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Rescue measure in favour of INBS

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					                       EUROPEAN COMMISSION




                                                                 Brussels, 30.3.2010
                                                                 C(2010)2111 final



Subject:       State aid NN 11/2010 – Ireland
               Rescue measure in favour of INBS,


Sir,
The Commission wishes to inform the Irish authorities that, having examined the information
supplied by your authorities on the measure referred to above, it has decided to approve the
measure temporarily for six months.


1      PROCEDURE

(1)     On 17 December 2009 the Irish authorities informed the Commission of their intention to
        undertake rescue measures in favour of Irish Nationwide Building Society (hereinafter
        "INBS").
(2)     On 29 January 2010, the Irish authorities submitted a draft notification of the proposed
        capital support measures in relation to INBS. As the aid already had been granted as of 22
        December 2009 the case was registered as a Non-Notified aid.
(3)     The Commission subsequently requested additional information on 1 February 2010.
(4)     On 16 February 2010, the Irish authorities submitted the notification of proposed capital
        support measures in relation to INBS.
(5)     The Commission requested further information on the measures on 2, 9, 17 and 23
        February and 1, 16 and 18 March 2010. It received further information on 4, 10 and 17
        February and 1, 11, 12, 17 and 18 March 2010.


Mr Micheál MARTIN,
Minister for Foreign Affairs,
Department of Foreign Affairs
80, St. Stephen's Green,
Dublin 2,
Ireland

Commission européenne, B-1049 Bruxelles – Europese Commissie, B-1049 Brussel – Belgium
Telephone: 32 (0) 2 299.11.11
2      DESCRIPTION OF THE MEASURE

2.1     The beneficiary

(6)       INBS is a building society with a balance sheet total of EUR 14.1 billion as on 31
          December 2008 ([…]∗ as per 31 December 2009, unaudited) and is thus the fifth largest
          Irish financial institution in terms of balance sheet size. Building societies are mutual
          organisations which have no shareholders but instead are owned by their members, who
          are also their clients. Their objective is to collect deposits and provide loans. […].

(7)       INBS offers traditional retail banking products to its members (savings and mortgages) in
          line with its goal as a building society. Over the last eight years however, it has also
          substantially increased its activities in commercial property lending mainly outside
          Ireland. Its exposure to land and property development loans grew significantly, with a
          compound annual growth rate (hereinafter "CAGR") for commercial lending of [20-30%]
          for the period from 2001-2009 compared to a CAGR of [0-10%] for its retail mortgage
          lending for the same period.

(8)       INBS is mainly active in Ireland, where it has a branch network of 50 branch offices and
          40 branch agents and the UK where it has no branch offices. It has a staff of
          approximately 343 (as at 31 December 2008).

(9)       NBS' entire loan book as on 31 December 2008 has a value of approximately EUR 11
          billion, of which the commercial loan book makes up EUR 8.2 billion. Retail deposits
          amount to EUR 6.7 billion. Impairments on the loan book over 2008 amounted to EUR
          467 million. INBS recorded a loss over 2008 of around EUR 243 million.

(10)      For 2009, the unaudited figures show that the total loan book amounts to approximately
          […], of which […] relates to commercial lending. Retail deposits have decreased to around
          […]. Impairments on the loan book over 2009 are expected to increase to approximately
          […].

(11)      INBS, on 30 November 2009, obtained derogations from the Financial Regulator from the
          normal capital requirements1 in respect of certain capital adequacy requirements. The
          derogations were granted until 31 March 2010 or until the Bank’s capital ratios are
          restored to a level adequate to enable it to comply with its capital ratio requirements prior
          to the granting of the derogations, whichever occurs earlier. In particular the derogation
          reduces the minimum total capital requirement of INBS from 11% to 8% and reduces the



∗
      Confidential information

1
      Capital in the case of INBS according to the 2008 annual accounts consists solely out of retained earnings,
      which qualify as core Tier-1 capital, see
      http://shadow.inbs.ie/reports/inbs/46327%20Irish%20Nationwide%20AR%2008.pdf


                                                           2
         risk weighting of loans classified as speculative property investment/development and
         speculative construction activities from 150% to 100%.2

(12)     INBS is one of the financial institutions covered by the Irish Guarantee Scheme for
         financial institutions (hereinafter “the CIFS scheme”), which was adopted under the Credit
         Institutions (Financial Support) Act 2008 and approved by the Commission on 13 October
         2008.3 The total State-guaranteed funding (including deposits) for INBS as of 30 June
         2009, under the CIFS Scheme was EUR […]. INBS also joined the Eligible Liabilities
         Guarantee Scheme (hereinafter "ELG scheme")4 on 3 February 2010. According to the
         estimates provided by the Irish authorities, the potential issuance of debt (including
         deposits) under the new scheme by INBS will be […].


