EUROPEAN COMMISSION Brussels, 19.5.2010 C(2010) 3221 final Subject: State aid N 161/2010 - Germany Further recapitalisation of Hypo Real Estate Sir, The Commission wishes to inform Germany that it has decided not to raise objections against a capital injection for Hypo Real Estate as rescue aid. 1. PROCEDURE (1) On 2 October 2008 the Commission temporarily authorised a State guarantee for HRE. On 7 May 2009 the Commission opened an in-depth investigation into aid measures for HRE, mainly based on doubts regarding HRE's viability. On 13 November 2009, this investigation was extended, in order to cover additional aid measures for HRE, and at the same time the Commission temporarily authorised several capital injections. On 21 December 2009, the Commission temporarily authorised guarantees of EUR 18 billion for HRE (2) On 30 April 2010 Germany sent the Commission a notification concerning a SoFFin 1 capital injection of EUR 1.85 billion for Hypo Real Estate (HRE). (3) On 3 May 2010 Germany clarified that this capital injection is divided into two tranches: an immediate capital injection of EUR 1.4 billion and a potential further capital injection of up to EUR 450 million. (4) On 5 May 2010 Germany informed the Commission that it exceptionally accepts that the Commission Decision be adopted in the English language. 1 Sonderfonds Finanzmarktstabilisierung. Seiner Exzellenz Herrn Dr. Guido WESTERWELLE Bundesminister des Auswärtigen Werderscher Markt 1 D - 10117 Berlin Commission européenne, B-1049 Bruxelles Europese Commissie, B-1049 Brussel Belgium Telephone: 32 (0) 2 299.11.11
(5) Further exchanges of information regarding the capital injection took place on 3 May, 5 May and 6 May 2010 between the Commission services and the German authorities. 2. DESCRIPTION 2.1. The beneficiary (6) In October 2003 HRE was established as a spin-off of parts of the commercial real estate financing of the HVB Group. In 2007, HRE took over the Dublin-based DEPFA Bank plc. and extended its business to public sector and infrastructure finance. HRE currently consists of the following main companies: Hypo Real Estate Holding AG, pbb Deutsche Pfandbriefbank AG and DEPFA Bank plc. 2. (7) In autumn 2009, HRE was taken into 100% State ownership by Germany. (8) At the end of 2009, HRE s balance sheet total amounted to approximately EUR 360 billion. (9) HRE is currently in a restructuring process. Germany has recently 3 submitted additional information regarding HRE's viability under the revised restructuring plan. 2.2. The measures to be authorised as temporary rescue aid (10) The notified EUR 1.85 billion capital injection is divided into two tranches: i. Capital injection of EUR 1.4 billion; and ii. Capital injection of up to EUR 450 million. (11) Germany claims that HRE has a capital need of up to EUR 1.85 billion until the end of September 2010. (12) The capital injection of EUR 1.85 billion will be granted by SoFFin and will be injected into the uncommitted reserves ("freie Rücklage") of Hypo Real Estate Holding AG. (13) The EUR 1.85 billion capital injection is part of a total capital need of up to EUR 10 billion set out in the restructuring plan for HRE, which was notified on 1 April 2009 in case number N 196/2009. (14) According to Germany, the EUR 1.85 billion capital injection is needed because: i. DEPFA Bank plc. has urgent capital needs in order to comply with regulatory capital requirements; in addition, the bank requires a risk buffer to sustain an adverse impact from such factors as : a. volatility of certain subportfolios; b. foreign exchange rate risk; 2 3 For further information see the Commission decision of 13 November 2009 (OJ C13, 20.01.2010, p. 58) Mitteilung der Bundesregierung der Bundesrepublik Deutschland and die Kommission der Europäischen Gemeinschaften entsprechend der Anfrage der EU Kommission zur Lebensfähigkeit der HRE (7.5.2010). 2
c. unforeseen further negative rating migrations; ii. The above factors also weigh on the total Risk Weighted Assets of the HRE group. (15) According to Germany, SoFFin has decided to inject the first tranche of the EUR 1.85 billion, i.e. EUR 1.4 billion, into HRE as soon as the Commission authorises this capital injection. (16) EUR [600 900] million from that amount will be immediately needed by HRE's subsidiary DEPFA Bank plc. in order to cover its capital needs and accommodate further risk factors. (17) Germany claims that, because of the volatility of the markets, in particular because of unforeseen developments which have affected the government bond markets of some Member States whose currency is the euro (Greece, Portugal, Spain) recently, the capital needs of DEPFA Bank plc., a bank specialised in public finance, may increase at any time. Therefore, there is an immediate need for this capital injection, to create a limited but necessary buffer. (18) The notified capital injection is necessary to ensure the continuance of DEPFA Bank plc. Without this capital injection DEPFA Bank plc. might no longer comply with the minimum capital requirements in the short-term, in particular with the own funds ratio. (19).DEPFA Bank plc. is obliged to exhibit daily to the Irish Financial Authority (IFSRA) a minimum core capital quote of 4% and a minimum own funds ratio of 8%. According to Germany, compliance with these regulatory minimum quotas remains critical, as otherwise IFRSA would be likely to impose bank supervisory measures against DEPFA Bank plc., such as a revocation of the bank licence or initiation of insolvency proceedings. In a letter dated [ ] 2010, IFRSA points to a strong possibility, on the basis of the forecasts for capital movements in 2010, that DEPFA Bank