EU Commission throws WestLB aid, bad bank into doubt

By Reuters Staff
December 22, 2009

BRUSSELS, Dec 22 (Reuters) – The European Commission said it doubts that WestLB’s plans to set up Germany’s first “bad bank” complies with EU rules on state aid, granting only temporary clearance for the rescue plan.

“I am surprised about the level of the additional aid required and will make sure that the new aid is fully compatible with EU state aid rules,” Competition Commissioner Neelie Kroes said in a statement on Tuesday.

The Commission said it doubted the measures taken by the German government to rescue the stricken lender were compatible with state aid rules for impaired asset relief.

It would open an in-depth investigation into the plan, under which WestLB is receiving capital of 3 billion euros ($4.29 billion) from Germany, the European Union executive said.

For now, approval was given only to ensure financial stability, it added.

In a separate statement, the German finance ministry said it had no doubts the measures would be given the green light, adding that the EU’s investigation was part of the “usual legal assessment procedure for state aid”.

The regional state of North Rhine-Westphalia, where WestLB is based, also described the EU’s probe as a matter of routine.

WestLB, one of Germany’s state-backed regional landesbanks, is setting up of a “bad bank” to take over a portfolio of toxic and other assets worth a nominal 85.1 billion euros.

The measure cannot be definitively authorised because it does not meet the conditions of transparency, valuation, burden sharing and remuneration, the EU said.

In October, the bank said it would jettison at least 87 billion euros in risky assets to set up the country’s first bad bank, after winning a go-ahead for two months duration from the EU.

On May 12, the Commission approved a 5 billion euro risk shield for WestLB, forcing the German public-sector lender to focus on less risky activities and halving its size.

A number of German lenders, mainly landesbanks like WestLB, are looking at the possibility of setting up their own bad banks, which would remove the risk of further writedowns and let them concentrate on rebuilding healthy banking businesses.

The country’s big stock-market listed lenders, such as Deutsche Bank, Commerzbank  and Deutsche Postbank have said they would not need bad banks.

(Reporting by Dale Hudson in Brussels, Ludwig Burger in Frankfurt, Matthias Inverardi in Duesseldorf, editing by Philip Blenkinsop and Rupert Winchester)

((ludwig.burger@thomsonreuters.com; +49 69 7565 1311; Reuters Messaging: ludwig.burger.reuters.com@reuters.net))

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