2.2     The events triggering the measures

(13)     The decision by the Irish Government to make the State investment was taken in
         consideration of the deterioration of the institution's financial position which came to light
         in the context of the preparation of the publication of the end of the year 2009 accounts. In
         the light of the size and activities of INBS (i.e. commercial property lending) this
         deterioration is regarded by the Irish authorities as creating a significant risk of systemic
         disturbance to the financial system in Ireland.

(14)     As on 31 December 2008, the breakdown of INBS' loan book by sector was: real estate
         (46%), construction (15%), other commercial (17%) and residential (22%). As a result
         INBS' exposure to the property market is around 83% of its total loan book, which is
         significantly above the exposure of traditional banks in Ireland. At the same date the
         geographic breakdown of its loan book was: Ireland (47.4%), the United Kingdom
         (42.1%) and rest of Europe (10.5%).

(15)     Consequently, when the financial and economic crisis hit and property prices, especially
         commercial property prices, fell dramatically in both Ireland and the UK, INBS was very
         much exposed to losses in its loan book. As mentioned in paragraph (10), these losses
         have forced it to take significant impairments over 2009, amounting to approximately […].
         The losses INBS had to recognise also lead to a severe depletion of its capital base,
         resulting in an estimated core Tier-1 ratio as at the end of December 2009 of […] (with
         derogation), or […] (without derogation). INBS has furthermore been forced to take
         impairments on the loan book for the first quarter of 2010.



2
      For example, the risk weighted assets of INBS as at 31 December 2009 are […] absent the derogation while
      they amount to […] with the derogation.
3
      See Commission decision of 13 October 2008 in Case NN48/2008 "Guarantee Scheme for Banks in Ireland', OJ
      C312, 6.12.2008, p.2.
4
      See Commission decision of 20 November 2009 in Case N349/2009 "Credit Institutions Eligible Liability
      Guarantee Scheme", not yet published.



                                                       3
(16)      INBS will participate in the NAMA scheme established by the National Asset
          Management Act 2009 in order to cleanse and repair its balance sheet. The NAMA
          scheme was approved by the Commission on 26 February 2010.5 […]. It is anticipated that
          approximately EUR 8.5 billion (gross of impairments) of INBS’ commercial loan
          portfolio, representing a large proportion of its problem assets, will be transferred to
          NAMA. Although the haircut applied to nominal value in the transfer to NAMA still
          needs to be confirmed, it is currently estimated at […]. INBS' participation in NAMA will
          facilitate the accelerated removal of high risk property-related assets. This, in combination
          with the impairments already taken by INBS over 2009, will further decrease its capital
          base ([…] as explained in paragraph (15)).


2.3      The measures

(17)      INBS will receive a total capital injection of EUR 2.7 billion (which will decrease after
          assets are transferred to NAMA), split between two measures. The exact amount of capital
          injection will be subject to adjustments under the second measure.
          The first measure

(18)      INBS will receive a EUR 100 million capital injection (hereinafter "measure 1") through
          the issuance of Special Investment Shares (hereinafter "SIS"). These are shares that can be
          issued to the government pursuant to an amendment to the Building Societies Act 1989
          that was introduced by the National Asset Management Act 2009. The change in
          legislation was necessary in order to enable the Irish authorities to recapitalise building
          societies, which had not been possible under the previous legislative framework.
(19)      The rights attached to the SIS include the right of the Irish authorities to appoint and
          remove the majority of the directors, including the Chairman and CEO. In addition, the
          SIS will give to the Irish authorities privileged voting powers, resulting in the control of
          INBS. For example, a resolution in writing signed by the Irish authorities shall be as valid
          and effective as if the resolution had been passed at a general meeting; where the Irish
          authorities vote in favour of any resolution, that resolution shall be treated has having
          been passed.
(20)      The Irish authorities have submitted that the Financial Regulator has confirmed that the
          SIS will constitute unsecured subordinated share capital and will qualify as core Tier-1
          capital. In case INBS is wound-up or its assets or business are realised, the Irish
          authorities will be repaid at par before the ordinary share members, while they will also be
          entitled to the entire surplus which remains after the wound-up or realisation.6 In both
          cases the ordinary share members will not receive anything of the surplus.
(21)      The SIS can be redeemed by INBS only if it can replace the SIS by other core Tier-1
          capital, it is not in breach of its capital requirements, the Irish authorities have given their

5
      See Commission decision in Case N725/2009, "Irish asset relief – NAMA", not yet published.
6
      Surplus means any assets remaining after (i) the repayment of INBS' creditors; (ii) the repayment, redemption or
      return to the Irish authorities of State capital provided to INBS; (iii) the repayment, redemption or return of the
      SIS; and (iv) the repayment to ordinary share members of sums standing to their credit in the accounts of INBS.



