation methodology), burden-sharing, remuneration and asset management arrangements of the measure.

(104)

The Belgian State believes that each of these elements are adequately addressed by the KBC restructuring plan as filed on 30 September 2009 and by the various commitments that have been offered in connection with that restructuring plan.

(105)

The Belgian authorities submit that the restructuring plan complies with all conditions set forth in the Commission’s Communication of 23 July 2009 on the return to viability and the assessment of restructuring measures in the financial sector in the current crisis under the State aid rules (39).

(106)

In particular, the Belgian authorities are of the opinion that the restructuring plan ensures that KBC’s long-term viability is restored, that KBC provides an important own contribution to the restructuring costs and that distortions of competition are limited by substantial structural and behavioural measures.

(107)

The Commission must assess whether the measures concerned constitute State aid. Article 87(1) of the Treaty provides that any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings is, insofar as it affects trade between Member States, incompatible with the common market.

(108)

The Commission observes that, with regard to the first and second recapitalisation and the State Protection measure, it has already concluded that those measures constitute State aid. For the first recapitalisation, this was established in the Commission’s first recapitalisation Decision of 18 December 2008 (recitals 39 to 53 of the recapitalisation Decision). For the second recapitalisation and the State Protection measure, this was established in the Commission’s opening Decision of 30 June 2009 (section 4.1 of the opening Decision). The Commission furthermore notes that KBC will, in the context of the restructuring plan, not receive any additional measures and that the rescue aid measures will be converted into restructuring aid.

(109)

The Commission therefore has no reason to change its previous assessments. Consequently, the Commission concludes that the first and second recapitalisation and the State Protection measure obtained by KBC constitute State aid.

(110)

As regards the amount of aid, the recapitalisation measures constitute State aid amounting to the sum of the injected capital, thus in amount of EUR 7 billion.

(111)

As regards the aid amount of the State Protection measure, the Commission considers that a distinction should be made between the Equity Range and the Cash Range of the State Protection measure.

(112)

The Cash Range is regarded by the Commission to correspond to the asset relief measure. The Impaired Asset Communication states that the amount of aid in an asset relief measure corresponds to the difference between the transfer value of the assets and the market price. In an asset guarantee measure, the Commission considers that the transfer value is the point at which the State compensates the bank for losses in the form of cash. Therefore, in this case, the transfer value of the assets is EUR 14,8 billion (40), as the portfolio must suffer actual losses of EUR 9.1 billion (losses of EUR 3,9 billion in the non-super senior tranches, the first loss in the super-senior tranche of EUR 3,2 billion and the equity range EUR 2 billion) that have to be deducted from the EUR […] billion nominal value of the CDO portfolio. The market value of the CDO portfolio at the point of the transaction was EUR […] billion (41). The difference between the transfer value and the market value is EUR […] billion, of which 10 % has to be deducted as 10 % of the losses are retained by KBC. This amounts to EUR […] billion.

(113)

In addition, the Commission considers that the excess guarantee fee paid by KBC for the Cash Range should be taken into account. The total nominal guarantee fee is EUR 1,33 billion, of which, however, approximately EUR 1 billion (estimated excess guarantee fee (42) is above the minimum fee that is required by the Commission in the IAC. The amount of EUR 1 billion therefore needs to be deducted from the amount calculated in recital 112. This leads to a total aid amount for the asset relief measure of approximately EUR 260 million.

(114)

Accordingly, the two capital injections and the asset relief part of the State Protection measure together result in aid element of approximately EUR 7,26 billion, which amounts to 4,1 % of RWA of KBC.

(115)

Finally, the Equity Range of the State Protection measure is also assessed. The Commission notes that it could be considered as equivalent to a capital injection, given that the CBFA accepts it as regulatory capital which improves the capital position of the bank. Although the measure does not give liquidity and therefore cannot be exactly counted as a direct capital injection, the Commission considers that it could nevertheless be counted as additional aid, possibly up to nominal amount of EUR 1,8 billion. If it is counted as 100 % aid, the total aid element of all measures (two recapitalisations and State Protection measure) amounts to EUR 9,06 billion, or 5,1 % of RWA of KBC.