plc. might not be in a position to comply with these minimum regulatory capital requirements. (20) In addition, Germany claims that if doubts emerged as regards the support for HRE provided by Germany this would shatter the confidence of the financial markets in the viability of HRE. Those implications were already discussed with BaFin 4. There could also be negative impacts on the Irish financial market where DEPFA Bank plc is located. (21) If HRE can verifiably prove that at least one of the following circumstances applies, SoFFin will grant the second tranche of the EUR 1.85 billion capital injection, i.e. up to EUR 450 million: i. The regulatory capital ratios of DEPFA Bank plc. or of HRE group would fall below the obligatory minimum requirements, which according to the (revised) business planning will presumably be the case before [ ] 2010. In this respect SoFFin will apply a buffer of [0.3 0.7%]; 4 Confidential information Bundesanstalt für Finanzdienstleistungsaufsicht 3
ii. Other formal requirements, in particular an increase of the capital requirements due to rating migrations or changes to the supervisory framework (Basel III), make a further capital injection necessary. That need would have to be confirmed in writing by the supervisory authority; iii. Rating agencies announce a rating downgrade for reasons of from their perspective insufficient capital of HRE group, Pfandbriefbank, or DEPFA Bank plc; iv. The going concern assumption ("Fortführungsprognose"), of which the annual auditor ("Abschlussprüfer") has to assure himself for the interim financial statements ("Zwischenabschlüsse") and the financial statements ("Jahresabschlüsse"), is insufficiently supported by the executive board, or there is an imminent risk of overindebtedness ("Überschuldung") or illiquidity ("Illiquidität") if no further capital were to be provided. Such circumstances would have to be confirmed by the financial auditor ("Wirtschaftsprüfer"). 3. POSITION OF GERMANY (22) Germany notified the measure on a precautionary basis, as it is granted on the basis of the Finanzmarktstabilisierungsgesetz 5 already authorised by the Commission as an aid scheme. Therefore a further individual notification is, in the view of Germany, not necessary. 4. ASSESSMENT OF THE RESCUE AID 4.1 Existence of State aid under Article 107(1) TFEU (23) The capital injection is provided by SoFFin, an entity set up by the German government, and so will be made using State resources. The capital injection provides a selective advantage, enabling HRE which is active internationally, to obtain capital more favourably than on the market. The measure constitutes, for the reasons as already outlined in previous Commission decisions on HRE 6, State aid within the meaning of Article 107(1) TFEU. 4.2 Compatibility of the aid 4.2.1. Application of Article 107(3)(b) TFEU (24) Article 107(3)(b) TFEU enables the Commission to find aid compatible with the internal market if it remedies a serious disturbance in the economy of a Member State. As the breakdown of a systematically relevant bank can directly affect the financial markets and indirectly the entire economy of a Member State, the Commission currently bases its assessment of State aid measures in the banking sector on this provision, in light of the ongoing fragile situation on the financial markets. 5 6 Commission Decision of 27 October 2008 and of 12 December 2008 in cases N 512/2008 and N 625/2008 Rettungspaket für Kreditinstitute in Deutschland, prolonged through Commission Decision of 22 June 2009 in case N 330/2009. e.g. Commission Decision of 13 November 2009 (OJ C13, 20.01.2010, p. 58) 4
(25) The Commission has no grounds to doubt Germany's qualification of HRE as a bank of systemic relevance. 4.2.2. Temporary compatibility of the capital injection (26) In order to be approved under the Banking Communication 7 any aid or aid scheme must comply with general criteria for compatibility under Article 107(3) TFEU viewed in the light of the general objectives of the Treaty and in particular must be appropriate, necessary and proportional. The Banking Communication contains general conditions for support measures in the financial crisis including, inter alia, for capital injections. Capital injections are furthermore subject to a specific Communication of the Commission, the Recapitalisation Communication. 8 (27) Capital injections into banks are in principle an appropriate instrument to help banks to resist the consequences of the financial crisis, providing a cushion to absorb losses, to fulfil regulatory capital requirements, to ensure lending to the real economy, and to prepare a bank's return to long-term viability or its orderly winding up. 9 (28) HRE is at present restructuring on the basis of a restructuring plan notified on 1 April 2009 which has subsequently been updated by Germany. This updated plan is currently being assessed by the Commission. The notified capital injections (EUR 1.4 billion and up to EUR 450 million) form part of the overall funding concept described in the restructuring plan, i.e. it is a part of up to EUR 10 billion of capital injections already envisaged as potentially necessary in the restructuring plan of 1 April 2009. The information provided by Germany shows that HRE continues to face serious difficulties in covering its capital needs without additional State support. (29) Where financial stability is at stake and urgent remedial action is needed - as in the present case - to keep an ailing bank afloat, it can be accepted that it is necessary to temporarily grant emergency aid prior to the final assessment of the revised restructuring plan. The Commission remains of the