                                                            4
        consent and all State capital provided to INBS has been repaid. The Irish authorities
        confirmed that the redemption of the State capital also includes the repayment of an
        amount equivalent to the value of the promissory note.7 The Irish authorities have
        committed to obtain the prior approval of the Commission for the redemption of the SIS.
(22)    INBS can pay a dividend on the SIS provided it has sufficient 'adjusted distributable
        reserves' and does not breach its regulatory requirements.8
(23)    The ordinary share members of INBS have been wiped-out as far as their economic
        ownership rights are concerned. In case INBS were to convert from a building society into
        a limited liability company, the SIS would be converted into ordinary shares with the
        same rights attached as the SIS. The members who, absent the SIS, would receive an
        amount of shares to reflect their economic ownership in the building society, would under
        the terms of the SIS, not receive any shares upon conversion.
(24)    The SIS acquired by the Irish authorities are perceived by the Irish authorities to be the
        minimum appropriate level of investment in SIS in order to emphasise their commitment
        to maintain INBS' solvency ratio and to make it possible for them to assume control of
        INBS.
        The second measure
(25)    INBS will receive a further capital injection of EUR 2.6 billion through a direct grant in
        the form of a promissory note which is of sufficient size to ensure that INBS is in
        compliance with its regulatory capital requirements as at 31 December 2009 (hereinafter
        "measure 2"). The capital injection also takes into account the impairments INBS has been
        forced to take in the three first months of 2010 until the date of issuance of the note. The
        Irish authorities have submitted that their preliminary estimation is that they will reduce
        the principal amount after the completion of assets transfer to NAMA, since the reduction
        of INBS' assets will result in lower capital ratio requirements for the building society.
(26)    The principal amount of the promissory note will be made available to INBS on the date
        of issuance, which will be shortly after the adoption of this decision. The capital injection
        will be taken into account in the accounts over 2009. This is possible because the Minister
        for Finance in a letter dated 22 December 2009, informed INBS of the commitment of the
        Irish authorities to inject capital in order to ensure that it will satisfy regulatory
        requirements.
(27)    From an accounting perspective the promissory note will be an asset (receivable) on
        INBS' balance sheet. On the liability side, the note shall furthermore qualify as core Tier-
        1 capital from a regulatory perspective. The Irish Financial Regulator has confirmed that
        the measure will qualify as core Tier-1 capital.
(28)    Although the full principal amount will be available to INBS immediately, the amount
        will be transferred to INBS in annual payments of a maximum of 10% over a 10-year
        period. The principal amount of the instrument will therefore amortise over time. In order
        to ensure that the value of the promissory note in the accounts of INBS (where it will be
7
    This because the repayment of the note itself is not foreseen (see paragraph (25) to (32)).
8
    Adjusted distributable reserves in this context are taken to mean the aggregate amount of accumulated retained
    earnings and any other reserves and surpluses of INBS.



                                                          5
       reported at present value) is not lower than its nominal value (which would result in a
       reduction of core Tier-1 capital), the Irish authorities will pay every year a coupon on the
       average (unpaid) principal amount during the preceding year. The Irish authorities intend
       to accumulate the coupon and pay it after the payment of the principal amount. This will
       have as a consequence that the duration of the payments made to INBS is increased by
       four years to fourteen years in total. The coupon is a fixed rate which will discount the
       principal repayments and accumulated coupon payments. The calculation of the coupon
       will be based on a linear interpolation of Irish Government Bond Yields.9
(29)   The principal amount of the promissory note will be adjusted downwards after INBS has
       transferred its NAMA eligible assets to NAMA on the Final Reset Date, to take into
       account the reduction in risk weighted assets (hereinafter "RWA") and thus the change in
       INBS' capital ratios following this transfer. The Irish authorities have provided a
       commitment that in case they intend to increase the amount of the promissory note, they
       will notify this to the Commission. The adjustment of the note aims at providing INBS
       with sufficient capital to meet its regulatory capital requirements at 31 December 2009, 31
       March 2010 and the date when NAMA serves a completion notice on INBS. This is
       expected to take place at the end of 2010. The Final Reset Date as defined by the Irish
       authorities at the latest occurs when NAMA serves its completion notice to INBS. The
       Irish authorities can also decide to fix the principal amount at a date prior to that.
(30)   The promissory note is not remunerated by INBS; the Irish authorities will not obtain any
       further rights in INBS and repayment of the note is not foreseen.
(31)   The conditions attached to the promissory note include a dividend stopper on all capital
       instruments of INBS and commercial constraints. These constraints require INBS to
       engage in cost base reductions in conjunction with its restructuring plan, to recognise
       impairments on its loan book and to comply with the same behavioural commitments to
       which INBS is subject under the CIFS and ELG schemes (even in case the building
       society no longer participates in the schemes or in case the schemes expire). The Irish
       authorities can waive any of these behavioural conditions. The Irish authorities have
       provided the commitment that they will seek prior approval from the Commission if they
       intend to waive any of these behavioural safeguards.
(32)   According to estimates provided by the Irish authorities, the measure will raise INBS' core
       Tier-1 ratio from […] (without derogation), or […] (with derogation), to 4% and INBS'
       total capital ratio from […] (without derogation), or […] (with derogation), to 14.1%.
        Timing of the measures
(33)   As regards the timing of measure 1 and 2, the Irish authorities have indicated that it is
       necessary to implement measure 1 before measure 2 in order for the Irish authorities to
       obtain the necessary rights associated with the SIS and protect their interests regarding the
       substantial investment made.