(116)

Article 87(3)(b) of the Treaty empowers the Commission to declare aid compatible with the common market if it is intended ‘to remedy a serious disturbance in the economy of a Member State’. Given the present circumstances in the financial markets, the Commission considers that the measures may be examined directly under the Treaty rules and in particular under Article 87(3)(b) of the Treaty.

(117)

The Commission has acknowledged that the global financial crisis can create a serious disturbance in the economy of a Member State and that measures supporting banks are apt to remedy this disturbance. This has been confirmed in the Commission’s Banking Communication (43), its Recapitalisation Communication, its IAC and its Restructuring Communication. In respect of the Belgian economy this was confirmed in the Commission’s various approvals of the measures undertaken by the Belgian authorities to combat the financial crisis (44) Therefore, as indicated in the recapitalisation Decision and the opening Decision, the legal basis for the assessment of the aid measures should be Article 87(3)(b) of the Treaty.

(118)

As outlined in section 8.2, the Commission considers that, as regards the State Protection measure, a distinction should be made between the Equity Range and the Cash Range of the measure.

(119)

The Commission considers that the commitment to inject capital, subject to the trigger event of specific realised losses on the CDO portfolio, associated with Equity Range should be considered as equivalent to a capital injection (45) Therefore, its compatibility is assessed under the Recapitalisation Communication.

(120)

The Commission considers that the Cash Range, where the State is committed to compensate KBC for losses in cash, should be considered as an asset relief measure. Therefore its compatibility is assessed under the IAC.

(121)

The specific conditions applying to asset relief measures are laid down in the IAC. In line with section 5.2 of the IAC, an asset relief measure must provide for full ex-ante transparency, adequate burden-sharing followed by the correct valuation of the eligible assets and should ensure the correct remuneration of the State for the asset relief measure to ensure shareholders’ responsibility and burden-sharing.

(122)

The Commission already established that the State Protection measure in favour of KBC complies with the IAC as regards full ex-ante transparency and disclosure and eligibility of assets in the opening Decision. The Commission therefore focuses its assessment on conditions relating to valuation, remuneration and burden-sharing and asset management arrangements, as these were the aspects of the State Protection measure upon which it opened the investigation.

(123)

Regarding the valuation, the IAC establishes in section 5.5 that a correct and consistent approach to valuation is of key importance to prevent undue distortions of competition. Accordingly, the Commission has carefully scrutinized the valuation and in particular the underlying general methodology in order to ensure a consistent approach at Community level. For that purpose, the Commission called on the technical assistance provided by a panel of valuation experts. In assessing the measure, the Commission also employed asset valuation methodologies which have benefited from the technical assistance provided by experts from the ECB.

(124)

In line with paragraphs 40 and 41 of the IAC, the transfer value of the impaired assets must be in line with their real economic value (hereinafter ‘REV’). In an asset guarantee measure, the Commission considers that the transfer value is the point at which the State compensates the bank for losses in the form of cash. In this case the transfer value is EUR 14,8 billion, while KBC states that the REV of the portfolio is EUR […] billion. It follows that if the REV is indeed EUR […] billion, then the measure meets the requirements of the IAC as regards valuation, as the transfer value would be below the REV.

(125)

As regards the REV of the CDO portfolio, the Commission’s doubts have been allayed. Taking into account the prudent assumptions (such as correlation, loss severities and house price appreciation, default probabilities), in combination with reasonable stressed default probabilities, the Commission considers that EUR […] billion ([…] % of the notional value) is a prudent calculation of the REV.

