EcoFlash

Does the support of an IPS constitute state aid?

2
9 April 2019  
Does the support of an IPS constitute state aid?  
Céline Choulet  
Shareholders in Norddeutsche Landesbank  
NordLB) and the German Savings Banks  
Association (DSGV) have submitted  
EUR 3.6 bn restructuring proposal for NordLB to  
the European authorities for approval.  
Halved in ten years  
(
Consolidated balance sheets of Landesbanken at 31 December, EUR bn  
LBBW  BayernLB  WestLB  NordLB  
a
 HSH Nordbank  Helaba  LB Berlin  SaarLB  
It  
seems  
possible  
that  
the  
European  
2000  
Commission will interpret the plan as state aid,  
given that it draws solely on public resources.  
1
1
500  
000  
If it is judged not compatible with the rules of the  
internal market, the plan could be rejected,  
opening the way to NordLB being sold (possibly  
through a privatisation) or put in resolution.  
500  
We believe that the criteria for analysing the  
support provided to NordLB should not be  
limited just to the nature of the resources used  
0
(
which are certainly public) but should also  
include the nature of the contributors (its  
shareholders and the mutual protection fund  
S-Group).  
Chart  
Source: SNL, Bankscope  
Indeed, European legislation (CRR, BRRD)  
considers the mutual support structures  
provided by Institutional Protection Schemes  
financial difficulties (resulting mainly from its financing of the  
shipping sector), NordLB posted a net loss of EUR 2.354 bn  
in 2018. Its CET1 common equity ratio tumbled from 12.4% at  
end-2017 to 6.82% at end-2018, well below the minimum  
(
IPS) as recovery measures that are private in  
nature.  
1
requirement .  
Ultimately, the support plan for NordLB offers,  
for the first time, an opportunity to question the  
coherence of European state aid rules and the  
existence of IPS with state-owned members.  
As early as the beginning of 2018, NordLB was considering  
various options to boost its solvency, including a joint offer by  
US private equity funds or a merger with Landesbank Helaba.  
Its shareholders (the state of Lower Saxony with 59.13%, the  
state of Saxony-Anhalt with 5.57%, Savings Bank  
Associations of Lower Saxony (26.36%), Saxony-Anhalt  
State-owned Norddeutsche Landesbank (NordLB) is  
Germany’s fourth largest regional bank (see chart). Like its  
peers, it operates as a commercial and investment bank  
whilst also playing the role of central institution for the savings  
banks within its scope of competence. Faced with significant  
(5.28%) and Mecklenburg-Western Pomerania (3.66%))  
1
At 1 March 2019, the SREP capital requirement for NordLB was  
0.57%.  
1
EcoFlash // 29 April 2019  
economic-research.bnpparibas.com  
2
finally announced in early February that they would favour a  
joint solution with the DSGV, the association representing the  
are, de facto, state-owned banks. They belong to the states  
(Länder) and the savings banks (Sparkassen), whose  
supervisory authorities (Träger) are public bodies held by  
municipalities or counties. Supporting a credit institution with  
public resources, even in the role of shareholder, represents,  
in principle, state aid under the TFEU.  
interests of the German savings bank financial group  
2
(
S-Group ). At the time of publication of its annual results on 4  
April, the bank set out the shape of the restructuring plan to  
be submitted to the European authorities.  
Although this support would have provided the Landesbanken  
with capital to which they would not have had access via the  
market, the European Commission approved them on the  
basis of Article 107, paragraph 3, point b) of the TFEU. This  
allows state aid destined “to remedy a serious disturbance in  
the economy of a Member State” to be considered as  
compatible with the internal market. The Commission believes  
that “persisting stress in financial markets” and the risk of  
The plan  
The support plan has a total value of EUR 3.635 bn. This  
would take the form of a EUR 2.835 bn capital injection, which  
would represent a virtual doubling of NordLB’s core equity .  