9
    The coupon on the promissory note will be set at the date of issuance. The Irish authorities provided an example
    which demonstrated that the fixed coupon, if it had been set on 24 February 2010, would have been 4.16%.



                                                         6
         Behavioural constraints
(34)    INBS will continue to be subject to the behavioural constraints and transparency and
        reporting conditions imposed under the CIFS and the ELG schemes even in case the
        building society does not longer participate in the schemes or in case the schemes expire.10
        These include balance sheet growth constraints, controls over acquisition of shares in
        other financial institutions, establishing subsidiaries and/or entering into new business,
        compliance with targets on assets and liabilities and capital ratios set by the Financial
        Regulator on consultation with the Minister for Finance, limitations on the payment of
        dividends and controls on executive remuneration.

3      POSTION OF THE IRISH AUTHORITIES

(35)    The Irish authorities accept that the INBS measures constitute State aid. However, the
        Irish authorities are of the view that the INBS measures are compatible with the internal
        market on the basis of Article 107(3)(b) of the Treaty on the Functioning of the European
        Union (hereinafter "TFEU") as they are necessary in order to remedy a serious disturbance
        in the Irish economy. In particular the Irish authorities submit that the INBS measures are
        (i) appropriate; (ii) necessary and limited to the minimum amount necessary; and (iii)
        proportionate as designed to minimize negative spill-over effects on competitors.

(36)    Appropriate and well-targeted. The Irish authorities submit that INBS is systemically
        important to the maintenance of stability of the financial system in Ireland. INBS is one of
        the six core credit institutions in the State, which has been confirmed by the Irish Central
        Bank. It has a balance sheet size of around EUR 13 billion and accounts for a material
        share of customer deposits and lending in the Irish economy. The total number of
        customers with loans with INBS is approximately […], of whom […] are Irish customers.
        The total number of retail depositors in INBS is approximately […], of whom […] are
        Irish customers. […].

(37)    Necessary and limited to the minimum amount. The Irish authorities submit that the
        measures (measure 1 and measure 2) are required as a matter of absolute urgency to
        preserve the financial stability of INBS, in particular because no private investor could
        enter in the capital of INBS considering its status of building society. In addition the
        measures are limited in size to what is necessary to ensure that INBS meets its minimum
        regulatory capital requirements as at 31 December 2009. According to Ireland the capital
        injections through measures 1 and 2 provide INBS with the necessary capital to meet its
        minimum capital requirements and will thus help preserve financial stability.
(38)    Proportionate. The Irish authorities submit that the terms and conditions of the INBS
        measures, together with the terms and conditions already imposed on INBS under the
        CIFS scheme, contain an extensive range of safeguards against possible abuses and
        distortions of competition. In particular INBS will continue to be subject to the


10
     See Commission decision of 20 November 20009 in Case N 349/2009, Credit Institutions Eligible Liability
     Guarantee Scheme, paragraphs 24-26, not yet published.



                                                     7
          behavioural conditions and transparency and reporting conditions that have been imposed
          under the CIFSs scheme and the ELG scheme.
(39)      The Irish authorities have also provided the following commitments:
          (i) To notify to Commission for approval any increase in the principal amount of the
              promissory note which occurs on the Final Reset Date
          (ii) To obtain the prior approval of the Commission for the redemption of the SIS;
          (iii)To seek prior approval of the Commission before waiving any of the behavioural
               constraints mentioned in paragraph (31);
          (iv) To submit a restructuring plan in line with the principles laid down in Commission's
               Communication on the return to viability and the assessment of the restructuring
               measures in the financial sector (hereinafter "Restructuring Communication")11 and
               the Commission Communication on "The application of State aid rules to measures
               taken in relation to financial institutions in the context of the current global financial
               crisis" (hereinafter "the Banking Communication")12. In line with the Recapitalisation
               Communication, which provides that a restructuring plan should be presented six
               months after the introduction of the measures13 (22 December 2009 in the present
               case), a restructuring plan will therefore have be presented to the Commission before
               22 June 2010.

4      ASSESSMENT

4.1     Existence of State Aid

(40)      The Commission first has to assess whether the measures constitute State aid within the
          meaning of Article 107(1) TFEU. According to this provision, State aid is any aid granted
          by a Member State or through State resources in any form whatsoever which distorts, or
          threatens to distort, competition by favouring certain undertakings, in so far as it affects
          trade between Member States. The Commission in this context observes that the Irish
          authorities do not dispute that measures 1 and 2 constitute State aid.

(41)      The Commission observes that in this case State resources are involved as measures 1 and
          2 are entirely financed by the State.

(42)      The Commission also has to assess whether the measures confer a selective advantage on
          the beneficiary or beneficiaries of the aid. The Commission considers measure 1 and 2 to
          be selective as they solely benefit INBS.

