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1.3.2012 Official
Journal
of
the
European
Union L
60/1
II
(Non-legislative acts)
DECISIONS
COMMISSION DECISION
of 18 July 2011
on State aid C 15/09 (ex N 196/09), which Germany implemented and is planning to implement for
Hypo Real Estate
(notified under document C(2011) 5157)
(Only the German text is authentic)
(Text with EEA relevance)
(2012/118/EU)
THE EUROPEAN COMMISSION,
six months or until the submission of a credible and
substantiated restructuring plan for the bank. Germany
notified the measure on 30 September 2008.
Having regard to the Treaty on the Functioning of the European
Union, and in particular the first subparagraph of Article 108(2)
(2) On
1
April
2009,
Germany
notified
a
restructuring
plan
thereof ( 1 ),
for Hypo Real Estate Group (‘HRE’) (registered under case
number N 196/09). By letter dated 17 April 2009
Germany supplemented the notification of the restruc
turing plan by informing the Commission of a capital
Having regard to the Agreement on the European Economic
injection of EUR 60 million and a prolongation of State
Area, and in particular Article 62(1)(a) thereof,
guarantees of EUR 52 billion which had been granted
under the approved bank support scheme ( 4 ).
Having called on interested parties to submit their comments
(3) By
letter
dated
7
May
2009
( 5 ), the Commission
pursuant to those provisions ( 2 ) and having regard to their
informed Germany that it had initiated the procedure
comments,
laid down in Article 108(2) of the Treaty on the Func
tioning of the European Union. That decision (‘opening
decision’) was published in the Official Journal of the
European Union ( 6 ), calling on interested parties to
Whereas:
submit comments.
(4) On
3
June
2009
Germany
notified
a
capital
injection
I. PROCEDURE
amounting to EUR 2,96 billion, registered under case
number N 333/09.
(1) On
2
October
2008
the
European
Commission
auth
orised State aid to Hypo Real Estate Holding AG in the
form of a State guarantee of EUR 35 billion (registered
(5) On
17
August
2009
Germany
informed
the
Commission
under case number N 44/08) ( 3 ) temporarily, that is for
(registered under case number C 15/09) that it intended
to again prolong guarantees previously granted by the
( 1 ) With effect from 1 December 2009, Articles 87 and 88 °f the EC
Sonderfonds Finanzmarktstabilisierung (‘SoFFin’)
Treaty have become Articles 107 and 108, respectively, of the TFEU.
amounting to EUR 52 billion for HRE (cf. recital 2).
The two sets of provisions are, in substance, identical. For the
purposes of this Decision, references to Articles 107 and 108 of
the TFEU should be understood as references to Articles 87 and 88,
( 4 ) Commission decision of 12 December 2008 in case N 625/08 (OJ C
respectively, of the EC Treaty where appropriate.
143, 24.6.2009, p. 1).
( 2 ) OJ C 240, 7.10.2009, p. 11; OJ C 13, 20.1.2010, p. 58; OJ C 300,
( 5 ) Commission decision of 7 May 2009, replaced by decision of
6.11.2010, p. 6.
24 July 2009 in case C 15/09 (ex N 196/09) (OJ C 240, 7.10.2009,
( 3 ) Commission decision of 2 October 2008 (OJ C 293, 15.11.2008,
p. 11).
p. 1).
( 6 ) See footnote 5.

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L 60/2
EN
Official Journal of the European Union
1.3.2012
(6) On 20 and 21 October 2009, Germany provided
(14) On
10
September
2010
Germany
notified
an
impaired
another update of the restructuring plan, notified the
asset measure — i.e. the intent to transfer assets from
Commission of further intended measures for HRE
HRE to FMS Wertmanagement AR ( 11 ) (‘FMS-WM’) —
(creation of a winding-up institution, grant of additional
and a capital injection of up to approximately EUR 2,13
guarantees) and informed the Commission about a
billion, as well as an additional guarantee, i.e. a
further prolongation, i.e. the third prolongation, of the
settlement guarantee of up to EUR 20 billion (case
existing SoFFin guarantees of EUR 52 billion (registered
number N 380/10).
under case number N 557/09).
(15) On
24
September
2010
the
Commission
again
extended
(7) On
26
October
2009
Germany
notified,
under
case
the formal investigation procedure and temporarily auth
number N 557/09, a further capital injection
orised the impaired asset measure, the liquidity guarantee
amounting to EUR
3,0 billion, SoFFin guarantees
of EUR 20 billion and the settlement guarantee of up to
amounting to a total of EUR 18 billion for HRE, as
EUR 20 billion. That decision was published in the
well as a SoFFin guarantee amounting to EUR 2 billion
Official Journal of the European Union ( 12 ), calling on
for HRE’s winding-up institution ( 7 ). The Commission did
interested parties to submit comments. The Commission
not approve the SoFFin guarantee amounting to EUR 2
decision of 24 September 2010 did not cover the capital
billion.
injection of up to EUR 2,13 billion that was notified by
Germany on 10 September 2010; i.e. that capital
injection was not approved by the Commission.
(8) On
13
November
2009,
the
Commission
extended
the
formal investigation procedure and temporarily approved
capital injections of EUR 60 million, EUR 2,96 billion
(16) On
14
June
2011
Germany
submitted
a
final
update
of
and EUR 3 billion (in cases: C 15/09, N 333/09 and
the restructuring plan. On 15 June 2011 Germany
N 557/09) until the Commission has taken a final
submitted a list of related commitments, which was
decision on the restructuring plan. That decision was
supplemented on 1 July 2011.
published in the Official Journal of the European
Union ( 8 ), calling on interested parties to submit
comments.
(17) On
14
June
2011,
Germany
clarified
that
the
next
capital
injection will not amount to EUR 2,13 billion as notified
on 10 September 2010, but that it will amount to
(9) On
15,
16
and
17
December
2009
(registered
under
case
EUR 2,08 billion and that the reduced amount will be
number N 694/09) the German authorities comple
made available to FMS-WM.
mented the notification of 26 October 2009 by
submitting further information regarding the SoFFin
guarantees of EUR 18 billion.
(18) In
the
course
of
time
several
meetings
and
telephone
conferences have taken place and further correspondence
has been shared between the Commission departments,
Germany and HRE.
(10) On
21
December
2009
the
Commission
temporarily
authorised the SoFFin guarantees of EUR 18 billion for
one year maximum (case number N 694/09) ( 9 ).
(19) The
Commission received comments from interested
parties, forwarded them to Germany, and received obser
vations from Germany by letter dated 24 March 2010.
(11) On
30
April
2010
Germany
notified
a
SoFFin
capital
injection of EUR 1,85 billion (case number N 161/10).
II. THE BENEFICIARY AND THE AID MEASURES
(12) On
19
May
2010
the
Commission
temporarily
auth
II.1. The beneficiary
orised the EUR 1,85 billion capital injection until the
Commission has taken a final decision on the restruc
(20) In
October
2003
HRE
was
established
as
a
spin-off
of
turing plan (
parts of the commercial real estate financing business of

10 ).
HVB Group. In 2007, HRE took over Dublin-based
DEPFA Bank plc and extended its business to public
sector and infrastructure finance. The HRE group (
(13) On 2 September 2010 Germany notified a SoFFin

13 )
liquidity guarantee amounting to EUR 20 billion (case
currently consists of Hypo Real Estate Holding AG
number N 380/10).
(‘HRE Holding’) and its three subsidiaries pbb Deutsche

Pfandbriefbank AG (‘PBB’), DEPFA Bank plc and Hypo
Real Estate Finance BV in Liquidation (‘HRE Finance
( 7 ) According to Germany, the SoFFin guarantee amounting to EUR 2
i.L.’). DEPFA Bank plc and PBB each have a number of
billion for HRE’s winding-up institution was never formally
requested by HRE or approved by SoFFin.
( 8 ) Commission decision of 13 November 2009 in cases C 15/09 (ex
( 11 ) Winding-up institution of HRE.
N 196/09), N 333/09 and N 557/09 (OJ C 13, 20.1.2010, p. 58).
( 12 ) Commission decision of 24 September 2010 in cases C 15/09 (ex
( 9 ) Commission decision of 21 December 2009 in case N 694/09 (OJ
N 196/09) and N 380/10 (OJ C 300, 6.11.2010, p. 6).
C 25, 2.2.2010, p. 14).
( 13 ) For further information on the HRE group and its problems see the
( 10 ) Commission decision of 19 May 2010 in case N 161/10 (OJ C
opening decision and the decisions on the extension of the
190, 14.7.2010, p. 7).
procedure.