Nearly EUR 1.5 bn would be contributed by the state of Lower  
Saxony, EUR 200 million by the state of Saxony-Anhalt and  
EUR 1.135 bn by the S-Group. The bank would also benefit  
from guarantees from the state of Lower Saxony. These  
would allow NordLB to make a saving of around EUR 800  
million in its capital.  
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“major negative spill-over effects for the rest of the banking  
system which could flow from the failure of a credit institution”  
justify the prolongation of the conditions of application of the  
state aid rules in the context of the financial crisis (initially  
defined in October 2008 and updated on six occasions since  
With this support, NordLB intends to reach a common equity  
ratio of 14% by the end of 2019. The plan also covers a  
refocusing of NordLB on some of its activities (continuation of  
financing of SMEs and large customers, withdrawal from ship  
financing, scaling back of aircraft financing and retail banking)  
and a reduction in the size of its balance sheet (to EUR 95 bn  
from EUR 154 bn at end-2018). The bank estimates that the  
costs associated with its restructuring (notably the sale of  
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then ). To be considered as compatible with the internal  
market, such aid must be limited to the minimum necessary  
(notably through a burden-sharing) and come with safeguards  
against undue distortions of competition.  
By way of example, in 2012 the Commission came to the  
conclusion that the EUR 3.3 bn restructuring package granted  
to NordLB, whilst it constituted state aid, was compatible with  
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portfolios of non-performing loans ) will prevent it from  
returning to profit before 2020.  
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European rules . The Commission took the view that the  
restructuring plan presented guaranteed the viability of the  
bank over the long term, ensured adequate remuneration of  
the capital provided and had satisfactory burden-sharing  
(suspension of dividend payments and payment of hybrid  
coupons during the restructuring period). The reduction of  
NordLB’s balance sheet (restriction on certain commercial  
activities, sale of non-essential subsidiaries) and various  
commitments made by the bank were also likely to mitigate  
the distortions of competition as a result of the aid. The  
Commission also stressed that the recapitalisation was the  
result of the European Banking Authority’s capital  
requirements following a resistance test conducted in 2011  
and the Capital Exercise of 2012 rather than an intrinsic  
problem. Lastly, the Commission judged that the failure of a  
bank such as NordLB, considered by a Member State as  
being of systemic importance, could have had damaging  
effects on the German financial markets and economy.  
In the light of Article 107 of the European treaty and previous  
decisions by the Commission, it is possible that this support  
will be interpreted as state aid.  
The support of a public shareholder constitutes  
state aid  
Article 107, paragraph 1 of the Treaty on the Functioning of  
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the European Union (TFEU) stipulates that save as  
otherwise provided in the Treaties, any aid granted by a  
Member State or through State resources in any form  
whatsoever which distorts or threatens to distort competition  
by favouring certain undertakings or the production of certain  
goods shall, in so far as it affects trade between Member  
States, be incompatible with the internal market.”  
In the past, any recapitalisation proposals submitted by  
shareholders of Landesbanken have been treated as state  
aid, as they used state resources. German regional banks  
The unusual nature of this plan  
The regional authorities have indicated that they are once  
again obliged to present a plan that does not contravene  
European state aid rules. The Länder and the DSGV both  
2
The S-Group operates on the principle of subsidiarity: local savings  
banks exercise the main functions of banking branches, whilst the  
Landesbanken carry out the tasks that local banks themselves can  
not cover (for example, securities transactions, financing and  
international support for exporting clients, access to hedging  
products, treasury management, payment methods, etc.). The  
network is also characterised by centralised liquidity management:  
the Sparkassen invest their excess resources with the Landesbanken,  
which play the role of central banks and clearing houses for the whole  
network. The local savings banks are traditionally both shareholders  
in and net creditors of the Landesbanken. One of the specific features  
of S-Group, as an IPS, which we will return to here, concerns the  
solidarity commitments linking its members.  