11
      OJ C195, 19.8.2009, p. 9.
12
      Commission Communication on "The application of State aid rules to measures taken in relation to financial
      institutions in the context of the current global financial crisis", adopted on 13.10.2008, OJ C 270, 25.10.2008,
      p. 8.
13 See paragraph (40) of the Commission's Communication on the recapitalisation of financial institutions in the
   current financial crisis: limitation of aid to the minimum necessary and safeguards against undue distortion of
   competition, OJ C 10, 15.01.2009, p. 2.



                                                           8
(43)    The measures furthermore confer an advantage on INBS as it allows INBS to absorb its
        impairments and […], while its competitors that are facing similar impairments have to
        absorb these losses without government support. INBS, in contrast, will recover the
        capital it has lost due to these impairments. Indeed, INBS will increase its capital base as
        the measures will ensure that its capital base will be in line with regulatory requirements
        that applied to INBS before it obtained derogations from the Financial Regulator, allowing
        it to operate below these requirements.

(44)    In addition, measure 2 has the effect of a de facto guarantee of capital adequacy provided
        by the Irish authorities for a prolonged period of time (the additional adjustment period
        will last until the Final Reset Date). It therefore confers an advantage on INBS as other
        competitors will not benefit from such a measure and will have to find other, potentially
        more expensive means, to maintain their capital position.

(45)    The proposed recapitalisation would not have been provided by a market economy
        investor expecting a reasonable return on his investment. For the proposed recapitalisation
        the State is only investing because no market economy operator was willing to invest on
        similar terms.14 As stated by the Irish authorities, the willingness to avoid a further
        deterioration in INBS' financial position, which would represent a threat to the stability of
        the financial system as a whole, has determined the State intervention, rather than the
        possible return for the State as an investor. In addition measures 1 and 2 do not foresee
        any remuneration for the State. The Commission therefore comes to the conclusion that
        the measure provides a selective advantage to INBS.

(46)    The Commission furthermore finds that measures 1 and 2 distort competition as they
        allow INBS to obtain the capital necessary to absorb the substantial impairment losses.
        The recapitalisation will thus help it to avoid severe financial difficulties, which could
        result in the withdrawal of the building society from the market. Due to the intervention of
        the Irish authorities however, INBS will be able to continue its activities on the Irish and
        UK markets.

(47)    The Commission finds that measure 1 and 2 are also able to affect trade between Member
        States as INBS is competing on, amongst others, the Irish and UK retail savings markets,
        the Irish and UK mortgage lending markets and the Irish and UK commercial lending
        markets. In the Irish market, some of INBS' competitors are subsidiaries of foreign banks,
        while in the UK market INBS competes with both UK-based banks and the subsidiaries of
        foreign banks active on the UK market.

Conclusion
(48)    Due to the above considerations, the Commission considers that measures 1 and 2 fulfil all
        conditions laid down in Article 107(1) TFEU and, therefore, those measures qualify as
        State aid to INBS. The Commission furthermore observes that the aid was effectively
        granted on 22 December 2009, on the basis of the indication by the Minister for Finance

14
     See paragraph 39 of Commission decision in Case N507/2008 – UK "Financial Support Measures to the
     Banking Industry in the UK", OJ C 290, 13.11.2008, p. 4.



                                                  9
         of his intention to recapitalise INBS. The commitment of the Minister for Finance to
         provide INBS with additional capital has been taken into account in the annual report over
         2009. The aid has therefore been implemented contrary to Article 108(3) TFEU.

4.2     Compatibility of the aid

(49)     As regards compatibility of the aid provided to INBS through measures 1 and 2 with the
         internal market, the Commission first needs to determine whether the aid can be assessed
         under Article 107(3)(b) TFEU, i.e. whether the aid remedies a serious disturbance in the
         economy of the Ireland. Subsequently, the Commission, using this legal basis, has to
         assess whether the measures at issue are compatible with the internal market


4.2.1    Legal basis for the compatibility assessment
(50)     Article 107(3)(b) TFEU provides for the possibility that aid falling within the scope of
         Article 107(1) TFEU can be regarded as compatible with the internal market where it
         "remedies a serious disturbance in the economy of a Member State".
(51)     Given the present circumstances in the financial markets, the Commission considers that
         the measures may be examined under Article 107(3)(b) TFEU.
(52)     The Commission considers that market conditions deteriorated all over the world since the
         last quarter of 2008. The Commission observes that Ireland in particular has been severely
         hit by the financial and economic crisis. The economic downturn combined with the fall in
         property prices and the exposure of the Irish banks to land and property development
         loans have lead to significant impairments for Irish banks. Irish banks have furthermore
         been faced with difficulties in obtaining funding and capital from the markets due to the
         uncertainty associated with the property market in Ireland.
(53)     The Irish authorities have shown that INBS has been faced with a severe deterioration in
         its capital position as huge impairment provisions are required to cover the losses on its
         loan book. Indeed, according to Irish authorities' estimates, without the proposed capital
         injections, the core Tier-1 ratio would be […] (without derogation) and the total capital
         ratio would be […] (without derogation) on 31 December 2009.
(54)     Without the capital injection there would be […] with consequent severe adverse impacts
         on other banks and the wider financial system in Ireland. This position has been confirmed
         by the Irish Central Bank. According to the Irish Central Bank, it is essential that INBS, as
         a systemically important financial institution, the stability of which is essential to the
         maintenance of financial stability in the banking sector in Ireland, receives the
         recapitalisation in order to avoid severe financial difficulties.
(55)     For these reasons the Commission accepts that the recapitalisations in favour of INBS are
         necessary to avoid a serious disturbance in the economy of Ireland