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EN
1.3.2012 Official
Journal
of
the
European
Union L
60/3
further subsidiaries and participations. PBB is the
(26) HRE
had
to
cover
the
short-term
liquidity
needs
of
renamed core bank of the group and the only one of
DEPFA Bank plc. However, the volume of the credit
the three subsidiaries of HRE Holding which will
lines which became due on 30 September 2008 was
continue to generate new business. Its sectors of
too big to be supported by HRE. Furthermore, internal
activity are real estate finance and public investment
transactions and activities within the HRE group, such as
finance (‘PIF’). DEPFA Bank plc is in run-down and will
receivables, guarantees and letters of comfort, meant that
not contract any new business as of notification of this
most companies in the HRE group were in the same
Commission decision. Its core activities mainly included
situation. The liquidity problems therefore posed a
public sector finance lending businesses and budget
serious threat to the existence of the HRE group.
credit and the financing of infrastructure projects (e.g.
roads, bridges, tunnels and public buildings). As its
name suggests, HRE Finance i.L. is a company in liqui
(27) HRE’s
difficulties
were,
inter
alia,
also
attributable
to
a
dation (
legacy problem stemming from assets that did not show

14 ).
an appropriate return on investment if their actual risk
profile was taken into account, and to the fact that HRE
was the product of a merger of several smaller banking
(21) FMS-WM,
the
winding-up
institution
for
HRE,
was
estab
institutes which were using different IT systems, […] (*).
lished in 2010. It manages the assets and derivatives of
the HRE group that it has taken over because they were
II.3. The State aid measures
either non-strategic or contained an unacceptable risk or
capital burden. FMS-WM has in the course of time taken
(28) Overall,
the
German
State
has
provided
or
will
provide
over a considerable part of HRE’s assets. FMS-WM does
HRE with capital injections totalling up to approximately
not have a banking licence.
EUR 9,95 billion (FMS-WM has received or will receive
part of that capital) and guarantees of EUR 145 billion.
HRE also benefited from an asset relief measure with an
aid element of approximately EUR 20 billion.
(22) HRE reported losses of EUR 5,5 billion for the financial
year 2008, losses of EUR 2,2 billion for 2009 and losses
of EUR 0,9 billion for 2010.
II.3.1. Capital injections
II.3.1.1. C a p i t a l
i n j e c t i o n
o f
E U R 6 0
m i l l i o n
(23) By injecting capital amounting to approximately
EUR 3,02 billion (EUR 60 million in March 2009,
(29) As part of Germany’s intention to gain full control over
EUR 2,96 billion in June 2009), Germany became 90 %
HRE by acquiring all its shares in several steps, on
owner of HRE. In autumn 2009 a squeeze-out of
30 March 2009 SoFFin bought 20 million new HRE
minority shareholders took place. Germany acquired the
shares at their nominal value of EUR 3 per share,
remaining shares, paying EUR 1,30 per share, and
resulting in a capital injection to HRE of EUR 60
becoming 100
% owner of HRE. A restructuring
million and giving SoFFin an 8,65 % share in the
process was subsequently initiated for HRE.
equity. That capital injection was temporarily approved
by the Commission on 13 November 2009.
II.3.1.2. C a p i t a l
i n j e c t i o n
o f
E U R 2 , 9 6
II.2. HRE’s difficulties in the context of the financial
b i l l i o n
crisis


(30) On
2
June
2009,
HRE
shareholders
approved
a
capital
(24) At
the
end
of
September
2008,
HRE
faced
a
liquidity
injection amounting to EUR 2,96 billion into HRE by
shortage, which put the bank on the brink of insolvency.
issuing new shares to be acquired by SoFFin. As a
HRE was not able to obtain short-term financing on the
result, SoFFin held 90 % of the shares of HRE. Those
markets because the financial market crisis led to the
newly issued shares were registered in the commercial
collapse of some financing markets. After Lehman
register on 8 June 2009. This capital injection was
Brothers applied for creditor protection, the interbank
temporarily approved by the Commission on
market in particular came to an almost complete
13 November 2009.
standstill in mid-September 2008.
II.3.1.3. C a p i t a l i n j e c t i o n o f E U R 3 b i l l i o n
(25) The
business
model
of
DEPFA
Bank
plc,
a
wholly
owned
(31) The
capital injection notified on 26 October 2009,
subsidiary of HRE since October 2007 that was highly
amounting to EUR 3,0 billion in total, was structured
dependent on funding from the interbank market and
as follows:
other short-term unsecured funding sources, proved to
be extremely fragile in the face of the liquidity crisis, and
the resulting problems threatened its very existence.
(a) EUR 2 billion was injected into the uncommitted

reserves (‘freie Rücklagen’) of HRE Holding and PBB.
After the squeeze-out of minority shareholders, HRE
( 14 ) HRE Finance i.L. was created in 2007 for the purpose of one
was entirely owned by Germany/SoFFin;
specific securities transaction and has been in liquidation since
2008. It has no employees and its balance sheet total at the end
of 2010 was only EUR 275 000. (*)
Confidential
information.

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L 60/4
EN
Official Journal of the European Union
1.3.2012
(b) EUR 1 billion was injected as a silent participation in
of HRE. The guarantees were temporarily approved by
PBB, with a profit-dependent coupon of 10 % p.a.
the Commission on 2 October 2008.
(32) The
contracts
for
that
EUR
3
billion
capital
injection
(37) These
guarantees were provided for a liquidity line
were signed on 16 November 2009. The capital
amounting to EUR 20 billion provided by the Deutsche
injection was temporarily approved by the Commission
Bundesbank and for guaranteed notes amounting to
on 13 November 2009.
EUR 15 billion taken up by a consortium of German
financial institutions.
II.3.1.4. C a p i t a l
i n j e c t i o n
o f
u p
t o
E U R 1 , 8 5 b i l l i o n
(38) HRE
paid
a
guarantee
premium
to
the
State
for
the
EUR 35 billion guarantee consisting of a basic premium
(33) The
capital
injection
of
up
to
EUR
1,85
billion,
into
the
and a performance-related premium. The basic premium
uncommitted reserves (‘freie Rücklagen’) of HRE, was
consisted of 1 % p.a. on the so-called ‘First-Loss-Guar
divided into two tranches:
antee-Amount’ and of 0,5 % p.a. on the so-called
‘Second-Loss-Guarantee-Amount’. The performance-
related premium consisted of 1,25 % p.a. on the ‘First-
(a) a capital injection of EUR 1,4 billion (that tranche
Loss-Guarantee-Amount’ and of 0,25 % p.a. on the
was temporarily approved by the Commission on
‘Second-Loss-Guarantee-Amount’.
19 May 2010 and was injected thereafter);
II.3.2.2. G u a r a n t e e s o f E U R 5 2 b i l l i o n
(b) a capital injection of up to EUR 450 million (that
tranche was also temporarily approved by the
(39) Between November 2008 and February 2009 HRE
Commission on 19 May 2010, contingent on the
received guarantees of a total amount of EUR 52
existence of certain circumstances ( 15 ). It has not yet
billion from SoFFin on the basis of the approved
been injected as those circumstances have not yet
German banking rescue scheme ( 16 ).
occurred).
(40) HRE paid a guarantee fee of 0,5 % for the parts of the
(34) The capital injection of EUR 1,85 billion is part of a total
guarantee actually used to cover bonds and a
capital need set out in the restructuring plan for HRE.
commitment fee of 0,1 % for parts not used.
EUR 1,4 billion of this capital injection was injected in
order to comply with regulatory capital requirements and
to have a risk buffer. The contract for that EUR 1,4
II.3.2.3. G u a r a n t e e o f E U R 8 b i l l i o n
billion capital injection was signed on 20 May 2010.
Germany expects the other part of the EUR 1,85
(41) The
‘secured
notes’
expiring
on
23
December
2009
were
billion, i.e. EUR 450 million, to be injected in the third
replaced by a SoFFin guarantee for EUR 8 billion. The
quarter of 2011.
Commission temporarily approved that guarantee on
21 December 2009.
II.3.1.5. C a p i t a l
i n j e c t i o n
o f
E U R 2 , 0 8
b i l l i o n
(42) HRE
paid
a
guarantee
premium
to
SoFFin
amounting
to
0,5 % p.a. of the guaranteed sum. For parts of the
(35) On
10
September
2010
the
German
authorities
notified
guarantee that were not used, a commitment fee of
a capital injection of up to EUR 2,13 billion for HRE. On
0,1 % p.a. was applicable.
14 June 2011, Germany clarified that the capital
injection would not amount to EUR 2,13 billion but to
EUR 2,08 billion and that the amount would be injected
II.3.2.4. G u a r a n t e e o f E U R 1 0 b i l l i o n
into FMS-WM. According to Germany, the EUR 2,08
billion would be injected in the third quarter of 2011.
(43) On
21
December
2009
a
SoFFin
guarantee
of
EUR
10
SoFFin put the EUR 2,08 billion, subject to agreement by
billion, lasting for one year at most, was temporarily
the European Commission, as a capital claim (‘Einlagean
approved by the Commission, in order to ensure the
spruch’) into the capital reserve (‘Kapitalrücklage’) of HRE
liquidity needs of HRE.
Holding. HRE Holding transferred that capital claim to
FMS-WM as of 1 October 2010.
(44) HRE
paid
a
guarantee
premium
to
SoFFin
amounting
to
0,5 % p.a. of the guaranteed sum. For parts of the
II.3.2. Guarantees
guarantee that were not used, a commitment fee of
0,1 % p.a. was applicable.
II.3.2.1. G u a r a n t e e s o f E U R 3 5 b i l l i o n
(36) On
13
November
2008
Germany
provided
State
guar
( 16 ) Commission decision of 27 October 2008 in case N 512/08,
antees of EUR 35 billion to bridge the refinancing needs
Rettungspaket für Kreditinstitute in Deutschland, replaced by
Commission decision of 12 December 2008 in case N 625/08,
Rettungspaket für Finanzinstitute in Deutschland (OJ C 143,
( 15 ) See footnote 10.
24.6.2009, p. 1).

