On Tuesday, the European Commission (EC) temporarily approved, for reasons of "financial stability," German landesbank WestLB's proposed "bad bank," which would take over a portfolio of toxic and non-strategic assets with a nominal value of €85.1 billion ($121.9 billion), and an additional €3 billion capital injection from Germany's SoFFin bank rescue fund. The EC, however, "has doubts" that the design of the bad bank is "compatible with state aid rules for impaired asset relief as well as with those for the restructuring of banks," particularly that the measures cap the losses of WestLB's savings bank shareholders from the toxic assets at €4.5 billion, and has therefore "opened a formal in-depth investigation." Competition Commissioner Neelie Kroes stated that "the measure cannot be definitively authorized as it does not fulfill the conditions of transparency and disclosure, valuation, burden sharing and remuneration, which are all necessary elements to ensure the restoration of viability and a mitigation of the negative effects of the massive state support received."
Separately, yesterday, the EC temporarily approved, also for reasons of "financial stability," the rescue of BayernLB's Austrian subsidiary Hypo Group Alpe Adria (HGAA) by the Austrian government and the Land Carinthia. However, the EC is extending its in-depth investigation, initiated this past May, into the €0.7 billion and €0.9 billion capital injection HGAA received from BayernLB and the Austrian government, respectively, and the capital injection of €10 billion and a risk shield of €4.8 billion which BayernLB received in December 2008 from one of its owners, Freistaat Bayern. HGAA must provide an in-depth restructuring plan by the end of March 2010 and BayernLB must revise the restructuring plan it has already submitted in consideration of the new rescue aid to HGAA. As HGAA is "a systemic bank in Austria and a number of countries in South-Eastern Europe," the EC has approved the new aid measures for a maximum period of up to six months, during which the EC will evaluate in detail whether the new state support is fully in line with EU state aid rules, whether the restructuring plan will be "apt to restore the viability of HGAA," and whether the bank's owners "sufficiently participate[d] in the cost of restructuring." During this time, the EC will also investigate whether BayernLB will be able to "restore its viability and whether adequate measures for limiting market distortions are in place."