                                                  10
4.2.2    Compatibility assessment

(56)    In line with point 15 of the Banking Communication, in order for an aid or aid scheme to
        be compatible under Article 107(3)(b) TFEU it must comply with general criteria for
        compatibility under Article 107(3) TFEU, which imply compliance with the following
        conditions15:
         a. Appropriateness: The aid has to be well targeted in order to be able to effectively
            achieve the objective of remedying a serious disturbance in the economy. This would
            not be the case if the measure were not appropriate to remedy the disturbance.
         b. Necessity: The aid measure must, in its amount and form, be necessary to achieve the
            objective. That implies that it must be of the minimum amount necessary to reach the
            objective, and take the form most appropriate to remedy the disturbance.
         c. Proportionality: The positive effects of the measure must be properly balanced
            against the distortions of competition, in order for the distortions to be limited to the
            minimum necessary to reach the measure's objectives.
(57)    The Commission Communication on "The recapitalisation of financial institutions in the
        current financial crisis: limitation of aid to the minimum necessary and safeguards against
        undue distortion of competition" (hereinafter "the Recapitalisation Communication")16,
        further elaborates on the three principles of the Banking Communication and states that
        recapitalisations can contribute to the restoration of financial stability. In particular the
        Recapitalisation Communication states that recapitalisations may be an appropriate
        response to the problems of financial institutions […].17

4.2.2.1 Compatibility with the Banking and Recapitalisation Communications

a. Appropriateness of the Measures

(58)    The measures, which both constitute recapitalisation measures and can therefore be
        assessed together, aim at ensuring that INBS is in compliance with its regulatory capital
        requirements18 as at 31 December 2009, 31 March 2010 and after the transfer of assets to
        NAMA has taken place. They target in particular INBS' core Tier-1 ratio and total capital
        ratio. The Commission considers that a capital injection is the most efficient and
        straightforward measure as it directly improves the core Tier-1 and the total capital of the
        building society.


15
     See paragraph 41 of Commission decision in Case NN 51/2008 Guarantee scheme for banks in Denmark, OJ C
     273, 28.10.2008, p.2.
16
     Commission Communication on " The recapitalisation of financial institutions in the current financial crisis:
     limitation of aid to the minimum necessary and safeguards against undue distortion of competition ", OJ C 10 of
     15.01.2009, p. 2.
17
     Recapitalisation Communication, […].
18
     The Irish authorities submit that minimum regulatory capital levels are a minimum Total Capital Ratio target of
     8%, and a minimum Core Tier 1 Capital Ratio of 4%.



                                                        11
(59)    The Irish authorities submit that the financial regulator has confirmed that both measures
        can be categorised as core Tier-1. These measures will result in an improvement of the
        core Tier-1 ratio and the total capital ratio. Thanks to the measures, INBS will meet its
        minimum regulatory capital requirements at this date and will no longer be in need of
        derogations by the Financial Regulator regarding its capital requirements.
(60)    The Irish authorities have stated that without a total capital injection of EUR 2.7 billion
        (which could decrease upon the transfer of the eligible bank's assets to NAMA) […] with
        consequent severe adverse impacts on other banks and the wider financial system in
        Ireland. This position has been confirmed by the Irish Central Bank and the Financial
        Regulator. […].

(61)    The Commission considers that the measures are appropriate because they effectively
        meet their objective to ensure that INBS is in compliance with its regulatory capital
        requirements as at 31 December 2009, 31 March 2010 and after the transfer of assets to
        NAMA has taken place, and effectively achieve the objective of preventing the failure of
        INBS. The measures furthermore ensure that financial stability in Ireland is maintained.
        The Commission observes that the Central Bank and the Financial Regulator have
        confirmed that the measures are necessary in order to safeguard financial stability in
        Ireland. For these reasons, the Commission finds that the measures are appropriate.