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hope to avoid the privatisation of NordLB or the triggering of  
6
Communications from the Commission concerning the application of  
state aid rules in the context of the financial crisis set out the  
conditions for providing aid to banks in the form of financial  
guarantees, recapitalisation and impaired asset measures and the  
requirements for restructuring plans. Aid must satisfy these conditions  
to be considered compatible with the internal market. The most recent  
update to the Commission’s communication has been in force since 1  
August 2013:  
3
NordLBs common equity tier 1 (CET1) capital stood at EUR 3.1 bn  
https://eur-lex.europa.eu/legal-  
at the end of 2018.  
NordLB has announced that on 9 April it sold EUR 2.6 bn in non-  
content/EN/TXT/?uri=uriserv:OJ.C_.2013.216.01.0001.01.ENG&toc=  
OJ:C:2013:216:TOC  
http://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_c  
4
7
performing loans (from a total of EUR 7.5 bn at end-2018) to the  
Cerberus fund.  
ode=3_SA_34381  
5
8
https://eur-lex.europa.eu/legal-  
HSH Nordbank is the only Landesbank to have been privatised. In  
content/EN/ALL/?uri=CELEX%3A12008E107  
May 2016, the Commission gave its final approval to an increase from  
EcoFlash // 29 April 2019  
economic-research.bnpparibas.com  
3
a
resolution process, which requires an internal  
financial constraints, including direct capital and liquidity  
support.” Measures to clean up the balance sheet, restructure  
or adjust the business model may be imposed on the  
institution in difficulty. In order to minimise the ex-ante risks of  
moral hazard and the ex-post risks of contagion, IPS must  
establish contributions from their members as a function of  
their risk profiles and must not generally allow for  
unconditional or unlimited support for their members. Thus,  
although there must be “a clear commitment [...] on the part of  
recapitalisation equivalent to at least 8% of liabilities. Given  
that the bank no longer meets minimal regulatory  
requirements in terms of capital, in order to be considered  
compatible with the internal market the banks restructuring  
plan must include a partial recapitalisation by requiring a  
conversion to equity or a reduction in value of subordinated  
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1
0
1
1
debt instruments . At the end of 2018, NordLB’s additional  
Tier 1 and Tier 2 capital stood at EUR 2.7 bn.  
the IPS to provide support when  
monitoring of risks and early intervention measures  an IPS  
member is or is likely to become insolvent or illiquid”, this  
despite previous  
The conditions for a rescue of NordLB would nevertheless be  
unique.  
remains conditional: an IPS is  
a system of mutual  
In contrast to the support packages previously put in place for  
Landesbanken, the aid provided will not come solely from  
NordLB’s shareholders but also from the mutual cooperation  
and support network, the S-Group, of which it is a member.  
Individual contributions from the members of the S-Group  
have not been fully communicated. The three biggest  
Landesbanken (LBBW, BayernLB and Helaba) are due to  
contribute to the recapitalisation of NordLB for a total of EUR  
commitments and obligations. The opportunity to help a  
member financially must be evaluated in the light of its  
financial position and its past risk-taking, available funds and  
the capacity of other members to replenish funds afterwards.  
Conditions for the use of funds are even more tightly  
restricted when the IPS has the double function of a mutual  
protection system and a deposit guarantee system (as is the  
case for the S-Group). The need for prior approval of  
members of the decision-making committee (with a 75%  
qualified majority) before any activation of mutual support  
illustrates this conditionality. As far as we are aware, this  
system has never been used to help a Landesbank since the  
financial crisis of 2008.  
2
60 million. The association of the savings banks of the state  
of Lower Saxony, which is both a shareholder in NordLB and  
a member of S-Group, will inject EUR 320 million alongside  
the savings banks of Bavaria (EUR 68 million) and Hesse and  
Thuringia (EUR 37.7 million).  