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1.3.2012 Official
Journal
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the
European
Union L
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II.3.2.5. G u a r a n t e e o f E U R 2 0 b i l l i o n
usage) into a government-backed vehicle to be wound
down over a number of years. The transferred non-
(45) HRE needed an additional EUR
20 billion liquidity
strategic assets also included those that could not be
guarantee because of adverse developments on the
used as collateral for covered bonds.
capital and interest rates futures markets, which
affected HRE until the assets had been transferred to
the winding-up institution FMS-WM. The guarantee was
temporarily approved by the Commission on
(51) The
effective
transfer
date
was
30
September
2010.
By
24 September 2010.
that time, due to amortisation, the portfolio earmarked
for the transfer had a book value of EUR 173 billion. In
accordance with the Communication from the
Commission on the treatment of impaired assets in the
Community banking sector (‘Impaired Asset Communi
(46) HRE paid a guarantee premium of 0,8 % p.a. For the part
cation’ or ‘IAC’) (
of the guarantee not used a commitment fee of 0,1 %

17 ), the Commission appointed external
experts to support it in valuing the portfolio, determining
p.a. was applicable.
the aid element and assessing whether and to what extent
the value of the transfer made was above the real
economic value (REV) of the portfolio. As laid down in
the IAC, Germany also commissioned an external expert
II.3.2.6. G u a r a n t e e o f u p t o E U R 2 0 b i l l i o n
to perform an independent valuation.
(47) A
settlement
guarantee
of
up
to
EUR
20
billion
was
needed because of the remaining uncertainties regarding
the technically complicated procedures in connection
(52) The portfolio included about EUR
30 billion of
with the transfer of assets to the winding-up institution.
commercial real estate loans, which are geographically
The guarantee was temporarily approved by the
diversified and composed mainly of financing of office
Commission on 24 September 2010.
buildings and shopping centres. They are of a relatively
short duration (three years) but of inferior credit quality.
(48) HRE
paid
a
guarantee
premium
to
SoFFin
of
0,8
%
p.a.
(53) The
non-commercial
real
estate
part
of
the
portfolio
was
For the unused part of the guarantee a commitment fee
composed of public sector finance or bonds and loans to
of 0,1 % p.a. was applicable.
public entities or utilities. Most of that business consisted
of standard bonds (‘plain vanilla bonds’), but it also
included EUR 31 billion of ‘structured credit instruments’
and another EUR 30 billion of public sector loans. The
quality of the assets in this part of the portfolio was
II.3.3. Transfer of assets to a winding-up institution
significantly better than that of the commercial real
(49) On
10 September 2010, Germany
also notified the
estate loans. However, due to their long maturities and
transfer of a notional amount of about EUR 210
with the market credit spread widening since acquisition,
billion of assets and about EUR 280 billion of derivatives
the securities suffered from a significant discount in
to the winding-up institution FMS-WM. FMS-WM was
terms of market price.
created by a board decision of 8 July 2010 in accordance
with the German Finanzmarktstabilisierungsfondsgesetz
[Financial Market Stabilisation Fund Act] (§ 8a of the
FMStFG). It manages assets and derivatives of the HRE
(54) The
Commission’s
experts
found
that,
in
contrast
to
some other State aid cases, the complex commercial
group that it has taken over because they were either
real estate loans and structured credit assets categories
non-strategic or contained an unacceptable risk and
(mainly consisting of student loan backed securities,
capital burden. FMS-WM acts independently of HRE
public sector asset backed securities and EUR 5 billion
and benefits from an obligation on the part of SoFFin
in a total return swap investment) were overall safe.
to compensate losses (‘Verlustausgleichspflicht’). However,
They expected only limited losses on those categories,
FMS-WM does not have a banking licence. As a result,
albeit higher than estimated by Germany’s experts,
many of the HRE assets could only be synthetically trans
mainly due to the valuation of cash bonds in the
ferred; a variety of ‘transfer’ mechanisms, depending on
Halcyon/Pegasus structures as well as the negative basis
the specific circumstances, were devised to obtain a
and the implicit funding cost in the total return swaps.
similar regulatory capital relief effect for PBB and the
By contrast, the ‘plain vanilla’ bonds were transferred at
HRE group.
an asset swap level close to parity, considerably above
their REV. In addition, they belonged to markets that
were not particularly impaired, so that their REV
should in fact be close to their market value. As a
(50) The transfer was temporarily approved by the
result, the Commission’s experts concluded that the
Commission on 24 September 2010. The measure trans
REV of that part of the portfolio would be considerably
ferred non-strategic and non-performing assets such as
below the value at which HRE transferred it to FMS-WM.
government bonds or non-performing property loans (or,
as described in recital 49, only their regulatory capital
( 17 ) OJ C 72, 26.3.2009, p. 1.

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(55) For the derivatives portfolio, the Commission’s experts largely agreed with the findings of Germany’s
experts. In addition, they estimated the countervalue of the credit risk to be slightly higher than the
level found by Germany’s experts and incorporated some findings from their sample as well as a
general ‘operational risk’ charge, motivated by prudent assumptions surrounding shortcomings in the
overall hedge effectiveness.
(56) The table below summarises the findings of the Commission’s experts:
(in EUR billion)
Δ REV–TV
Δ REV–TV
Divergence
Portfolio Notional
value
Transfer value
(TV)
(Germany’s
(Commission’s (Commission v
figures)
experts’ figures)
Germany)
Bonds 83,444 93,960 –
0,902 –
7,590 –
6,688
Structured Credit 31,199 30,111 –
0,765 –
1,981 –
1,216
CRE loans 26,312 23,874 –
1,211 –
2,800 –
1,589
Non-CRE loans 29,834 31,115 –
0,222 –
1,084 –
0,862
Derivatives 280,255 –
13,106 –
2,149/ – 2,786 –
0,255
– 2,531
Total 451,044 165,954 –
5,249/ – 16,241 –
10,610
– 5,631
(57) As
a
result,
the
aid
amount
that,
in
line
with
the
IAC,
is
activities that generate low margins, and the plan
not a priori compatible with the internal market (which
contained very little information on issues that are vital
is defined as the difference between REV and transfer
to the restructuring process such as the modification and
value) is determined by the experts as being about
integration of the IT systems. At that stage, the
EUR 16,2 billion. The total aid amount, i.e. the difference
Commission also had doubts that there were sufficient
between transfer value and market value, is difficult to
measures to limit distortions of competition and
establish due to the lack of easily available market prices
sufficient burden-sharing measures.
for the loan part of the portfolio. The extreme
assumption that the market value of the loan book is
zero would give a total aid amount of EUR 90 billion.
(59) The in-depth investigation was extended on
Assuming that the loans trade in the same way as liquid
13 November 2009 because:
bonds of similar maturity and credit quality, the total aid
would be around EUR 20 billion.
(a) the additional State aid measures for HRE, in the
II.4. Grounds for initiating and extending the in-
form of a capital injection of EUR 2,96 billion (cf.
depth investigation
recital 30), a capital injection of EUR 3 billion (cf.
recitals 31 and 32), a guarantee of EUR 8 billion
(58) On
7
May
2009,
the
Commission
opened
an
in-depth
(cf. recitals 41 and 42), a guarantee of EUR 10
investigation into State aid measures for HRE, mainly
billion (cf. recitals 43 and 44) and a guarantee of
based on doubts regarding HRE’s viability, in particular
EUR 2 billion ( 18 ) for refinancing a possible
in the light of HRE’s refinancing strategy and needs. The
winding-down solution, plus capital injections
initial restructuring plan submitted to the Commission
amounting to a total of EUR 4 billion (structured as
on 1 April 2009 only identified external factors as
follows: the capital injection of EUR 1,85 billion
reasons for HRE’s financial problems and targeted a
referred to in recitals 33 and 34 and the capital
balance sheet reduction of only 25 %, meaning that the
injection of EUR 2,08 billion discussed in recital
refinancing volume would have remained high. HRE
35) had to be covered; and
planned to reduce the group balance sheet by selling
assets on the market, not by transferring them to a
( 18 ) According to Germany, the EUR 2 billion for the winding-up insti
winding-up institution. One of the core business fields
tution was never formally requested by HRE or approved by SoFFin.
described in the restructuring plan was budget finance
The Commission did not approve that guarantee.