(126)

In addition, the estimations of the REV of the portfolio in a stress scenario is approximately EUR […] billion ([…] % of the notional value), which is still above the transfer value. The Commission considers, that this valuation of the REV in a stress scenario can be considered as acceptable based on the assumptions and methodology used.

(127)

The Commission’s doubts regarding the remuneration paid by KBC have been allayed. The Commission notes that the State Protection measure has a capital relief effect of EUR 504 million. As noted in point 21 of IAC and footnote 11 attached thereto, an asset relief mechanism should be remunerated the same way as a capital injection. In normal circumstances such a capital injection would cost in the region of EUR 35 million annually (46). That is considerably less than the annual guarantee fee of EUR 221 million (total of EUR 1,33 billion over six years KBC pays. Indeed, KBC pays in excess of EUR 1 billion over and above the minimum remuneration required under the IAC.

(128)

Regarding burden-sharing, the IAC states in section 5,2 the general principle that banks ought to bear the losses associated with impaired assets to the maximum extent. That implies first that the bank should bear the difference between the nominal value and the REV of the impaired assets. That criterion is fulfilled in this case as the REV of the portfolio corresponds to EUR […] billion ([…] % of the notional value) and the transfer value to EUR 14,8 billion (62 % of the notional value).The transfer value therefore lies below the REV. The figure of the REV has been verified and found reasonable by the Commission’s experts. KBC bears losses even beyond the REV. The Commission’s doubts with regard to burden sharing have therefore been allayed.

(129)

Regarding the managements of assets, the Commission notes that the arrangements between the Belgian authorities and KBC comply with the requirements laid down in the IAC. The Belgian authorities have obtained the customary and necessary rights to safeguard their interests as described in recital 62. Accordingly, those rights are to provide safeguards to protect third party investors, super-senior counterparties and therefore, by extension, the Belgian authorities against possible conflicts of interest in the management of the guaranteed portfolio. In addition, the Belgian authorities are provided with the right to monitor the management of the guaranteed portfolio and are granted appropriate rights to further protect their interests.

(130)

On the basis of the foregoing, the Commission concludes that its doubts regarding the asset relief measure have been allayed and that the measure is in line with the IAC.

(131)

The Commission recalls that in the case of losses in the Equity Range, the Belgian authorities have committed to provide capital if KBC so requests. This recapitalisation of KBC in the Equity Range can occur through the issuance by KBC of ordinary shares to the Belgian authorities at market price. If as result of such an issuance the Belgian authorities were to exceed a 30 % shareholding, they will receive hybrid securities. Therefore, for the measure to be compatible, the capital injection committed should be the minimum necessary and should be remunerated in line with the Recapitalisation Communication.

(132)

Regarding the remuneration for the Equity Range, the compatibility of the remuneration should be assessed in two ways. Firstly, the State should be remunerated for providing the equity guarantee. Secondly, in the event that it does inject capital, this should be remunerated appropriately.

(133)

Regarding the equity guarantee, KBC must pay for having the right to an equity injection on standby. The underwriting fee is calculated by reference to the fee levels investment banks charge for stand-by equity underwritings. The customary fee for this type of underwriting commitment, according to the Belgian authorities, varies between 10 and 15 bps per week. The mid-point of this range (12.5 bps) has been applied to KBC. That amounts to 650 bps per year on the principal amount of EUR 1.8 billion. The Commission recalls point 26 of the Recapitalisation Communication, which states that the price of recapitalisations should be in line with the Eurosystem Recommendations of 20 November 2008. These, in turn, state that the required rate of return on ordinary shares should be the equity risk premium of 500 bps per annum (47). In this case, the underwriting premium can be considered as the equity risk premium described in the Eurosystem Recommendations. As the underwriting fee is in excess of this threshold, the remuneration is considered sufficient.

