7.5.2 The relevance of the context

Section 6.8 introduced the concept of the “relevant context”.1 This concept is especially relevant in relation to the question which entities benefit from the State aid measures.

If a beneficiary bank continues to exist as an independent and standalone bank (i.e. the C-context), then the identification of the potential beneficiary of State aid is quite simple: namely the beneficiary bank. However, in other contexts, the identification of potential beneficiaries of State aid is less straight-forward.

In the T-context, the activities of the ailing bank are transferred to another entity (i.e. the acquiring bank). Thus, in this context, there is another entity; and this entity could also be a beneficiary of State aid. This means that in the T-context, there are usually two potential beneficiaries: i) the economic activities sold, and ii) the acquiring bank.

In the S/T/W-context, there are even more potential beneficiaries. In this context, the ailing bank is split-up into a bad bank (to be wound-down) and a good bank (to be sold). Thus, in this context, there are usually three potential beneficiaries: the economic activities sold, ii) the acquiring bank, and iii) the activities that remain in the bad bank.

Point 20 of the Restructuring Communication recognises that the sale of a bank may involve State aid to the buyer. The transfer of an ailing bank to the acquiring bank is usually facilitated by the State. The fair value of the transferred liabilities may exceed the fair value of the transferred assets. The difference (i.e. the funding gap) is covered by the State (which constitutes State aid).2

There is an advantage to the buyer if the price that the buyer paid for the transferred activities is too low and does not reflect the market price. In that regard, point 49 of the 2008 Banking Communication laid down the following requirements: i) the sales process should be open and non-discriminatory, ii) the sale should take place on market terms, iii) the sales price for the assets and liabilities involved should be maximised. These requirements are reprised in point 80 of the 2013 Banking Communication.3 If these requirements are met, then the transaction does not entail State aid to the buyer.

The open and transparent tender is regarded by the Commission as a competitive process that ensures that aid is limited to the minimum. In one of its decisions, the Commission expressed that it considered an open tender procedure as “a proper way to gauge market interest and to determine the selling price”.4

It is worth stressing that an open and transparent tender is relevant for three reasons. In the first place, an open and transparent tender ensures that the sale price reflects the market price. This means that there is no aid to the buyer. In the second place, since an open and transparent tender ensures that the sale price reflects the market price, the aid is limited to the minimum.5In the third place, an open and transparent tender ensures equal opportunities for potential bidders.6 The first and second reason for the relevance of an open and transparent tender (‘no aid to the buyer’ and ‘aid limited to the minimum’) are in essence two sides of the same coin. Indeed, there is an advantage to the buyer if the price that the buyer paid for the transferred activities is too low and does not reflect the market price. At the same time, this means that the State aid is not limited to the minimum.

In most cases involving a sale of the ailing bank, the requirement of an open and transparent tender was met. However, there are a few exceptions, as is illustrated by the cases discussed below.

In the case of the sale of the viable activities of ATE Bank (a Greek bank), the Commission observed that the Bank of Greece had only contacted a limited number of banks. In its decision, the Commission indicated that it would normally consider that contacting such a limited number of buyers does not allow it to conclude that the tender was open. However, the Commission went on to observe that at that time, the situation of Greece was very specific, because foreign banks were trying to reduce their exposure to the Greek economy while Greece was in an unprecedented and protracted recession. The Commission therefore accepted that, since the international investment banks that the Bank of Greece contacted indicated that there was no foreign interest in ATE Bank, it was not necessary to contact other foreign banks as it was reasonable to anticipate that they would show no interest for the activities of ATE Bank.7 Similar observations can be found in the decisions on other Greek banks, such as T Bank, Panellinia Bank and Cooperative Bank of Peloponnese.8

As mentioned before, the split-up of Dexia (in October 2011) comprised the sale of Dexia Banque Internationale à Luxembourg (Dexia BIL) to a Quatari investment group (Precision Capital SA) and the Luxembourgish State. Precision Capital acquired 90% of Dexia BIL, the other 10% was acquired by the Luxembourgish State. In the Opening Decision on Dexia BIL, the Commission took the view that the sale process for Dexia BIL had not been open, transparent and non-discriminatory, because the sale process had been restricted to bilateral negotiations with a number of potential buyers without a call for tenders.9 By contrast, in its decision of 25 July 2012, the Commission concluded that the sale of Dexia BIL did not constitute State aid. This decision was based on additional information that the Commission received following the opening decision. The Commission noted that the sale of Dexia BIL was subject to a fairness opinion.10 The Commission examined this fairness opinion and noted that the price of the transaction lied within the range of the fairness opinion. The price paid could therefore be regarded as a market price.11

To conclude, in most cases, the Commission arrived at the conclusion that the sales process was open and transparent (and that aid to the acquirer could therefore be excluded). In some cases, the sales process was not completely open and transparent. However, the Commission has consistently taken into account elements that could justify why the sales process was not entirely open and transparent.