Mutual support structures, the cornerstone of IPS  
The decision in the Banca Tercas case cannot be  
extrapolated  
European legislation recognises the S-Group, to which all  
German Landesbanken and Sparkassen belong, as an  
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2
Institutional Protection Scheme (IPS) . The European  
The Commission’s communication on state aid does not set  
out any particular regime for intervention by an IPS. It does  
however stipulate that “interventions by deposit guarantee  
funds to reimburse depositors in accordance with Member  
States' obligations under Directive 94/19/EC on deposit-  
guarantee schemes do not constitute State aid. However, the  
use of those or similar funds to assist in the restructuring of  
credit institutions may constitute State aid. Whilst the funds in  
question may derive from the private sector, they may  
constitute aid to the extent that they come within the control of  
the State and the decision as to the funds' application is  
imputable to the State.” On 19 March, the European Court of  
Justice overturned the Commission’s 2015 ruling that the  
support measures to the Italian savings bank Banca Tercas,  
by the Italian deposit guarantee fund (FITD), were state aid.  
The Court considered that the Commission was not able to  
demonstrate that this was state aid on behalf of the state and  
financed with state resources. The Commission did not  
provided sufficient evidence that the Italian public authorities  
exerted a substantial influence on the decision to set up  
support measures. Moreover, the funds used came from  
voluntary contributions (FITD’s mandate allows for protective  
measures in favour of its members) rather than mandatory  
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3
regulation of June 2013 defines an IPS as “a contractual or  
statutory liability arrangement which protects those institutions  
and in particular ensures their liquidity and solvency to avoid  
bankruptcy where necessary” (article 113, paragraph 7 CRR).  
According to the ECB’s guide to the approach for recognition  
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4
of IPS for prudential purposes of July 2016 , where there is a  
risk of failure at a member of an IPS and preventative  
measures are not sufficient, “the IPS needs to decide on  
material or financial support.”  
The IPS should have a broad range of measures, “ranging  
from less intrusive measures, such as closer monitoring of the  
member institutions on the basis of relevant indicators and  
additional reporting requirements, to more substantial  
measures that are proportionate to the riskiness of the  
beneficiary IPS member institution and the severity of its  
EUR 7 bn to EUR 10 bn in the asset guarantee provided by the states  
of Hamburg and Schleswig-Holstein to HSH. This decision was based  
on new undertakings by German authorities, which covered the  
separation of HSH into two entities and the sale of the operating  
business without further state aid. In November 2018, the  
Commission approved the sale of HSH to a consortium of private  
equity funds led by J.C. Flowers and Cerberus. An agreement was  
reached to maintain its membership to the S-Group for three years.  
1
5
contributions to FITD .  
9
However, we do not believe that the Banca Tercas case can  
be applied to NordLB. Granted, the S-Group also has the role  
of a deposit guarantee fund. It could also claim that any  
decision to intervene to help NordLB would not be attributable  
to the state (IPS preventative measures, internal vote) and  
that the funds used would correspond to voluntary  
contributions (over and above the minimum required for  
deposit guarantees). The fact remains that the resources  
The plan will be assessed against the Commission’s 2013  
communication (which increased burden-sharing requirements),  
which would be a first for a plan submitted by a Landesbank.  
1
0
http://europa.eu/rapid/press-release_MEMO-09-441_en.htm  
11  
To the extent that this is legally possible and on condition that the  
principle that no creditor may be disadvantaged more than in the  
event of a liquidation without state aid.  