b. Necessity – limitation of the aid to the minimum

(62)    According to the Banking Communication, the aid measure must, in its amount and form,
        be necessary to achieve the objective. That implies that the capital injection must be of the
        minimum amount necessary to reach the objective. In this context, the Commission
        observes that the amount of the measures will ensure that INBS will again fulfil its
        regulatory capital requirements without derogations being necessary.
(63)    As regards the remuneration INBS has to pay, the Commission observes that for measure
        1, the investment through SIS, the State will only be remunerated if INBS is in a position
        to pay out a dividend. The term sheet does not define at which price the SIS can be
        redeemed and therefore does not explicitly include or exclude a premium to the nominal
        value, which could be considered as a form of remuneration19. Measure 2 is not
        remunerated and redemption is not foreseen. The Commission notes that paragraphs 15
        and 44 of the Recapitalisation Communication explain that lower remuneration in duly
        justified cases can be accepted in the short term for distressed banks on the condition that
        this will be reflected in the restructuring plan.
(64)    It is therefore necessary for the Commission to verify whether INBS is fundamentally
        sound or not. The Recapitalisation Communication provides a number of indicators to
        assess the risk profile of a financial institution, and whether the bank is fundamentally
        sound or distressed: (i) capital adequacy and sustainability of the business model; (ii) size



19
     The redemption can only occur with the agreement of the State, which in turn committed to obtain the
     Commission's approval before accepting any redemption.



                                                   12
        of the recapitalisation; (iii) current CDS spreads; and (iv) the current rating of the financial
        institution and its outlook.20

(65)    Capital adequacy and sustainability of the business model. The Irish authorities estimate
        that the core Tier-1 capital ratio would have been as low as […] (without derogation) at 31
        December 2009 without the recapitalisation. Total capital ratio would have been as low as
        […] (without derogation). Although the Financial Regulator granted derogations to INBS
        on 30 November 2009, reducing the total capital requirement from 11% to 8% and
        allowing a reduction of the risk weighting of particular assets, INBS is not in a position to
        respect its capital requirements. In addition, INBS is the most important contributor to
        NAMA in relative terms, planning to transfer […] of its commercial loan portfolio (or […]
        of its commercial and retail loan book). This illustrates the weakness of the business
        model of INBS. Finally, INBS […] of its combined deposit book between 1 January 2009
        and 30 September 2009, reflecting the loss of confidence by customers.
(66)    Size of the recapitalisation. The Irish authorities estimate that the RWA of INBS as at 31
        December 2009, amount to […] with the derogation, and […] without the derogation. The
        Irish authorities estimate the measures will account for up to EUR 2.7 billion in total
        (excluding the potential decrease of this amount after assets are transferred to NAMA),
        leading to a recapitalisation corresponding to [>10%] (with derogation) or [>10%]
        (without derogation) of the RWA respectively. This figure is […] times higher than the
        2% threshold mentioned in the Recapitalisation Communication.
(67)    Current rating of the financial institution and its outlook. The current credit rating status
        of INBS from Moody's is ''Baa3/P3'' deposit rating and a "E+" financial strength rating.
        The current credit rating status of INBS from Fitch is long-term ''BBB-'' and short term
        ''F1+'', and therefore only one grade above junk bonds.
(68)    Current CDS spreads. The Irish authorities have informed the Commission that INBS
        does not have its own CDS spread. This criterion can therefore not be applied to the
        present case and the Commission must therefore base its assessment on the information
        available for the three other indicators. The Commission considers that the lack of
        information on this indicator does not preclude it from making an assessment on INBS'
        soundness.
(69)    Based on the forgoing indicators, the Commission has come to the conclusion that INBS
        is not fundamentally sound, and that it is in a particularly distressed financial situation
        according to the criteria laid down in the Annex to the Recapitalisation Communication.
        In particular, INBS cannot meet its regulatory capital requirements, it has lost confidence
        of many customers, its ratings are significantly degraded, and the recapitalisation
        measures will account for more than [>10%] of its RWA.
(70)    Having established that INBS is a financial institution in distress, which without the State
        intervention […] could endanger financial stability in Ireland, the Commission therefore
        considers it justified that no remuneration is paid for the two measures. This is in line also



20
     See the Annex to the Recapitalisation Communication.



                                                      13
        with the Commission's previous decisional practice.21 INBS is currently not in a position
        to pay the remuneration required for distressed banks as indicated in the Restructuring
        Communication. The Commission furthermore notes that the Irish authorities have
        committed to submit a restructuring plan for INBS that will take into account the lack of
        remuneration paid for the capital injections.