In order to assess whether the transferred activities are beneficiary of aid, the Commission assesses whether these transferred activities constitute an economic continuity of the beneficiary bank.12 The aid measure might constitute an advantage to the transferred activities, if these activities would have been put in run-off without the aid measure.13 In other words: if the aid measure allowed the continuation of the transferred activities (within the acquiring bank), then the transferred activities are a potential beneficiary of the aid.14

The determining factor is whether the transferred activities constitute an economic continuity of the beneficiary bank. This is the case when the functional identity continues to exist.15 If most assets, infrastructure, IT systems, employees and customers of the failing bank are transferred to the acquiring bank, then the identity of the sold economic entity continues to exist and the sold part of the failing bank can be considered as a commercial entity that perpetuates the commercial activity of the failing bank.16

In the T-context, usually all of the beneficiary bank’s activities are transferred. This clearly constitutes a continuation of the economic activity and there is not much discussion whether the transferred activities are a beneficiary of the aid. By contrast, in the S/T/W-context, the question whether the transferred activities are a beneficiary of the aid is much more complicated, for only a part of the bank’s activities are transferred. Does the functional identity of the bank’s activities continue to exist in case of a split-up?

A sale ‘en bloc’ is as indicator of the continuation of the economic activity. In its decision on the Greek T Bank, the Commission noted that the aid measure allowed a sale ‘en bloc’: all the key productive banking assets were transferred (employees, branches, deposits, loans and headquarters). The Commission concluded that there was an advantage to the economic activity that continued to exist due to the sale of T Bank’s assets ‘en bloc’.17

The Commission takes into account the business model of the transferred activities. In the decision on Hypo Group Alpe Adria (HGAA), the Commission noted that the business model of the entities to be sold was different from the business model of HGAA. Also the client base was different: HGAA focussed on large-scale business and key clients; in contrast, the entities to be sold would focus on SME business. The Commission concluded that once the operational entities would be sold and HGAA would cease to exist there would be no continuation of the economic activity of HGAA. 18

An important aspect is whether the transferred activities are integrated into the acquiring bank’s existing structure. For instance, in the case of Roskilde Bank, the transferred branches were integrated into the branch network of the acquiring banks. The Commission concluded that the transferred branches cannot be seen as being separate from the buyers.19 In other words: there is no continuation of the functional identity of the economic activities of the bank.

In its decision on Kaupthing Bank Luxembourg, the Commission observed that the buyers acquired only some of the Bank’s liabilities, without any infrastructure that would enable them to continue to offer banking services on the market independently. The Commission held as follows: “The deposits of the Bank’s former customers will be immediately transferred to Crédit Agricole Belgique or Keytrade Bank accounts and will therefore be immediately integrated into the buyer’s existing structures. Consequently, even though the aid has made possible the orderly and ‘en bloc’ transfer of deposits from the Belgian branch to the buyers, this does not constitute the continuation of an independent undertaking but the transfer of a ‘distinct set of liabilities’”.20

In some cases, there was no integration. For instance, Nationwide – which took over the Dunfermline business – intended to operate Dunfermline as a sep- arate brand.21 This contributes to the finding of a continuation of the functional identity.

To conclude, where the previous subsection showed that the Commission always arrived at the conclusion that aid to the buyer could be excluded, the current subsection showed that the conclusions with respect to the transferred activities is not always the same. In some cases, the transferred activities are considered as beneficiary of State aid, while in other cases, they are not. The determining factor is whether the functional identity of the transferred activities continues to exist.

In the S/T/W-context, the ailing bank is split-up into a good bank (to be sold) and a bad bank (to be wound-down). This bad bank is usually referred to as the “Rump bank”. Is the Rump bank a beneficiary of State aid?

In several decision, the Commission held as follows: even though the Rump bank is to be liquidated, it will still carry out some economic activities, albeit on a small scale and in a running-down objective. Such activities may include offering banking services to their remaining customers. Since these activities are also carried out by other operators on the market, the Rump bank will potentially compete with them. The Rump bank is therefore considered as a beneficiary of State aid.

The determining factor is thus whether the Rump bank will carry out economic activities. In some instances, this is not the case. Consequently, in these cases, the Rump bank is not a beneficiary of State aid. For instance, in the case of AB Ukio bankas, the Commission noted that Rump Ukio was under bankruptcy proceedings and no longer had a banking license. In the decision, it was indicated that Rump Ukio may carry out certain limited activities in relation to loans, such as extension of repayment terms, restructuring of loans, realising certain securities etc. to secure the value of assets. However, it may not issue additional loans or provide drawdowns from existing facilities.22 The Commission therefore concluded that Rump Ukio was not a beneficiary of State aid. 23