The European Court of First Instance has asked the Commission for extra information on its decision to approve the transfer of a German federal public investment fund to a bank part-owned by the federal authority.
The European Court of First Instance has asked the European Commission for extra information on its decision to approve the transfer of a German federal public investment fund to a bank part-owned by the federal authority, as the court seeks to rule on claims from private banks the deal should have been found in breach of state aid rules.
A three-judge CFI panel on Tuesday heard two separate but related cases brought against the European Commission by the Association of German Banks (Bundesverband Deutscher Banken), whose members are private banks. The association wants the court to annul two decisions by the European Commission, made in 2004 and 2005, which allowed Germany’s federal authority of Hessen to make two transfers of an investment fund to Landesbank Hessen-Thuringia-Girozentrale, also known as Helaba. Hessen owns 10 percent of Helaba.
Private German banks say the investment fund injection by Hessen into Helaba has given Helaba an unfair competitive advantage. Pressure on Germany to reform the first two pillars of its cooperative, savings and private banks has been growing for years – both from Brussels’ competition authority and from private banks faced with bankruptcy in the wake of the subprime crisis.
In 2004, Brussels ordered Germany to recover more than three billion euros plus interest from seven regional banks. Helaba got away with just 6 million in repayments, a figure dwarfed by sister bank WestLB, which had to repay almost one billion euros.
- The complaint -
The Bundesverband charges Helaba should receive similar orders as WestLB, a claim the commission rejects because of the nature of Hessen’s shareholding and investment in Helaba.
The banking association contests a number of points: it says the commission’s decision to allow the transfer rather than label it unfair state aid was based on erroneous calculations. It says the conditions of the deal between Hessen and Helaba are incompatible with regular market activity, and therefore breach the legal principle of deals having to be compatible with those of a private investor in a market economy.
The injection of the fund by Hessen allows Helaba to “offer much more favourable rates to clients than private banks,” particularly in the real estate sector, said Hans-Joerg Niemeyer, representing the German banking group. Despite some protests from the commission, Niemeyer presented the judges with a power-point presentation that updated and added to material contained in his client’s application.
Helaba’s 80 percent expansion in commercial real estate between 2003 and 2007 “is having a deleterious effect on some members of my association,” he said.
The commission erred in the calculation it used to allow the transfers: it allowed an initial fund transfer made in 1998 from Hessen to Helaba by using data from 1999, he said.
“The commission is trying to paper over the cracks,” he told the bench.
Turning to conditions of the loan, Niemeyer said data showed Hessen’s investment was being given a return that was lower than the rate of inflation, and therefore not compatible with market conditions. Hessen’s investment has “significant disadvantages” compared to those made under regular market conditions and “the risk is much greater,” Niemeyer said. Hessen’s below-inflation remuneration is “beyond good and evil,” fellow Bundesverband counsel Kai-Steffen Scholz added.
For every 100 euros Helaba may lose in case of bankruptcy, Hessen would lose 43 euros, Niemeyer said – while other shareholders in financial institutions would be expected to lose just 40 or 80 eurocents per 100 euros lost, Niemeyer said.
What’s more, Hessen’s investment resulted in no greater voting or monitoring rights, and it has no power to end the deal with Helaba. Remuneration, refinancing and repayment and trade tax conditions are such that “if this was a capital investor operating they would never have accepted this,” Niemeyer said.
These conditions have already benefited Helaba’s accounts in an unfair way, Niemeyer said. A lack of liquidity in the investment also means that “borrowers are paying a rate that’s below the market rate,” he said. Under the EU’s new IFRS accounting rules, Helaba in 2007 appointed the transfers not as a liability – something the bank must repay – but as equity.
A phased-in approach to the deal also gives Helaba an unfair leg-up, Niemeyer said.
- Silent participation -
The fact that Hessen has made the transfer as a silent participation means the conditions are permissible, unlike in the case of WestLB, countered the commission’s counsel Tibor Scharf.
Backed up by legal counsel for Germany and Hessen, Scharf rejected Niemeyer’s claim that the transfer should instead be seen as share capital just as in the case of WestLB.
“There is no indication that the Land of Hessen wanted to get back its money through remuneration,” he argued.
Niemeyer protested while answering questions by the judges.
“It’s unbelievable that we’re tagging one participation as silent and the other as core capital,” he said.
The case should not be compared with WestLB, Germany’s Joerg Witting argued. “The reality has changed and the markets have changed. This is an example of a correct application of the market investor test.”
- Market position evidence -
The commission, backed by Germany, Hessen and Helaba, rejected evidence that private banks suffered due to Helaba’s boosted finances.
German banks have failed to show that any loss of market share by German private banks “were caused by a transfer or silent contribution,” Scharf said.
Banks such as Dresdner Bank, CommerzBank and Deutsche Bank left the real estate sector of their own accord, said Helaba counsel Heinz-Joachim Freund. “They can’t complain if others have filled the gap,” Freund said.
- Margin of discretion -
While some parts of the case are easy to understand, others are of great complexity – a situation in which the commission under EU law enjoys “broad discretion,” Scharf reminded the judges. “It’s not for the courts to use their own data,” he said.
The commission did not misuse this discretion, he added, insisting Brussels had observed correct procedures during its investigations into Helaba.
- Conditions of participation -
The commission, Hessen and Germany defended Hessen’s choice of Helaba as a recipient of its real estate investment fund.
Hessen’s first priority had been to keep the investment fund intact so it may continue to function as an incentive to local real estate development. If it had to accept worse-than-market conditions from Helaba, that was a choice it was entitled to make, said Hessen counsel Stefan Lehr.
“If you rent out your house you are not providing aid just because selling your house would give you a higher return,” Lehr said.
And the federal authority had found no other bank willing to take on its entire investment fund, the Hessen lawyer continued. Cooperative banks in the region had demanded Hessen split up its fund – a move Hessen rejected as it would have entailed the costly breaking up of thousands of mortgages within the fund.
“For Hessen, the purpose of the special fund is of prime importance – it doesn’t want valuable papers,” said Helaba’s Freund.
The phased model of remuneration “was appropriate in that it took account of both parties’ interests,” he added.
Meanwhile Witting, for Germany, offered that the grading structure of Hessen’s transfer and remuneration affords “no economic advantage to the bank.”.
Unlike WestLB, which received a large capital injection in the early 1990s, Helaba did not seek significant funds from Hessen – another reason why Helaba should not be compared with WestLB, Helaba’s Freund said.
Responding to a question by presiding judge Otto Czucz, Freund rejected the Bundesverband’s assertion that Helaba’s current position contrasts with weak performances before Hessen’s 1998 transfer.
In the late 1990s, an “expert report describes Helaba as a solid business compared with Dresdner Bank,” he said.
Responding to a question by presiding judge Otto Czucz for evidence of other investors requesting higher remuneration, Bundesverband counsel Kai-Steffen Scholz said a single answer did not exist as pricing would be “affected by a multiplicity of reasons.”
Unable to answer a question on the power of Hessen to withdraw its funds and reinvest them elsewhere, the commission has an additional ten days to submit extra answers. Once these have been submitted, the panel will announce a date for its ruling.
By Juliane von Reppert-Bismarck
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