        Obligation to submit a restructuring plan or a liquidation plan

(71)    The Recapitalisation Communication states that financial institutions that receive a capital
        injection while they are not fundamentally sound, such as INBS, are under the obligation
        to submit a far-reaching restructuring plan or a liquidation plan within six months of
        recapitalisation. 22
(72)    In the present case, the Commission considers that the recapitalisation measures were
        granted on 22 December 2009, when the Minister for Finance informed INBS of the
        commitment of the Irish authorities to inject capital in order to ensure that it will satisfy
        regulatory requirements. The fact that this letter of the Minister of Finance constitutes a
        firm promise is further evidenced by the fact that it is taken into account by INBS' auditors
        in the preparation of the 2009 accounts.
(73)    The extent to which INBS will need to restructure its activities is increased by the fact that
        the recapitalisation measures do not foresee any remuneration for the State. Paragraph 15
        of the Recapitalisation Communication allows an exception to the general requirement of
        remuneration for recapitalisations only in the short term, and only under the assumption
        and condition that the costs of public intervention and the competitive impact of the State
        intervention will be reflected in the compensatory measures within the restructuring plan.

c. Proportionality – measures limiting negative spill-over effects

(74)    The Commission observes that INBS in the context of the CIFS and ELG schemes is
        subject to several behavioural constraints set out in paragraphs (31) and (34) which aim to
        limit the distortion of competition. As regards the behavioural constraints in paragraph
        (31) (the dividend stopper, obligations regarding cost reduction and recognition of
        impairments and the constraints of the CIFS and ELG schemes) the Commission observes
        that although these can be waived pursuant to the terms of the promissory note, the Irish
        authorities have provided the commitment to seek prior Commission approval in case they
        intend to waive these constraints. Taking into consideration the level of distress INBS is
        facing combined with the need to maintain financial stability in Ireland, the Commission
        considers these measures at this time to be sufficient to be able to temporarily approve
        measures 1 and 2 as rescue aid.




21
     The same approach was taken in point 64 of Commission's decision of 26 June 2009, in case N 356/2009,
     Recapitalisation of Anglo Irish bank, OJ C 235, 30.9.2009.
22
     Recapitalisation Communication, paragraph 44.



                                                     14
Conclusion

(75)    The Commission thus concludes that the recapitalisation measures are: (i) appropriate to
        […]; (ii) necessary as they are limited to the minimum; (iii) that INBS is a distressed bank;
        (iv) that the fact that INBS does not pay remuneration is justified under the circumstances;
        (v) INBS is under the obligation to submit a restructuring plan before 22 June 2010, which
        has to reflect the level of distress of the bank, the size of the State recapitalisation, and the
        absence of remuneration for the State; and (vi) there are sufficient measures limiting the
        negative spill-over effects for other competitors to enable the Commission to temporarily
        approve the recapitalisation as emergency aid. The Commission can therefore temporarily
        approve measures 1 and 2 for six months.


4.2.2.3 Viability review and restructuring plan
(76)    As regards the need for an assessment of the institution's balance sheet and activities, the
        Recapitalisation Communication states in paragraph 44 that the use of recapitalisation for
        a distressed bank can only be accepted on the condition of a far-reaching restructuring.
        The Commission furthermore observes that the aid provided to INBS is a multiple of 2%
        of its RWA, confirming that an in-depth restructuring would be required. The Commission
        furthermore observes that the Irish authorities have committed to submit a restructuring
        plan for INBS.
(77)    The Commission therefore requires the Irish authorities to submit a restructuring plan for
        INBS taking into account all aid measures INBS has received that fulfils the requirements
        of the Restructuring Communication23 as regards return to viability, burden-sharing and
        own contribution and measures limiting the distortion of competition. The restructuring
        plan should be submitted to the Commission before 22 June 2010.24

CONCLUSION

•    The Commission concludes that the EUR 100 million capital injection through SIS and the
     EUR 2.6 billion capital injection in the form of a promissory note constitute State aid
     pursuant to Article 107(1) TFEU.

•    The Commission regrets that Ireland put the aid in question into effect, in breach of Article
     108(3) of the Treaty on the Functioning of the European Union.

•    The Commission nevertheless finds that the rescue measures in favour of INBS are
     temporarily compatible with the internal market for reasons of financial stability. The rescue
     measures in favour of INBS are accordingly approved for six months as of the date they were
     put into effect (i.e. 22 December 2009) or, if Ireland submits a restructuring plan before that
     date, until the Commission has adopted a final decision on the restructuring plan.
23
     Communication from the Commission "The return to viability and the assessment of restructuring measures in
     the financial sector in the current crisis under the State aid rules", OJ C195, 19.8.2009, p. 9.
24
     Which is six months following the letter from the Irish Minister for Finance of 22 December 2010



                                                        15
•   The Commission requires the Irish authorities to submit an in-depth restructuring plan at the
    latest by 22 June 2010 that takes into account the very high aid amount granted to INBS.
If this letter contains confidential information which should not be disclosed to third parties,
please inform the Commission within fifteen working days of the date of receipt. If the
Commission does not receive a reasoned request by that deadline, you will be deemed to agree to
the disclosure to third parties and to the publication of the full text of the letter in the authentic
language on the Internet site:
http://ec.europa.eu/community_law/state_aids/state_aids_texts_en.htm

Your request should be sent by registered letter or fax to:

            European Commission
            Directorate-General for Competition
            State Aid Greffe
            Rue Joseph II 70
            B-1049 Brussels
            Fax No: (+32)-2-296.12.42

                                                               Yours faithfully,
                                                              For the Commission




                                                            Joaquín ALMUNIA
                                                      Vice-President of the Commission




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