Their public shareholders must bail out them

June 5, 2012 4:52 AM

Their public shareholders must bail out them

When an interview-balance to the "Echos", at the end of its dual mandate of European Commissioner, Mario Monti, in fall 2004, he accepted as his most difficult decision to take, the abolition of duty-free. A measure that he had to defend as Commissioner for the internal market in the Santer Commission ("Les Echos" of October 26, 2004). Before, he hesitates however with a sensitive competition record: the abolition of State guarantees which benefited the Landesbanken.

This record he has indeed quite complicated life. It dates back to December 1999, when the European Banking Federation (EBF) filed a complaint with Brussels on two guarantee instruments traditionally used in the German public banking sector: the institutional liability and the comfort. The first, that could result in "duty of maintenance", the public authorities who have a credit institution must ensure the proper functioning.

According to the second, that can be translated as "duty of care", the guarantor honoured all the commitments the Bank could not be satisfied by its assets. This guarantee is unlimited in amount and time. Therefore, argue the private banks, recipient institutions have a competitive advantage: they can refinance bond markets to much better rates.

Taking their reasoning to his account, the Commission conducts negotiations, initially very tense, with Berlin in February 2000. In July 2001, the Secretary of State Caio Koch-Weser and Mario Monti finally find an agreement, which is however many months to be finalized in March 2002. It provides for a transitional period to July 18, 2005.

Mario Monti was not for all finished with the Landesbanken. The Directorate for competition began another procedure against them, totally disconnected from the first. This second case dates back even more far, 1994, when the Association of German private banks denounced transfers of assets to the Landesbanken organized in the early 1990's to enable them to achieve compliance with the new guidelines governing the solvency ratios.

Recapitalisation plans

Brussels first survey the WestLB, the largest case of regional banks, and concluded that it is of State aid incompatible with Community law. Indeed, the remuneration paid by the Bank, in exchange for the transfer of assets of the order of 0.6, was significantly lower than would have expected an informed market investor. In July 1999, the Commission requires WestLB that it repay more than 800 million euros. The Bank appealed the decision. In March 2003, the Court of first instance of Luxembourg confirms the Commission's analysis but seeks a new calculation of the amount of the refund, which seemed partly unsuitable. Mario Monti services resumed their calculator. In October 2004, they take a new decision which includes six other Landesbanken this time. They seven German regional banks must pay back more than 3 billion euros, excluding interest.

It is believed the closed folder. Is wrong. Undermined, the Landesbanken can honour such a slate. Their public shareholders must bail out them. Mario Monti advantage, it is his successor, the Dutch Neelie Kroes, who enters the scene. Very quickly, it must raise the tone to force banks to render aid before be recapitalized, only way not to empty the Community decision to reimbursement of its meaning. At the end of enough hard negotiations, it finally agreement with Caio Koch-Weser, still on the bridge.

Banks have repaid the money, as expected, at the beginning of the year. The question now is whether if Neelie Kroes will validate all recapitalisation plans...