(134)

Furthermore, in the event that KBC does call upon the Belgian authorities to provide an equity injection, the Belgian authorities will subscribe to the newly issued equity at market terms. In this case the Belgian authorities will obtain ordinary shares and will be remunerated accordingly. This is line with the Annex to the Recapitalisation Communication. In the context of the current crisis, the Commission previously has accepted equity injections where the issue price was based on a market-orientated valuation such as the share price (48).

(135)

If the Belgian authorities, when buying KBC shares, were to acquire more than 30 % voting rights, which could require them to launch a mandatory takeover bid, they will have the option to subscribe to hybrid capital instead. The coupon that KBC will have to pay is similar to that for the two already approved recapitalisation measures. In addition, the Belgian authorities have the option of converting these hybrids into ordinary shares at market terms, which is in line with the terms of its subscription to the newly issued equity described above. Therefore the remuneration of the hybrid securities is in line with the Recapitalisation Communication.

(136)

As regards the limitation of the aid to the minimum necessary, the Commission notes that the capital injection will only be called upon if the relevant CDO portfolio suffers realised credit losses that exceed EUR 7,1 billion. If that situation arises, KBC, although it has already provisioned for losses exceeding this amount, will likely face significant difficulties and market uncertainties about its financial position. In line with the reasoning given with regard to the first and the second recapitalisations, which established that a properly remunerated capital injection was an appropriate means of restoring confidence in a systemically important bank such as KBC, the Commission considers that it is reasonable to conclude that the commitment to provide capital in case of significant losses on the CDO portfolio is appropriate and to the minimum necessary.

(137)

Based on the above the Commission concludes that the conditions of the Recapitalisation Communication are fulfilled.

(138)

Given that the terms of the asset relief part of the State Protection measure are in line with the IAC and the terms of the Equity Range are in line with the Recapitalisation Communication, the Commission considers that the aid granted through the State Protection measure is compatible with the common market.

(139)

The Commission observes that the Restructuring Communication does not set criteria for the conditions under which a bank may need to present a restructuring plan, but builds on the criteria laid down in the Recapitalisation Communication and the IAC.

(140)

The Commission notes that KBC has received State aid in excess of 2 % of the bank’s total RWA. KBC should therefore in line with point 4 of the Restructuring Communication and with point 55 of the IAC, as well as with its previous commitments mentioned in the opening Decision, undergo in-depth restructuring.

(141)

The Restructuring Communication sets out the State aid rules applicable to the restructuring of financial institutions in the current crisis. According to the Restructuring Communication, in order to be compatible with article 87(3)(b) of the Treaty, the restructuring of a financial institution in the context of the current financial crisis has to:

(142)

The Restructuring Communication sets out in points 9 to 11 that the Member State should provide a comprehensive and detailed restructuring plan which provides complete information on the business model. The plan should also identify the causes of the difficulties faced by a financial institution and alternatives to the restructuring plan proposed. The information submitted by the Belgian authorities meets these requirements.

(143)

In assessing a restructuring plan, the Commission must assess whether the bank is able to restore long-term viability without State aid. With respect to KBC, any restructuring plan should demonstrate that it has taken measures to deal with the source of its difficulties, that its business model is viable and that it is able to withstand a realistic stress scenario. It should also indicate, as noted in point 14 of the Restructuring Communication, how the State aid is redeemed or that it is remunerated according to normal market conditions.

(144)

The restructuring plan identifies the main causes of the difficulties for the bank, which were mainly attributable to value markdowns on KBC’s synthetic CDO portfolio. Those instruments must be marked-to-market with any changes in the market value flowing immediately through the income statement. KBC required two capital injections and an asset guarantee to deal with these losses and their subsequent effect on its capital position.