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1.3.2012 Official
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European
Union L
60/7
(b) the Commission had doubts that the restructuring
for example, be reduced to approximately 30 % of its
measures were compatible with the Commission
pre-crisis level (HRE’s new business in commercial real
communication on the return to viability and the
estate finance amounted to EUR 32,1 billion in 2007).
assessment of restructuring measures in the
The workforce has been reduced by approximately 30 %,
financial sector in the current crisis under the State
and all the executive board members of HRE who held
aid rules ( 19 ) (Restructuring Communication).
office before the crisis have been replaced. More than 30
participations, one third of which are outside Europe,
have already been divested or liquidated, or are in the
process of liquidation. Some 26 out of 32 branches have
(60) On
24
September
2010
the
in-depth
investigation
was
been closed. In addition, a multi-year, group-wide trans
extended once more because:
formation project called ‘New Evolution’ with a budget of
approximately EUR 180 million has been launched to
improve and integrate the IT systems.
(a) the additional State aid measures for HRE, namely a
guarantee of EUR 20 billion (cf. recitals 45 and 46), a
further guarantee of up to EUR 20 billion (cf. recitals
(64) PBB
will
continue
two
strategic
business
lines,
real
estate
47 and 48) and the transfer of assets to a winding-up
finance (REF) and public investment finance (PIF). Both
institution (cf. recitals 49 to 57) had to be covered;
business lines target assets that are eligible for German
and
covered bonds, either in the form of German mortgage
bonds (‘Hypothekenpfandbriefe’) or in the form of German
public sector bonds (‘ffentliche Pfandbriefe’). All other
activities, in particular budget finance business, infra
(b) the Commission had doubts regarding the compati
structure finance, capital markets and asset management
bility of the asset relief measure with the IAC, in
activities, will be terminated.
particular with respect to transparency, valuation,
burden sharing and remuneration, and had noted
that the restructuring plan had shortcomings with
(65) The
arrangements
for
the
two
other
subsidiaries
of
HRE
regard to demonstrating the restoration of viability,
Holding are as follows: DEPFA Bank plc is put into run-
proper burden sharing and appropriate mitigation of
down as of the date of notification of this Decision and
distortions of competition.
will not generate any new business. The same applies to
its subsidiaries. HRE Finance is in liquidation and also
not carrying out new business.
II.5. Main features of the restructuring plan
(61) On
1
April
2009
Germany
notified
a
first
draft
of
a
(66) Germany
claims
that
the
fundamental
decision
to
pursue
restructuring plan for HRE and, after several modifica
a more conservative commercial strategy and to focus on
tions, it submitted the final update of the plan on
German covered bonds as the primary refinancing source
14 June 2011. Unless otherwise specified, all references
ensures a qualitative improvement of the lending
to the restructuring plan in the remainder of this
activities because they are subject to the legal
Decision are to this final version of 14 June 2011.
framework of the German Pfandbriefgesetz [Pfandbrief
Act], which has specific requirements regarding the
management, monitoring and control of risks, and
provides for protective measures such as limitation of
(62) According
to
the
restructuring
plan,
HRE
—
having
been
the loan-to-value ratio. That funding strategy
freed from its legacy of impaired assets with a nominal
considerably reduces HRE’s previous dependency on the
value of EUR 210 billion by transferring them to the
interbank money market, which in future is only needed
winding-up institution FMS-WM — will redesign its
for the warehousing period preceding the issuance of
business activities in such a way that its core bank PBB
covered bonds.
can carry out its activities based on a stable funding
approach and improved internal control systems. Its
future activities will be on a considerably smaller scale
than HRE’s activities before the crisis, regardless of
III. COMMENTS FROM INTERESTED PARTIES
whether measured in terms of balance sheet size,
(67) The
Commission received comments from interested
volume of new business, workforce, branch network or
parties, as summarised below:
geographical scope.
(a) Summary of comments from Verband deutscher
(63) Compared with the situation before the crisis, PBB’s
Pfandbriefbanken (vdp) (November 2009):
strategic balance sheet size at the end of 2011 —
corrected for items that are in run-down mode or have
been synthetically transferred to FMS-WM — accounts
— vdp is convinced that a business model which is
for approximately 15 % of HRE’s balance sheet size at
aligned on Pfandbrief-eligible business is
the end of 2008. New business in real estate finance will,
promising and capable of ensuring the long-
term viability and profitability of a bank
( 19 ) OJ C 195, 19.8.2009, p. 9.
without State guarantees.

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(b) Summary of comments from Heisse Kursawe
(c) Summary of comments regarding Bohdan Kalwa
Eversheds (November 2009):
rowskyj:
— Heisse Kursawe Eversheds is of the opinion that
— Germany agrees with Mr Kalwarowskyj that, on
the State aid violates the rights of certain share
the basis of the planned restructuring measures,
holders, that the planned acquisition of all HRE
the long-term viability of HRE would be secured.
shares by SoFFin by excluding minority share
holders (squeeze-out) constitutes further State
aid, that the squeeze-out is not appropriate aid
V. POSITION OF GERMANY
and that it violates the principle of free
movement of capital.
(69) Germany
accepts
that
the
measures
constitute
State
aid
within the meaning of Article 107(1) TFEU.
(c) Summary of comments from Heisse Kursawe
Eversheds (February 2010):
(70) In
order
to
ensure
that
the
business
model
set
out
in
the
restructuring plan is put into action, and to ensure that
— In its further comments, Heisse Kursawe
adequate burden sharing is achieved and distortions of
Eversheds is of the opinion that the exclusion
competition are limited to the minimum necessary, on
of the minority shareholders of HRE (squeeze-
15 June 2011 Germany submitted a number of commit
out) is State aid within the meaning of
ments, supplemented on 1 July 2011 ( 20 ), which can be
Article 107 et seq. TFEU, that such State aid
summarised as follows:
violates the freedom of movement of capital,
and that State aid for HRE may only be auth
orised if HRE will be continued on the basis of
(a) Implementation
of
the
restructuring
plan
and
the
commit
a sustainable restructuring plan.
ments: Germany will ensure that the restructuring
plan as set out in its final version and the
commitments are fully implemented.
(d) Summary of comments from Bohdan Kalwarowskyj
(February 2010):
(b) Duration of the commitments: In principle the
commitments are valid until the end of the restruc
— Mr Kalwarowskyj is of the opinion that, based on
turing period, i.e. 31 December 2015. However,
the valuation documents of HRE presented in the
commitments regarding DEPFA Bank plc and its
context of the squeeze-out on 5 October 2009, it
subsidiaries will in principle end as soon as
is evident that HRE will be viable and profitable,
DEPFA Bank plc is reprivatised, if that happens
and that SoFFin in cooperation with HRE aims to
sooner. In such a case, Germany would notify the
manipulate the company value downwards.
Commission of the sale in advance and would not
implement the sale without the Commission’s
IV.
approval, if it were to take place before
COMMENTS FROM GERMANY ON THE COMMENTS
31 December 2013. Commitments regarding PBB
FROM INTERESTED PARTIES
will end as soon as PBB is reprivatised, but in any
(68) On
24
March
2010
the
Commission
received
comments
event not before 31 December 2013
from Germany on the comments from interested parties:
(c) Business lines: Germany will ensure that only PBB
(a) Summary of comments regarding Verband deutscher
will pursue new business and will do so only in
Pfandbriefbanken (vdp):
two business lines, real estate finance and public
investment finance. All other business lines are
stopped (the budget finance portfolio will remain
— According to Germany, the comments from vdp
on the PBB balance sheet but in run-down mode)
confirm that the planning of HRE’s business
and all other entities of the HRE group will stop
model is based on plausible assumptions.
their business activities.
(b) Summary of comments regarding Heisse Kursawe
Eversheds:
(d) Reprivatisation of PBB: Germany will reprivatise PBB
as soon as possible, and by 31 December 2015 at
the latest.
— Germany is of the opinion that the squeeze-out
does not constitute State aid within the meaning
of Article 107(1) TFEU. As the squeeze-out does
(e) Restriction
of
growth
of
PBB: Germany will ensure that
not constitute State aid, the question whether
the growth rates of PBB remain within defined
there is a violation of the principle of free
limits, measured in terms of balance sheet size as
movement of capital (which is not the case in
well as volume of new business.
Germany’s opinion) is not relevant to the in-
depth investigation at hand.
( 20 ) The full commitments document is annexed to this Decision.

