9.4 Eligibility of assets

The compatibility-assessment usually starts with the ‘eligibility-criterion’ of the IAC. In that regard, many decisions recall that “section 5.4 of the IAC1 indicates that asset relief requires a clear identification of impaired assets and that certain limits apply in relation to eligibility to ensure compatibility”.2

In most cases, the eligibility of assets is not really an issue. For instance, in the case of Landesbank Baden-Württemberg (LBBW), the guaranteed portfolios mainly consisted of assets such as RMBS, CMBS, CDO’s, CLO’s and ABS.3 The Commission held that these are “typically assets for which there is a market failure and at which impaired asset relief measures are targeted”.4 Similarly, in the case of the Belgian bank KBC, the Belgian State had granted protection on KBC’s CDO portfolio.5 Since only CDO’s were covered, this case did not raise any issues of eligibility. The Commission recalled that in Annex 3 of the IAC, CDO’s are mentioned as examples of impaired assets which can be included in relief operations without doubts as to their eligibility.6 Thus, in cases involving structured securities, it is quite easy to establish that the ‘eligibility-principle’ of the IAC has been met.

However, not only structured securities are eligible to asset relief measures. The approach of the Commission with respect to the eligibility of assets can be characterised as broad. This is apparent from point 32 of the IAC, which proposes “a pragmatic approach including elements of flexibility, which would ensure that other assets also benefit from relief measures to an appropriate extent and where duly justified”. This is elaborated in points 34 and 35 of the IAC. Point 34 provides for the possibility of extending eligibility to “well-defined categories of assets corresponding to the systemic threat upon due justification, without quantitative restrictions”. Point 35 provides for the possibility for banks to be relieved of impaired assets outside the scope of eligibility set out in points 32, 33 and 34 of the IAC without the necessity of a specific justification for a maximum of 10-20 % of the overall assets of a given bank. Point 36 of the IAC is also of importance, since it stipulates that the wider the eligibility criteria, the more thorough the restructuring and the remedies to avoid undue distortions of competition will have to be.7

The broad approach of the Commission as regards the ‘eligibility of assets-principle’ is visible in several decisions. For instance, in the case of WestLB, the bad bank did not only consist of structured securities but comprised also corporate, State, municipal, and student loans. The Commission recalled that the IAC recognised the necessity of a pragmatic and flexible approach to the selection of asset types for impaired assets measures. Furthermore, the Commission noted that the range of asset classes affected by the financial crisis became broader due to spill-over effects. In particular, student loans and securities related to shipping, aircraft and real estate in general, face illiquid markets and/or were subject to severe downward adjustments. The Commission therefore considered that asset relief for such assets could help to achieve the objectives of the IAC, even if such assets were not included in the assets classes that initially triggered the financial crisis. However, the Commission held that pursuant to point 36 of the IAC, the comparatively broad range of assets affected required an increased depth of restructuring.8