(145)

In order to assess whether KBC can be considered viable, the Commission must assess whether the plan deals with these issues in the CDO portfolio. In this respect, the Commission notes that KBC has ceased to issue CDO instruments. As regards its residual CDO portfolio, KBC’s exposure to further losses has been significantly limited. Since EUR 14,8 billion (at 90 %) of the losses on the portfolio has been guaranteed by the State, the portfolio no longer has to be valued at mark-to-market, thus reducing volatility on KBC’s balance sheet. Its only remaining exposure is on the small part of the CDO portfolio that is valued above the transfer value of the State Protection measure plus a 10 % exposure to losses in the cash guarantee tranche. Therefore the Commission can conclude that KBC has taken sufficient actions to address the cause of its problems and that any further negative development in its CDO portfolio will not threaten its viability.

(146)

KBC also has an ABS portfolio that is not covered by the protection obtained from the Belgian authorities. The Commission observes that KBC has provided information on the remaining exposure ([…]). KBC will absorb any losses on that portfolio (calculated at EUR […] million per annum), which according to KBC does not threaten its viability because of its more conservative risk and maturity profile (49). The losses on the ABS portfolio have been taken into account in the financial projections for the restructuring plan.

(147)

As regards its business model, KBC intends to continue its bancassurance strategy, albeit within a smaller and more focussed group. It will provide a full range of banking and insurance products to its core customer segments, retail, private SME and mid-cap. It will focus on markets, for example in the CEE-R, where it already has healthy franchises, while withdrawing from markets that it considers high risk or where it has a franchise that is not or cannot become sustainable. KBC has a strong liquidity position. It has a limited reliance on wholesale, particularly short-term, funding and has a loan-to-deposit ratio of less than […] %. Its strong liquidity position is underlined by the fact that even during the most significant disruption in financial markets for many years it did not need to avail of any liquidity assistance from the Belgian State.

(148)

The Commission considers that KBC's business strategy, which consists of retail activities combined with cross-selling of insurance products in KBC’s core markets, is a viable business model. The Commission considers that the continuation of KBC’s operations in the CEE-R, which could be considered as a developing market, is an acceptable strategy, as it allows KBC to leverage its successful business model to a high-growth region, allowing it the possibility to continue to grow and generate profits. This is also important for financial stability concerns, as KBC is an important operator on financial markets in this region and its withdrawal could have destabilising effects. That analysis, as regards financial stability, also applies to KBC’s presence in Ireland.

(149)

According to points 9 and 12 to 15 of the Restructuring Communication, the restructuring plan should also demonstrate how the bank will restore its long-term viability without State aid as soon as possible. In particular, the bank should be able to generate appropriate return on equity, while covering all costs of its normal operations and complying with the relevant regulatory requirements.

(150)

The Commission considers that the restructuring plan submitted by KBC meets those requirements as KBC has provided financial projections for the period 2008-2013, giving information on revenues, costs, impairments, profits and capital position for each business unit. The Commission notes that the projections provided are based on reasonable underlying macroeconomic assumptions.

(151)

In the restructuring plan, KBC assumes that revenues and profits will return to approximately pre-crisis levels in a base case, with revenues of EUR […] billion in 2009, increasing to EUR […] billion in 2013 and a projected net profit (loss) of EUR -[…] billion in 2009 increasing to EUR […] billion in 2013. Most of the impairments will be taken in 2008 (EUR […] billion) and 2009 (EUR […] billion). KBC’s Tier-1 ratio will increase from […] % in 2009 to […] % in 2013. Given that the underlying business of KBC (excluding the losses generated by the KBC Financial Products division in CDOs and ABS) continued to generate profits throughout 2008 and 2009 to date, Commission considers the projections feasible.

(152)

As regards KBC’s ability to withstand a stress scenario, this was described in recital (42) to (49). The Commission considers the scenario generated as reasonable. As the stress scenario demonstrates that KBC will exceed its regulatory capital requirements, KBC can be regarded as meeting the requirements of paragraph 13 of the Restructuring Communication.

(153)

Moreover, the Commission notes positively that projected profits will allow the bank to remunerate the State capital adequately and redeem it over time. The repayment of the State capital should be possible without depleting the capital base of the institution, as the KBC’s Tier-1 capital ratio is projected to reach […] and exceed it afterwards under every scenario provided in the restructuring plan.