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1.3.2012 Official
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Union L
60/9
(f) Winding-up institution: Germany will ensure that,
(j) Restrictions
regarding
paybacks: Germany will ensure
after 30 September 2013, PBB will provide neither
that HRE and its subsidiaries refrain from paying
asset management services nor refinancing services
back existing financial instruments.
for the winding-up institution FMS-WM and that,
from an organisational point of view, those
services can be taken over by third parties.
(k) Acquisition ban: Germany will ensure that HRE and
its companies do not acquire other businesses
during the restructuring period.
(g) Market presence: Germany will ensure that PBB will
acquire new business only on the following
(l) Commitments relating to information technology of
geographic markets:
HRE/PBB: Germany will ensure that the project set
up to improve the bank’s IT systems is fully imple
mented.
(i) Real estate finance:
(m) Commitment relating to RAROC: Germany will ensure
that PBB’s strategic new business does not issue any
— Core markets ( 21 ): Germany, United
new loans that have a risk-adjusted return on capital
Kingdom, France and Spain.
(RAROC) of less than 10 % on a transaction-by-
transaction basis.
— Further markets: Sweden, Poland, Czech
(n) Monitoring trustee: Germany will ensure that the
Republic, Belgium, Netherlands,
restructuring plan and all commitments are
Luxembourg, Austria, Switzerland,
correctly implemented and that the implementation
Denmark, Finland, Norway, Slovakia and
is constantly monitored by a sufficiently qualified
Hungary.
monitoring trustee.
(ii) Public investment finance:
VI. ASSESSMENT OF THE AID
VI.1. Existence of State aid under Article 107(1)
TFEU and potential beneficiaries
— Core markets: Germany, France, Spain and
Italy.
(71) The
various
measures
in
question
were
provided
either
directly by Germany or by SoFFin, an entity set up and
controlled by the German Government, and thus involve
— Further markets: Switzerland, Austria,
State resources. The measures provide a selective
Poland, Hungary, Czech Republic, Slovakia,
advantage to HRE, enabling it to obtain new capital
Sweden, Norway, Denmark, Finland,
and guarantees and benefit from asset relief measures
Belgium, Netherlands, Luxembourg and
on more favourable conditions than could normally
United Kingdom.
have been found on the market. HRE is an inter
nationally active bank, competing with other banks in
Germany and other countries. Therefore, for the same
(h) Remuneration for using the winding-up institution:
reasons as already outlined in the previous Commission
Germany will ensure that HRE, within the limits
decisions on HRE ( 22 ), the measures constitute State aid
of its abilities, pays adequate remuneration in
within the meaning of Article 107(1) TFEU.
return for using the winding-up institution FMS-
WM. Specifically, Germany will ensure that the
(72) Within
the
HRE
group
only
PBB
(and
its
subsidiaries)
is
Bundesanstalt für Finanzmarktstabilisierung
pursuing new economic activities and is thus active on
(‘FMSA’) orders HRE to pay an amount of
the markets. PBB can thus be regarded as the entity
EUR 1,59 billion to FMS-WM either directly or via
continuing the activities of the former HRE (albeit to a
its subsidiaries. Those subsidiaries of HRE which
limited extent, as explained in recital 63). All other
transferred assets to the winding-up institution and
entities of the HRE group (i.e. DEPFA Bank plc and its
which have a core capital quota exceeding 15 % are
subsidiaries and HRE Finance i.L.) are in run-down mode
in principle liable for that payment. PBB will retain
and their activities are limited to what is necessary to
and accumulate profits in order to pay back the
allow for an orderly run-down, but they do not
silent participation.
generate new business.
(
(i) Restrictions regarding coupon payments and profit

22 ) Commission decision of 2 October 2008 (OJ C 293, 15.11.2008,
p. 1); Commission decision of 7 May 2009, replaced by the
distribution: Germany will ensure that HRE and its
decision of 24 July 2009 in case C 15/09 (ex N 196/09) (OJ C
subsidiaries refrain, within the legal limits, from
240, 7.10.2009, p. 11); Commission decision of 13 November
coupon payments and other measures of profit
2009 in cases C 15/09 (ex N 196/09), N 333/09 and N 557/09)
distribution.
(OJ C 13, 20.1.2010, p. 58); Commission decision of 21 December
2009 in case N 694/09 (OJ C 25, 2.2.2010, p. 14); Commission
decision of 19 May 2010 in case N 161/10 (OJ C 190, 14.7.2010,
( 21 ) PBB has an established branch network in core markets but not in
p. 7); Commission decision of 24 September 2010 in cases
the further markets.
C 15/09 (ex N 196/09) and N 380/10 (OJ C 300, 6.11.2010, p. 6).

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(73) The
final
objective
and
effect
of
all
the
aid
measures
serious disturbance in the economy of a Member State.
(irrespective of whether they were formally granted to
As the breakdown of a systemically relevant bank can
HRE, HRE Holding, PBB or DEPFA Bank plc) is to
directly affect the financial markets and indirectly affect
enable PBB to continue to be active on the markets. It
the entire economy of a Member State, the Commission
is thus PBB’s continued existence on the markets which is
currently, in the light of the ongoing fragile situation on
distorting competition. DEPFA Bank plc can (like FMS-
the financial markets, bases its assessment of State aid
WM) be considered merely as a winding-up institution
measures in the banking sector under State aid law on
for assets which for various reasons were not transferred
that provision.
to FMS-WM (the ‘bad bank’). It will realise its assets as
they mature or by selling them on the market, but will
not contract new business as of the date of notification
of this Decision ( 23 ).
(77) The
Commission
has
no
grounds
to
doubt
Germany’s
qualification of HRE as a bank of systemic relevance, in
particular in the light of the position it previously held in
the German Pfandbrief market, the original size of HRE’s
balance sheet and the amount of derivatives previously
(74) In view of the fact that PBB is therefore the economic
continuation of HRE and, in line with the Commission’s
held by HRE.
decision-making practice ( 24 ), PBB is considered the bene
ficiary of the aid, the assessment of the compatibility of
the aid which follows will therefore concentrate on PBB.
(78) The
Commission
observes
that
HRE
has
received
rescue
aid which the Commission has found to be compatible
with the internal market; however, that aid will now have
to be assessed to determine whether it may be considered
(75) As regards the view expressed by Heisse Kursawe
to be restructuring aid which is compatible with the
Eversheds that the squeeze-out constitutes State aid, the
internal market. Therefore the Commission must now
Commission notes that, while the capital injections into
assess the compatibility of those measures and all
HRE constitute State aid, the squeeze-out of minority
further restructuring measures, i.e. the guarantees of
shareholders (i.e. the acquisition of their shares against
EUR 52 billion and the capital injection of EUR 2,08
payment to those shareholders) does not in itself contain
billion, on the basis of the Impaired Asset Communi
State aid elements because it does not provide the bank
cation and the Restructuring Communication.
with an advantage stemming from State resources. The
squeeze-out involved a payment from the State to the
minority shareholders, but this had no economic effect
on HRE. From HRE’s perspective only its ownership
structure changed. As a result, the question whether the
squeeze-out infringes the Treaty provisions on free
VI.2.2. Assessment on the basis of the Impaired Asset
movement of capital does not need to be assessed
Communication (IAC)
within this Decision.
(79) Any
asset
transfer
to
a
winding-up
institution
must
take
place in accordance with the IAC. Furthermore, the
Restructuring Communication clearly states that
adequate remuneration of any State intervention
generally is one of the most appropriate limitations of
distortions of competition, as it limits the amount of
VI.2. Compatibility of the aid with the internal
State aid. A limit on the bank’s expansion in certain
market
business or geographical areas may also be required,
VI.2.1. Application of Article 107(3)(b) TFEU
for instance via market-oriented remedies such as
specific capital requirements, where the market would
(76) Under
Article
107(3)(b)
TFEU,
aid
may
be
considered
to
be weakened by direct restrictions on expansion, or to
be compatible with the internal market if it remedies a
limit moral hazard.
( 23 ) This commitment with regard to winding-up does not per se
prejudice the possibility that Germany might sell parts of DEPFA
Bank plc or the entire DEPFA Bank plc or any of its subsidiary
companies at a later date. If such sales were to take place before the
(80) As
regards
the
eligibility
of
assets
earmarked
for
transfer,
end of December 2013, they would be notified to the Commission
and would not be effected before the Commission had given its
paragraph 34 of the IAC recognises the necessity of a
approval. In a scenario in which the DEPFA Bank plc group or any
pragmatic and flexible approach to the selection of asset
of its parts were to start to recommence operations on the market,
types for impaired assets measures. The Commission has
this commitment enables the Commission to examine whether any
applied that flexibility in other State aid cases and
state aid from which the DEPFA Bank plc had benefited was
accepted the transfer of assets which, strictly speaking,
distorting competition and — if necessary — to take appropriate
were not distressed but were non-strategic in view of the
measures to reduce such distortion.
( 24 ) See, for example, Commission decision of 31 March 2011 in case
profound change in the business model of the bank in
SA.32745 (2011/NN, Kommunalkredit, not yet published).
question.