view that these State aid measures should be assessed separately on the basis of Article 107(3)(b) TFEU and that an individual notification is necessary, because they are not in conformity with the Commission decision of 12 December 2008 10 approving the aid schemes in the Finanzmarktstabilisierungsgesetz, which requires payment of a normal market remuneration. In addition, HRE is currently restructuring on the basis of a plan, submitted by Germany. To adapt to the changing market circumstances, Germany has updated this plan several times, making a separate notification appropriate. (30) The capital injection amounting to EUR 1.4 billion is proportional and limited to the minimum amount necessary. This capital injection covers immediate capital needs and 7 Commission 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", OJ C 270 of 25.10.2008, p. 8. 8 Communication from the Commission - Recapitalisation of financial institutions in the current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortions of competition, OJ C 10, 15.1.2009. 9 Recapitalisation Communication, points 4 and subsequent; Cf. Commission decision of 13 October 2008 in case N 507/2008 Financial Support Measures to the Banking Industry in the UK, OJ C 290, 13.11.2008, p. 4. 10 OJ C 143 of 24.6.2009, p. 1, (14). 5
caters for further foreseeable risk factors which could endanger compliance with regulatory minimum capital ratios in the coming months. (31) A large part of that capital injection amounting to EUR 1.4 billion, i.e. EUR [600 900] million, will be transferred from HRE Holding to DEPFA bank plc. Evidence provided by the German authorities shows that there is a strong possibility that in the near future DEPFA Bank plc might no longer comply with the Irish regulatory minimum capital requirements without the capital injection. The Irish authorities have hence asked HRE to immediately take appropriate measures in order to avoid a situation that would endanger DEPFA Bank plc.'s banking license. As such a situation would also affect HRE, the measure is proportional and necessary in order to keep the banking group afloat. (32) The remainder of that capital injection of EUR 1.4 billion, i.e. EUR [500 800] million, is needed by HRE to protect it against further risks stemming from likely events such as foreign exchange rate changes, rating migrations affecting HRE's portfolios, and increases of risk weighted assets in the context of current market volatility regarding certain countries. (33) The capital injection of EUR [500 800] million is proportional and necessary as it contributes to protect HRE from falling below regulatory minimum capital requirements in the immediate future. (34) HRE is a systemically relevant bank whose collapse would have serious impacts on the financial markets. Therefore, a rescue aid measure that averts this outcome is appropriate as long as it is commensurate with the needs to continue operations. (35) As regards the second tranche of the capital injection of EUR 1.85 billion, i.e. the capital injection of up to EUR 450 million, any of the circumstances which entitles HRE to receive the capital from SoFFin would constitute a serious threat to the bank's survival as a going concern. In any event, such a capital injection would solely ensure that the bank can be kept afloat until the Commission can finalise its assessment of the restructuring plan. It can therefore be considered to be proportional and limited to the amount necessary. (36) SoFFin will not receive a direct remuneration for the present capital injections. However, remuneration in line with market conditions cannot always be paid by distressed banks, at least in the short-term. According to paragraph 44 of the Recapitalisation Communication aid to a bank which is not fundamentally sound requires a thorough and far-reaching restructuring. A restructuring plan has been submitted, an updated version of which is currently under assessment. The Commission will in its ongoing investigation take into account the absence of a direct remuneration in the short-term. (37) On the basis of the considerations above, the Commission comes to the conclusion that the recapitalisation is appropriate, necessary and proportional, and can be considered compatible with the internal market on the basis of Article 107(3)(b) TFEU on a temporary basis. Within the assessment of the restructuring plan the conditions of the capital injections may have to be re-assessed. 6
5. CONCLUSION The Commission has accordingly decided not to raise objections against the capital injection of EUR 1.85 billion for HRE as a temporary rescue measure until the Commission has taken a final decision on the restructuring plan. The Commission notes that Germany exceptionally accepts that the decision to be adopted in the English language. Germany is requested to forward a copy of this letter to the potential recipient of the aid immediately. If this letter contains confidential information which should not be disclosed to third parties, please inform the Commission within fifteen working days of the date of receipt. If the Commission does not receive a reasoned request by that deadline, you will be deemed to agree to the disclosure to third parties and to the publication of the full text of the letter in the authentic language on the Internet site: http://ec.europa.eu/community_law/state_aids/state_aids_texts_de.htm Your request should be sent by registered letter or fax to: European Commission Directorate-General for Competition State Aid Greffe Rue Joseph II, 70 B-1049 Brussels Fax No: +32-2-296 12 42 Yours faithfully, For the Commission Joaquín ALMUNIA Vice-president of the Commission 7