(154)

Finally, the plan also lays out a convincing strategy for repaying the Belgian authorities. For the State Protection measure, the fee is paid in cash in 12 semi-annual instalments. As regards the capital injection, KBC starts paying coupons from 2011 and will begin repaying the principal once it begins to generate surplus capital, which under the base case is from 2012 onwards. Taking into account the 50 % penalty, KBC is projected to repay about EUR 7 billion in the years […], which is equivalent to the principal amount of State capital that is received. KBC intends to fully repay the State […]. The projected internal rate of return of the State is 13,9 % (50).

(155)

Consequently, the Commission considers that the restructuring plan submitted by KBC fulfils the requirements of the Restructuring Communication with regard to the restoration of the long-term viability.

(156)

The Restructuring Communication indicates that an appropriate contribution by the beneficiary is necessary in order to limit the aid to minimum and to address distortions of competition and moral hazard. To that end, firstly, the restructuring costs should be limited while, secondly, the aid amount should be limited and a significant own contribution is necessary.

(157)

As regards the limitation of the restructuring costs, the Restructuring Communication indicates in point 23 that the restructuring aid should be limited to cover the costs which are necessary for the restoration of viability. Furthermore, in order to keep the aid limited to a minimum, the banks should first use their own resources to finance the restructuring. Accordingly, the costs associated with the restructuring should not only be borne by the State but also by those who invested in the bank by absorbing losses with available capital and by paying an adequate remuneration for State interventions.

(158)

The Commission observes that the restructuring costs are limited to the costs which are necessary for the restoration of viability.

(159)

The Commission observes that the first and second recapitalisations were used by KBC to improve its core Tier-1 capital ratio and to increase the solvency of its insurance business. Those measures, by improving KBC’s capital position, have increased its ability to absorb losses. The State Protection measure was used to shield KBC from further write-downs on its CDO portfolio, as well as to increase its capital ratios. That measure has furthermore removed a source of volatility on its balance sheet.

(160)

Consequently, those measures have contributed to the restoration of viability of KBC as they have tackled the source of KBC’s difficulties, namely the substantial write-downs on its CDO portfolio and the consequences of these write-downs on KBC’s capital position. Furthermore, KBC will not be able to use the aid received to expand its business activities through acquisitions as it is limited in this respect by the commitments provided by the Belgian authorities with regard to the acquisition ban (see recital 66).

(161)

The Commission considers that the amount of aid is limited to the minimum. The Commission recalls that it has already established in the recapitalisation Decision (recital 65), and the opening Decision (recital 71) that the aid is limited to the minimum to ensure the viability of KBC.

(162)

In that context, the Commission observes that KBC will adequately remunerate the Belgian authorities for the aid measures it has received. That necessarily limits the amount of aid granted to KBC. With regard to the recapitalisations, KBC will pay the State a coupon of 8,5 % per security if a dividend is paid. KBC is required to redeem the securities at 150 %. As established in the recapitalisation Decision and in the opening Decision, the internal rate of return for the State is projected to be 13,9 %, above the level required by the Commission in the Recapitalisation Communication (51). As regards the State Protection measure, the Commission notes that KBC will pay a fee which is approximately […] times higher than that required in the IAC (see recital 127).

(163)

The Commission furthermore considers that the own contribution by KBC to its restructuring is considerable. KBC, as part of its financial restructuring, will list 40 % of its Czech subsidiary ČSOB and 40 % of its Hungarian subsidiary K & H on the local stock exchanges. That will significantly dilute KBC’s shareholding as it is currently 100 % owner of those subsidiaries and provides for a contribution by KBC and its investors. The proceeds of the listing of ČSOB and K & H will increase KBC’s own funds and will be used to repay the State.