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1.3.2012 Official
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European
Union L
60/11
(81) As set out in paragraph 46 of the IAC, in order to
However, it has introduced clauses allowing for recovery
facilitate the bank’s focus on the restoration of viability
as far as possible. They consist of:
and to prevent possible conflicts of interest, it is
necessary to ensure clear functional and organisational
separation between the beneficiary bank and its
impaired assets. The Commission understands that
(a) a contingent payment of EUR 1,59 billion from HRE
when the winding-up institution was created it was not
to the winding-up institution;
possible, in particular for technical reasons, to
immediately cut the links between PBB and FMS-WM.
However, that situation must be remedied as quickly as
possible. On that basis, Germany has committed that PBB
(b) the use by PBB of retained profits to redeem the
will establish the full organisational independence of the
silent participation of the Federal Republic of
related services and will no longer provide them to FMS-
Germany;
WM after 30 September 2013.
(c) after the payment of EUR 1,59 billion has been made
in full, the DEPFA Bank plc sub-group (i.e. parent
(82) As
regards
valuation
and
burden
sharing,
paragraph
21
company and all subsidiaries) must pay to Germany
of the IAC notes that correct remuneration is an element
an adequate remuneration for the State support;
of the burden-sharing requirement. The Commission will
ensure, as noted in Annex IV to the IAC, that any pricing
of the asset relief includes remuneration for the State that
adequately takes account of the risks of future losses
(d) although HRE has been nationalised, Germany plans
exceeding those that are projected in the determination
to reprivatise PBB, which means that Germany will
of the REV. In line with the Commission’s decision-
receive proceeds from any subsequent reprivatisation.
making practice on asset relief measures
( 25 ), the
Due to the fact that the State has taken the bank into
assessment of necessary remuneration of the capital
public ownership and now plans to reprivatise it, it
relief effect will be based on a transfer at the REV,
can also be argued that the State will try to recu
even if that is lower than the transfer value.
perate as much of its contribution as possible and
that former shareholders have contributed adequately.
(83) Paragraph
41
of
the
IAC
states
that
the
transfer
value
should correspond to the REV. Where a Member State
Moreover, the proposed restructuring is very far-reaching
considers it necessary — in particular to avoid technical
and includes a dramatic downsizing of the ‘good’ core
insolvency — to use a transfer value for assets that
bank, to approximately 15 % of HRE’s size at the end of
exceeds their REV, it can only be accepted if accom
2008. Together with commitments on growth restriction,
panied by far-reaching restructuring and the introduction
product range limitations, corporate governance and
of conditions allowing the recovery of that additional aid
reprivatisation through a public tender, the complete
at a later stage, for example through a claw-back mech
restructuring package can be considered sufficiently far-
anism.
reaching within the meaning of the IAC.
(86) The
Commission
also
observes
that
the
doubts
it
raised
(84) On
that
basis,
the
Commission
comes
to
the
conclusion
about Germany’s and HRE’s willingness and ability to
that the difference between the REV and the transfer
provide full ex ante transparency and disclosure of the
value, which is to be recovered at a later stage and
impairments have been alleviated by the extensive data
which was established with the support of the Commis
delivery from a dedicated team at the bank. In addition,
sion’s independent experts, is at the level of EUR 16,2
partly at the Commission’s request, HRE has had its data
billion, and calls for a particularly thorough restructuring
sets audited for consistency and quality, which facilitated
and downsizing of the bank. No additional remuneration
the final assessment by the Commission’s experts.
is required, pursuant to paragraph 21 of the IAC,
Furthermore, Germany and PBB have committed to far-
because, after an a priori capital deduction of EUR 16,2
reaching improvements to the risk management and
billion, the measure does not entail any further capital
reporting systems in order to alleviate the Commission’s
relief effect ( 26 ).
concerns about potential gaps in management
information systems in the future.
(85) The Commission observes that Germany has not
explicitly provided for recovery of that amount.
VI.2.3. Compatibility with the Restructuring Communication
(87) The
Restructuring
Communication
sets
out
the
State
aid
( 25 ) Cf. Commission Decision 2010/395/EU in case C 17/09, LBBW
rules applicable to the restructuring of financial insti
(OJ L 188, 21.7.2010, p. 1), and Commission Decision
2010/608/EC in case C 10/09 ING (OJ L 274, 19.10.2010, p. 139).
tutions in the current crisis. According to the Restruc
( 26 ) Cf. Commission Decision 2010/395/EU.
turing Communication, in order to be compatible with

