11.8.3.1 Which activities are discontinued?

With respect to the question which activities are discontinued, the simple answer is: “non-core activities”. This, in turn, raises the following question: what are non-core activities? Non-core activities are usually negatively defined as all activities that are not core activities.1

Naturally, non-core activities are likely to be different for each bank. It all depends on the bank’s business model and what the bank designates as ‘core’ and ‘non-core’. However, several general conclusions can be drawn from the decisional practice of the Commission. In the first place, some activities – most notably proprietary trading activities – are usually categorised as “non-core” (and thus terminated). In the second place, when the beneficiary bank operates internationally, some (or all) of its foreign activities are discontinued. In the third place, organisational structure is sometimes used as an argument to terminate certain activities. This is most prominent in cases of financial groups that combine banking and insurance activities (“bancassurance”). These three general conclusions will be discussed below.

It can be observed that proprietary trading activities are usually terminated.2 Proprietary trading – sometimes referred to as ‘trading for own account’ – is the purchase and sale of financial instruments with the intent to profit from the difference between the purchase price and the sale price.3

It should be noted that, apart from proprietary trading, there are no activities that are standard categorised as ‘non-core’. Activities that are sometimes labelled as ‘non-core’ are: credit swap activities4, structured investment activities5, leasIng6, factoring/forfeiting7, infrastructure finance8, real estate activities9, shipping financing and aircraft financing.

These activities have been mentioned as ‘non-core activities’, but the decisions usually do not explain in detail why these activities are non-core. However, there are a few decisions that elaborate upon the non-core nature of certain activities. For instance, in the Restructuring Decision on HSH Nordbank, the Commission mentioned that several business segments of HSH Nordbank, such as shipping financing and aircraft financing, were cyclical and volatile in nature.10 The Commission considered the relative importance of shipping and transport financing as problematic.11 The Commission therefore welcomed the fact that pursuant to the restructuring plan, HSH Nordbank would end its aircraft financing activities.

Many banks operate internationally. The domestic market is usually the core market of the bank. This is reflected in the restructuring plans that provide for a re-focus on the domestic market of the bank. This means that some of the bank’s foreign subsidiaries are to be divested.

To give an example, in August 2013, Alpha Bank – a Greek bank – sold its (unprofitable) subsidiary in Ukraine.12 Likewise, OVAG’s difficulties were attributable to its exposure to Central and Eastern European countries (CEE).13 The divestments of these activities therefore contributed to OVAG’s viability. In contrast to OVAG, the Belgian bank KBC did not divest its activities in the CEE countries.14 This illustrates that non-core activities are different for each bank.

Many banking groups pursue several kinds of activities. Some of them are not only active in banking, but they also have insurance activities. The combination of banking and insurance within one group is known as ‘bancassurance’. By combining banking and insurance, economies of scope can be achieved. Selling insurance products through the banking retail channel might result in cost economies of scope.15 In addition, banks that have acquired information about their customers (for instance information regarding their creditworthiness) can sometimes reuse that information by selling other financial products to those customers.16

In the Dutch context, the two prime examples of the bancassurance-model were ING and SNS REAAL. ING was the mother holding company that controlled 100% of ING Bank N.V. and ING Verzekeringen N.V. The restructuring plan of ING envisaged that ING would only pursue banking activities, while the insurance activities would be divested over time.17 Similarly, the bankinsurance holding company SNS REAAL had to divest its insurance subsidiary.

The Commission noted that “that divestment will simplify the business model of the remaining entity. For instance, as a result of the insurance divestment the double leverage will disappear”.18 Thus, there are two reasons in favour of divesting the insurance subsidiary. In the first place, this divestment simplifies the organizational structure and business model of the remaining entity. In the second place, this eliminates the double leverage. A double leverage means that the mother holding company uses debt as equity capital in its subsidiaries.

Other cases that feature the divestment of the insurance activities are CGD19, IL&P20 and NKBM.21 Conversely, the Belgian insurance group Ethias committed to divest its banking subsidiary Ethias Banque. This divestment was consistent with the aim of restructuring to refocus on Ethias’ core insurance activities.22

It is important to point out that the divestment of the insurance division is not always a viability-measure. This can be illustrated by the case of Bank of Ireland.23 Bank of Ireland provided life insurance and pensions in Ireland through New Ireland Assurance Company (NIAC), operating through the branch banking network. Originally, the restructuring plan of Bank of Ireland envisaged that it would divest its life assurance business (NIAC).24 It is noteworthy that this divestment was not mentioned as a viability-measure, but rather as an own contribution-measure and compensatory measure. In recital 214 of the 2010 Restructuring Decision, the Commission held that the divestment of NIAC would contribute to compliance with point 24 of the Restructuring Communication, which requires that banks should first use their own resources to finance restructuring (by, for instance, the sale of assets).25 The fact that Bank of Ireland would exit the Irish insurance market was also mentioned in the assessment of the compensatory measures. The divestment of NIAC would result in a reduction of Bank of Ireland’s balance sheet and of Bank of Ireland’s market presence. 26

Bank of Ireland faced difficulties to meet its commitment to divest NIAC within the deadline period.27 The Irish authorities therefore requested to replace the NIAC measure with other measures. In the Amendment Decision, the Commission considered the proposed replacement measures to be adequate “as they pursue the same objective as the NIAC measure, which is the limitation of the distortion of competition”.28 This recital clearly illustrates that the divestment of the insurance division is treated as a compensatory measure – and thus not as a viability-measure. Moreover, the Commission considered that divesting NIAC would even undermine BOI’s ability to return to profitability in the short term, because NIAC was a profitable subsidiary.29 Pursuant to this Amendment Decision, Bank of Ireland could pursue its bancassurance model.30

The Commission is thus not adamantly opposed to the bancassurance model. This is reflected by the fact that the Commission did not require a divestment of the insurance division in every bank State aid case. Indeed, there were some banking groups that were allowed to retain their bancassurance model. KBC is such a banking group. The Commission explicitly indicated that it considered that KBC’s business strategy, which consisted of retail activities combined with cross-selling of insurance products in KBC’s core markets, was a viable business model.31 Similarly, the restructuring plan of Lloyds Banking Group (LBG) did not envisage the divestment of the insurance division. This is somewhat surprising, because another British bank – namely Royal Bank of Scotland (RBS) – had to divest its insurance division. The decision on LBG did not explain why LBG was allowed to retain its insurance division.