(164)

Furthermore, KBC plans to sell the entire European Private Banking business unit including Vitis (life insurance), thus completely ceasing its activities in that market segment. The proceeds of the sale will also be used to build up KBC’s own funds in order to repay the State.

(165)

As regards burden-sharing, the Commission observes that in the context of the State Protection measure, KBC, on a CDO portfolio with a nominal value of EUR 23,9 billion, will take a first loss of EUR 9,1 billion. On top of that it will assume a 10 % share of losses in the EUR 14,8 billion super-senior tranche insured by the Belgian authorities.

(166)

Finally, the Commission notes that the Belgian authorities have committed that KBC will not pay coupons or call subordinated debt instruments, except where there is a legal obligation to do so. As a result, subordinated debt holders will receive limited remuneration and thus contribute to the restructuring.

(167)

The Restructuring Communication requires that the restructuring plan proposes measures limiting distortions of competition and ensuring a competitive banking sector. Moreover, they should also address moral hazard issues and ensure that State aid is not used to fund anti-competitive behaviour.

(168)

As regards the measures limiting the distortion of competition, the Restructuring Communication indicates that the Commission has to take into account in its assessment the amount of aid, the degree of burden-sharing and the effects the position the financial institution will have on the market after the restructuring. On the basis of that analysis, suitable compensatory measures should be put into place.

(169)

The Commission notes that KBC has received a considerable amount of aid, significantly above the 2 % RWA benchmark of the Recapitalisation Communication and the IAC (52). Against this background, the Commission concludes that aid to KBC caused distortions of competition on the markets where it has significant presence.

(170)

On the other hand, there are several aspects which should be taken into account when assessing the distortions of competition caused by the State aid granted to KBC. Firstly, the main factor behind KBC’s difficulties was its exposure to mark-to-market write-downs on its CDO portfolio, rather than excessive risk-taking and hence losses in its core business model. KBC has ceased activities in this area. Secondly KBC pays adequate remuneration for the State aid it has received. The Belgian authorities are projected to receive a return of 13,9 % on their capital injections. With regards to the State Protection measure, the Belgian authorities are guaranteeing the portfolio at a transfer value significantly below its REV while the remuneration it receives for the capital relief and the provision of the equity guarantee is above the Commission guidelines. Thirdly, the listing of ČSOB and K & H on the Czech and Hungarian markets provides for considerable burden-sharing.

(171)

Notwithstanding the above, the Commission still considers that suitable measures must be put in place to address the remaining distortions of competition.

(172)

KBC will reduce its balance sheet by 20 % in terms of Group RWA on a pro forma basis (17 % in terms of total assets). The reduction will be achieved mainly through divestments ([…]) and the run-down of KBC FP ([…]). As a result, KBC will reduce its market presence in several markets. In this respect, it should be noted that for financial stability reasons KBC will not be required to divest activities in certain countries, as per recital 177. This essentially ring fences around […] of KBC’s balance sheet from divestment or runoff.

(173)

In particular, KBC proposes to sell Centea and Fidea, which, although they are branded separately, are important parts of its business strategy in Belgium. Centea and Fidea are profitable businesses with a recognisable brand name that are relatively easy to separate from KBC’s Belgian business unit. They are two viable and independent entities on the Belgian market, which are self-funded, have a wide range of customer contact points and are profitable. […] It is also prepared to provide back-office services to facilitate the transfer of these entities to a new owner.

(174)

In 2008, Centea had a market share in volume terms of […] of mortgages, […] of debit cards (number of cards), […] of current accounts and […] of deposits/savings accounts. It has its own sources of funding and is a net contributor to KBC funding. Centea has a country-wide network of 712 client contact points and a portfolio reflecting a full banking product range. Centea has its own front-office function. Back-office services (including IT-services) are provided by KBC’s Shared Services and Operational Business Unit. Fidea has […] of market share in Class 21 life assurance, […] % in Class 23 life assurance, […] in non-life insurance and […] % in health insurance. Table 2 includes KBC, Centea and Fidea’s market shares in Belgium as well as the effects of the proposed divestments on KBC’s total market share.