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the internal market under Article 107(3)(b) TFEU, the
bank and internal control systems, are intended to ensure
restructuring of a financial institution in the context of
that the liquidity problems that put the bank on the
the current financial crisis must lead to the restoration of
brink of insolvency cannot be repeated. The restructuring
the long-term viability of the bank, include a sufficient
plan addresses the main concerns very specifically by
own contribution by the beneficiary (burden sharing) and
focusing on a more stable, Pfandbrief-based funding
contain sufficient measures limiting the distortion of
concept, by considerably reducing the previous
competition ( 27 ).
dependence on the interbank money market, by
improving and integrating its IT systems and by
reducing the geographical scope, the branch network
and the absolute size of the business. Terminating
(88) The
amount
of
capital
injections
already
granted,
the
other activities and treating them as a run-down
amount of capital injection still envisaged and the
portfolio on the PBB balance sheet is the logical
amount of State aid resulting from the asset transfer
complement to that concept.
together represent more than 20 % of HRE’s pre-crisis
risk weighted assets.
(92) Consequently,
the
two
remaining
business
lines
of
PBB
will only target assets which are eligible for German
VI.2.3.1. R e s t o r a t i o n
o f
t h e
l o n g - t e r m
covered bonds, either in the form of mortgage bonds
v i a b i l i t y o f P B B
(‘Hypothekenpfandbriefe’) or that of public sector bonds
(‘ffentliche Pfandbriefe’). The argument that a more conser
(89) In
line
with
section
2
of
the
Restructuring
Communi
vative commercial strategy of that kind should lead to a
cation, Germany submitted a comprehensive and
qualitative improvement of the lending activities is
detailed restructuring plan which identifies the causes
credible, in particular in the light of the specific
of the financial difficulties faced by HRE and provides
requirements of the German Pfandbrief Act regarding
detailed information about the business model.
the management, monitoring and control of risks, and
its protective measures such as limits to the loan-to-value
ratio.
Causes of the difficulties experienced by HRE
(90) The restructuring plan and the complementary
information provided by Germany show that HRE’s
(93) In recital 92 of the extension decision of 24 September
difficulties were mainly attributable to:
2010 (cf. recital 15 of this Decision) the Commission
expressed doubts that the bank could achieve sufficient
margins with its future business activities, in particular
those in the public finance sector, which is characterised
(a) the status of HRE, and in particular its subsidiary
by low margins. Some of HRE’s former public sector
DEPFA Bank plc, as a purely wholesale financed
finance activities, namely the PIF activities, are to be
bank without franchise funding, so that it was
continued. However, the PIF activities will only involve
highly dependent on an intact interbank money
financing for products linked to investments by public-
market, which temporarily came to a complete
sector customers. Hence they can be distinguished from
standstill after the collapse of Lehman Brothers;
budget finance activities, i.e. uncommitted financing of
public authorities, which are characterised by particularly
low margins. In the adjusted business model low-margin
budget finance activities are terminated (they are
(b) a legacy problem stemming from assets that do not
equivalent to approximately 75 % of the former public
show an appropriate return on investment if their
sector finance activities) and the resulting portfolio is put
actual risk profile is taken into account; and
in run-down mode on the PBB balance sheet, so that
those concerns of the Commission are alleviated.
Moreover, the commitment from Germany to ensure
that PBB in its strategic new business will not contract
(c) the fact that HRE was the product of a merger of
new loans which have a RAROC of less than 10 % on a
several smaller banks with different IT applications
single transaction basis helps to alleviate those concerns.
that were not integrated into a comprehensive, coor
dinated risk management system.
(94) The
Commission
also
notes
that
keeping
PIF
as
a
second
business line of PBB will mitigate concerns of market
Business model
players and rating agencies about the lack of diversifi
cation on the part of banks which restrict their activities
(91) As set out above, the restructuring and the planned
to a single business line (known as ‘monoline banks’) and
measures, which relate primarily to the funding of the
are therefore overly dependent on a single business area.
Having two business lines, with potentially different
business cycles, should enable PBB to secure more
( 27 ) In that regard the Commission agrees with the observations of
Heisse Kursawe Eversheds that the aid to HRE can be approved
stable and predictable revenues and to achieve the
only on the basis of a sustainable restructuring plan.
required visibility among institutional investors.

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EN
1.3.2012 Official
Journal
of
the
European
Union L
60/13
(95) The
restructuring
concept
will
result
in
a
clearer
organi
by PBB’s strategy to significantly reduce the amount of
sational structure, as fringe activities such as capital
unsecured funding required and instead to issue covered
markets and asset management activities are terminated
bonds, considered to be a more stable source of funding.
and the branch network is considerably reduced. A
substantial number of sales offices have already been
closed; according to the more detailed and regional
business model, four of those sales offices (Berlin,
(100) As an acute liquidity shortage was one of the main
Hamburg, the Rhine/Ruhr area and Stockholm) will be
causes of HRE’s problems that ultimately led to the
re-opened.
need for State support, the restructuring plan provides
for an adequate cash and liquidity reserve, taking into
account effects that might result from Basel III require
ments. That reserve is greatest at the beginning of the
(96) The restructuring plan ensures that PBB will not unduly
restructuring period and will gradually decrease over
increase its presence on the markets. New lending is
time. In the base case scenario the cash and liquidity
capped for both business lines. On its respective core
reserve would be approximately [12–17] % of PBB’s
markets PBB targets market shares of 1 % to 2 % with
balance sheet by the end of 2011 and reach a level of
its PIF activities and 2 % to 6 % with its REF activities.
approximately [7–17] % by the end of 2015. In the
stress case scenario the cash and liquidity reserve would
exceed [7–10] % of PBB’s balance sheet by the end of
2011, and reach a level of approximately [7–10] % by
the end of 2015. In the Commission’s view, the liquidity
(97) The
Commission
notes
that
the
bank
has
started
to
address the weaknesses of its IT system, which was
situation seems to be appropriate in both a base case and
initially rather heterogeneous and seriously deficient, in
a stress case scenario.
particular with regard to risk-management functionality
and applications. In 2009 HRE set up a multi-year,
group-wide project called ‘New Evolution’ with a
Solvency
budget of approximately EUR 180 million to transform
the IT landscape. The project will roll out various system
(101) With a core capital ratio (calculated on the Basel II
improvements in six successive releases. The scope of the
internal ratings-based approach) projected at 12,9 % at
project covers, inter alia, operational improvements such
the end of 2011 in the base case scenario or 10,5 %
as the consolidation of credit management systems, risk
in the stress test scenario, PBB is sufficiently capitalised
management related improvements of the IT system with
and will meet minimum capital requirements over the
respect to credit, market and liquidity risks, standard
restructuring period. According to the assumptions
isation of front office systems, and improvements to
used in the restructuring plan, the core capital ratio at
the accuracy, detail and quality of information and
the end of 2015 will be 12,4 % in the base case scenario
data. The information provided on the content and
or 11,3 % in the stress case scenario. However, the
progress of the IT transformation process suggests that
decline in the core capital ratio in the base case
the initial problems have been adequately addressed and
scenario is due mainly to the projected increase in risk-
can be resolved to the required extent during PBB’s
weighted assets resulting from the planned growth and
restructuring period. It is the Commission’s view that
not to losses (in the base case scenario, PBB shows a
the future IT system will be a functional, efficient
positive result after tax between 2011 and 2015; only
platform for timely and prudent risk management
in the stress case scenario would PBB show a loss after
which is appropriate to the business processes. Its full
tax in 2011 and 2012).
implementation is therefore crucial.
Profitability
(98) Liquidity,
solvency
and
profitability
of
PBB
( 28 ) are taken
(102) The profitability of PBB is expected to improve over the
as the main indicators of the viability of the bank,
restructuring period. According to the restructuring plan,
assessed under both a base case and a stress case scen
in the base case scenario PBB’s profit after taxes will
ario ( 29 ).
amount to EUR [110–150] million in 2011 and to
EUR [280-320] million in 2015. In 2011 that result
would correspond to a return on equity (after taxes) of
just [3–6] %, but at the end of the restructuring period in
Liquidity
2015 it would correspond to a return on equity (after
taxes) of [8–11] %. The targeted profitability in the base
(99) According
to
the
restructuring
plan,
PBB
will
no
longer
case can hence be considered satisfactory for a bank
benefit from State guarantees on its refinancing. PBB
pursuing the business targeted in the restructuring plan,
nevertheless remains a wholesale funded institution
both from a viability point of view and in the light of the
without franchise funding. That situation is mitigated
planned reprivatisation of PBB. According to Germany,
for PBB profits after tax will be offset by losses from
( 28 ) In line with case practice the viability of parts of the group that are
previous years. In view of the losses carried forward,
in run-down mode, such as DEPFA Bank plc, is not assessed.
this means that PBB will record balance sheet losses
( 29 ) The stress case scenario basically assumes a sovereign shock as in
(‘Bilanzverluste’) until 201[…] but will not do so in
the CEBS stress test of 2010 and a ‘double dip’ scenario, affecting
provisions for contingent loan losses, the amount of RWAs and
201[…], in the context of the redemption of the silent
prolongation rates.
participation.