1
2
C. Choulet (2017), Institutional protection systems: are they  
banking groups? BNP Paribas, Conjoncture, January 2017  
13  
https://eur-lex.europa.eu/legal-  
content/EN/TXT/?uri=CELEX:02013R0575-20180101  
15  
T. Humblot (2019), The FITD’s support measures adopted for the  
14  
https://www.bankingsupervision.europa.eu/ecb/pub/pdf/institutional_  
protection_guide.en.pdf  
benefit of Banca Tercas did not constitute State aid, BNP Paribas,  
EcoFlash, to be published  
EcoFlash // 29 April 2019  
economic-research.bnpparibas.com  
4
mobilised in favour of NordLB would be, in contrast to those  
used for Banca Tercas, state resources in the sense of Article  
In the end, as far as state aid is concerned, NordLB’s  
restructuring plan should be considered only in terms of the  
public resources committed by the two Länder. To interpret  
any support provided by the S-Group as qualifying under the  
terms of the 2013 communication (without taking account of  
the specific nature of this support) would deny the possibility  
of IPS being composed of public sector members. In other  
words, it would imply that any intervention by the S-Group  
would be incompatible with state aid rules.  
1
07(1) of the TFEU.  
Ultimately, a private solution?  
European legislation is more favourable to IPS in the texts  
setting out the prudential framework (CRR, BRRD). Thus the  
1
6
BRRD directive treats support measures put in place by IPS  
in the same way as private support packages, reducing the  
risk that the institution being helped be put into resolution. To  
this extent, an IPS can meet the BRRD’s requirements for  
1
7
Céline Choulet  
recovery plans, and its members exempted as a result .  
celine.choulet@bnpparibas.com  
The BRRD allows a bank to be put into resolution only under  
three conditions: 1. “the institution is failing or is likely to fail”;  
2
. there is no reasonable prospect that any alternative private  
sector measures, including measures by an IPS, or  
supervisory action, including early intervention measures or  
the write down or conversion of relevant capital instruments  
[
...] would prevent the failure of the institution within a  
reasonable timeframe; and 3. “a resolution action is  
necessary in the public interest”. The mutual support  
structures of an IPS are in some ways a sort of private bailout:  
the bailout of  
a Landesbank could be taken on by  
counterparties external to the group in difficulty but that are  
members of the same IPS (Landesbanken or perhaps even  
Sparkassen  
of  
other  
German  
Länder  
or  
Landesbausparkassen) and this offers protection to creditors  
from outside this network (deposit-holders and other creditors  
who are not members of the IPS).  
We believe that the conditions for the rescue of NordLB  
represent, at the very least, evidence of the existence of a  
real’ mutual support structure within the S-Group. Without an  
intervention from the DSGV, the credibility of the solidarity  
undertakings between S-Group members would have been  
1
8
called into question .  
16  
https://eur-lex.europa.eu/legal-  
content/EN/TXT/?uri=CELEX%3A32014L0059  
17  
Under Article 4, paragraph  
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b) of the BRRD, lending  
establishments that are members of an IPS (other than  
establishments under the direct supervision of the ECB, such as the  
Landesbanken) can be exempted from the requirement to draw up a  
recovery plan. Where such an exemption is granted, the IPS must  
draw up a plan of cooperation with each of its exempt members and  
ensure that its members meet regulatory requirements for capital and  
liquidity on an individual basis. According to a survey by the EBA in  
2017, 89% of German lending establishments (with total banking  
assets of EUR 1,793 bn, corresponding roughly to the aggregated  
assets of German savings banks and credit cooperatives) were  
eligible for such a waiver thanks to their membership of an IPS, but,  
at the time of the survey in April 2017, no waivers had been formally  
requested. 9% of establishments met the conditions required to  
benefit from simplified obligations. Regarding resolution plans, 98% of  
German lending establishments (with a combined EUR 2,320 bn in  
assets) are under simplified obligations. However no bank can be  
exempted from drawing up a resolution plan (such waivers are  
reserved to establishments that are members of a central body under  
Article  
4.8.a).  
Link  
to  
the  
study:  
https://eba.europa.eu/documents/10180/1720738/EBA+Report+on+th  
e+Application+of+Simplified+Obligations+and+Waivers+in+Recovery  
+
and+Resolution+Planning.pdf  
8
It is worth remembering that IPS status gives rights to prudential  
1
exemptions and waivers. In addition, ratings agencies take account of  
these links in their assessment of the credit risk associated with  
Landesbanken.  
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