[…]

(175)

A significant structural measure, such as the creation of a new competitor from an incumbent player with a large market share, can help encourage competition on a previously concentrated market. This applies on the Belgian market, where 4 large players account for the majority of the retail market.

(176)

The Commission regards these divestments as appropriate means of increasing competition on the concentrated Belgian retail banking market. With their established brand name and distribution networks, Centea and Fidea constitute attractive targets for competitors wishing to enter the Belgian market or expand their presence there While the market share of these divestments is small in some market segments, the Commission considers that this is counterbalanced by the fact that the entities are relatively self-sufficient and that KBC has committed that the divestments will take place […].

(177)

Moreover, KBC will limit its expansion in the CEE-R to countries where it already has a significant presence which represents a curtailment of its prior expansion plans. That can be regarded as limiting the distortion of competition, as KBC will not be using State aid to expand in markets where it does not have a currently viable business or in activities that are not part of its refocused business model. However, the Commission considers it appropriate that KBC is not required to withdraw from all its CEE-R markets, which it considers as core. As described in recitals 12 and 13, KBC is a significant market player in several of those countries. It could be damaging to financial stability in these countries and lending to the real economy if KBC was required to further reduce its presence in the region. The same is true for KBC’s presence in Ireland.

(178)

Furthermore, the Commission considers that the package of measures sufficiently addresses the issue of moral hazard. KBC has proposed a comprehensive sale of other core businesses (private banking, merchant banking, CEE-R) and non-core businesses as described in section 4.2.2 of this Decision. […] This is a significant reduction in the business activities of KBC.

(179)

The Commission notes that the Belgian authorities have provided a detailed timeline of planned divestments, as described in recital 62. The Commission also notes the appointment of hold separate managers for Centea and Fidea, a monitoring trustee and divestment trustees, where appropriate. Such commitments ensure that the majority of the down-sizing of KBC will be carried out in a timely manner. While there is scope for the target dates for divestments to be extended, it will only be upon the specific approval of the Commission.

(180)

The Commission notes positively the behavioural commitments provided by KBC and the Belgian authorities, which have been described in more detail in recitals 63 to 77. Those commitments include a commitment to lend to the real economy, a price leadership ban and a ban on mass-marketing the State support, thus preventing KBC to use the aid to fund anti-competitive market conduct. The acquisition ban furthermore ensures that the State aid will not be used to take over competitors.

(181)

As regards the price leadership ban, the Commission finds it to be in line with point 44 of the Restructuring Communication as it serves to ensure that State aid cannot be used to offer terms which cannot be matched by competitors which are not in receipt of State aid. The Commission considers the ban appropriate in markets where KBC is well established with a market share of at least [0-10] % and where it does not undertake any pro-competitive structural measures. In this case, the Commission considers it appropriate that the price leadership ban does not apply to Belgium, as the divestment of Centea and Fidea is a significant structural measure which should lead to improved competition on the Belgian market.

(182)

Taking into account the extent of burden sharing and likely short timescale for their implementation, the Commission considers that the scale and nature of measures proposed by KBC are sufficient and adequate to address any distortions of competition.

(183)

The Commission notes that point 46 of the Restructuring Communication indicates that, in order to verify that the restructuring plan is being implemented properly, detailed regular reports from the Member State are necessary. Accordingly, the Belgian authorities should provide the Commission with such reports every six months, starting from the date of this Decision.

(184)

The Commission finds that the restructuring plan set out in chapter 4 of this Decision is compatible with Article 87(3)(b) of the Treaty.

(185)

Based on the above assessment of the State Protection measure and the restructuring plan of KBC, as well as the commitments provided by the Belgian authorities and KBC, the Commission raises no objection against the restructuring plan and the conversion of the rescue measures into restructuring aid.