---

L 60/14
EN
Official Journal of the European Union
1.3.2012
(103) Table 1: PBB profit and loss forecast, International Financial Reporting Standards (IFRS) (base case
scenario), according to the restructuring plan
2011 2012 2013 2014 2015
Net interest income and EUR million […] […] […] […] […]
similar earnings
Net commission income EUR
million […] […] […] […] […]
Operating income EUR
[…] […] […] […] […]
million
Loan loss provisions EUR
million […] […] […] […] […]
Administrative expenses EUR
million […] […] […] […] […]
Balance of other income/ex EUR million […] […] […] […] […]
penses
Pre-tax profit/loss EUR
[…] […] […] […] […]
million
Taxes EUR
million […] […] […] […] […]
Profit/loss after taxes EUR
[110-150] [140-160] [170-220] [240-270] [280-320]
million
(104) Assessing PBB’s main profitability drivers, two sources of
the beneficiary bank and its impaired assets. The
profitability can be identified: first, PBB’s revenues
Commission understands that when the winding-up insti
stemming from its commercial activities will increase
tution was created it was not possible, in particular for
and, second, operating costs will decrease.
technical reasons, to immediately cut the links between
PBB and FMS-WM. However, that situation needs to be
remedied as quickly as possible. On that basis, Germany
(105) As regards the increase of revenues, the restructuring
has committed that PBB will establish full organisational
plan assumes that the average margin on loans can be
independence of the related services and will no longer
improved, in particular by underwriting new and more
provide those services to FMS-WM after 30 September
profitable business. With regard to the REF business line,
2013. The same applies to the refinancing of FMS-WM.
net margins calculated for the current portfolios are
That commitment also helps to ensure that in the
assumed to improve from [85–100] bps (basis points)
medium term PBB’s profitability is self contained and
to [105–120] bps in 2011, [105–110] bps in 2012 and
no longer based on fee income related to the transfer
[95-100] bps thereafter. The PIF business line will
of impaired assets.
generate a net margin of [27-35] bps during the whole
restructuring period, which is a considerable
improvement on the net margin of [6–12] bps calculated
(108) The Commission notes that PBB intends to reduce its
for the existing portfolio of public sector finance activ
operating costs considerably. Over the restructuring
ities ( 30 ). That improvement is largely due to the fact that
period, the cost-income ratio will improve significantly
budget finance activities, which are characterised by
from [64–79] % in 2011 to [32–42] % in 2015 in the
particularly low margins, will no longer be pursued.
base case scenario.
(106) Given the importance of securing sufficiently high
(109) PBB has adopted some decisive restructuring measures
margins, Germany’s commitment that PBB’s strategic
that affect its cost base. It has closed a considerable
new business will not contract new loans with a
number of sales offices and reduced its workforce by
RAROC of less than 10 % on a transaction-by-trans
approximately 30 % (1 366 employees at the end of
action basis is appropriate and necessary.
2010, compared with 2 000 employees at the end of
2007) ( 31 ). While those measures will have a positive
impact on operating expenses in the medium and long
(107) In 2011 and 2012, fees generated from asset
term, the restructuring process brings about extra
management services provided for FMS-WM (HRE’s ‘bad
ordinary expenses in the short term, in particular for
bank’) represent an important source of income for PBB.
redundancy and early retirement payments, fees for
As set out in the IAC, in order to facilitate the bank’s
lawyers and consultants, etc. In the Commission’s view,
focus on the restoration of viability and to prevent
the assumption that operating costs will stabilise at a
possible conflicts of interest, it is necessary to ensure a
considerably lower level once the restructuring process
clear functional and organisational separation between
has been completed therefore seems credible.
( 30 ) That portfolio does not contain the assets that have been trans
( 31 ) Certain persons (e.g. executive board members, supervisory board
ferred to the winding-up institution FMS-WM.
members) are not included in those figures.

---

EN
1.3.2012 Official
Journal
of
the
European
Union L
60/15
(110) After the transfer of impaired assets to FMS-WM, resulting in a significant reduction of the balance
sheet, the base case scenario shows that PBB’s loan loss provisions are stable for the restructuring
period.
(111) The Commission considers that the targeted profitability of PBB is also sufficiently robust against the
assumptions made in the stress case scenario, as neither the viability of the bank nor the prospects of
reprivatising PBB are put at risk. According to the restructuring plan, in the stress case scenario PBB
would record losses of EUR [100–125] million in 2011, yet at the end of the restructuring period in
2015 PBB is expected to show profits of EUR [270-310] million. The return on equity (after taxes)
would be negative in 2011 (– [2,8–3,8] %) and in 2012, but in that scenario the expected return on
equity in 2015 would be nearly [9–12] %.
(112) Table 2: PBB profit and loss forecasts, International Financial Reporting Standards (IFRS) (stress case
scenario), according to the restructuring plan
2011 2012 2013 2014 2015
Net interest income and
EUR
[…] […] […] […] […]
similar earnings
million
Net commission income EUR […] […] […] […] […]
million
Operating income EUR
[…] […] […] […] […]
million
Loan loss provisions EUR
[…] […] […] […] […]
million
Administrative expenses EUR
[…] […] […] […] […]
million
Balance of other income/ex
EUR
[…] […] […] […] […]
penses
million
Pre-tax profit/loss EUR
[…] […] […] […] […]
million
Taxes EUR
[…] […] […] […] […]
million
Profit/loss after taxes EUR
– [100-125] –
[75-90] [230-290] [250-290] [270-310]
million
(113) In the light of the improvements to the business model,
(c) The costs associated with the restructuring should
the technical infrastructure and the organisational set-up,
not be borne solely by the State but should also be
and their impact on PBB’s situation as to expected
borne by those who invested in the bank by
liquidity, solvency and profitability, the Commission
absorbing losses with available capital and by
considers that the restructuring plan fulfils the
paying an adequate remuneration for State interven
requirements of the Restructuring Communication with
tions. The objective of burden sharing is twofold: to
regard to the restoration of long-term viability.
limit distortions of competition and to address moral
hazard ( 32 ).
VI.2.3.2. O w n c o n t r i b u t i o n / b u r d e n s h a r i n g
(114) The Restructuring Communication stipulates that the
(115) The Commission’s doubts as to whether the aid is limited
beneficiary must make an appropriate contribution to
to the minimum necessary to restore the long-term
the restructuring costs. The principles are laid down as
viability of PBB have been allayed. Altogether Germany
follows in Section 3 of the Restructuring Communi
has invested or will invest nearly EUR 10 billion in HRE.
cation:
Part of those capital injections, i.e. EUR 2,08 billion, will
(a) Restructuring aid should be limited to covering costs
be used to recapitalise the winding-up institution FMS-
which are necessary for the restoration of viability.
WM, while another EUR 1,59 billion will be transferred
to FMS-WM in the course of the restructuring. Approxi
(b) In order to limit the aid amount to the minimum
mately 63 % of the capital of nearly EUR 10 billion
necessary, the beneficiary bank should first use its
remains within the HRE group.
own resources to finance restructuring, for example,
through the sale of assets.
( 32 ) See point 22 of the Restructuring Communication.

---

L 60/16
EN
Official Journal of the European Union
1.3.2012
(116) PBB is the only entity within the HRE group that will
aid rules to measures taken in relation to financial insti
undertake new business in future and hence actively
tutions in the context of the current global financial
participate in competition. In the base case scenario its
crisis ( 33 ) (‘Banking Communication’), adequately remun
core capital ratios (based on the Basel II RBA method) are
erated that part of the State aid. By contrast, up to now
projected to be 12,9 % at the end of 2011, declining
the bank has remunerated neither the capital received nor
slightly over the restructuring period to reach 12,4 %
the capital relief arising from the asset relief measure, and
by the end of 2015. The restructuring plan does not
is not capable of ensuring an adequate claw-back
raise doubts that the bank will meet minimum capital
mechanism for the aid element received in the form of
requirements over the restructuring period. The projected
a transfer value of the assets which was higher than their
core capital ratio is strong, yet in line with capital ratios
REV.
of competitors. In reaction to the financial crisis, banks
are now generally expected to show higher capital ratios
than before the crisis. It also needs to be borne in mind
that PBB, due to its problems within the crisis, needs a
strong capital base in order to convince market players
(120) In the light of the overall economic situation of HRE, it
that it is a reliable business partner. In the Commission’s
can be concluded that the bank was simply not in a
view, the amount of capital provided and the resulting
position to make any meaningful further own
capital ratios are therefore deemed to be adequate and
contribution to the restructuring costs ( 34 ). Therefore
limited to the minimum necessary.
the lack of own contribution has to be compensated
for by particularly far-reaching structural measures in
the restructuring plan, in order to ensure that the bank
and its shareholders adequately share the burden of the
rescue of the bank. Overall, the Commission considers
(117) HRE has furthermore benefited from the provision of
that the amount of downsizing laid down in the restruc
guarantees amounting to EUR 145 billion in total, of
turing plan in terms of organisational size, market
which EUR 124 billion have actually been used. Those
presence, scope of activities and balance sheet size is,
guarantees were necessary in order to enable the
given the specific circumstances of this case, an
continued operation of the bank when it faced insol
adequate substitute for the lack of adequate own
vency, at least until HRE was in a position to transfer
contribution.
its impaired assets to FMS-WM. All the guarantees that
were used by the HRE group, amounting to a total of
EUR 124 billion, were transferred to FMS-WM with effect
from 1 October 2010. The operation of PBB therefore no
longer relies on State guarantees. That transfer helped to
(121) It should also be borne in mind that the bank was taken
ensure that the