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EU regulators open probe into German bank credit crisis aid

EU regulators open probe into German bank credit crisis aid

European Union regulators opened an investigation Wednesday into whether euro26 billion (US$38.7 billion) in aid given to two German state-run banks in the wake of the U.S. subprime credit crisis violated EU state aid rules.
The probe is to determine whether the credit lines and aid _ given last July and August to protect IKB Industriebank AG and SachsenLB bank from potential losses _ constitute improper help, the European Commission says.
Wednesday's announcement of a new in-depth probe follows a series of rescue and bailout measures in which EU government authorities are seeking to ease the affect of the mortgage credit crunch on European lending markets.
The EU said it was already looking into a preliminary euro5 billion (US$7.4 billion) plan to cover payment defaults by German bank WestLB and is also to assess a massive restructuring of Britain's Northern Rock PLC, which will see the bank nationalized.
Defaults among subprime mortgage holders have roiled markets worldwide, and the effects have been felt keenly in Germany, especially among public-sector banks.
EU Competition Commissioner Neelie Kroes said the investigation was necessary to ensure aid given to financial institutions by governments and other state-run bodies do not unduly distort trade in the markets.
"Otherwise it is hard for European citizens to understand why they have to suffer from the economic downturn, while taxpayers' money is poured into once profitable banks that took excessive risks and might now avoid paying for their risky strategies," Kroes said.
She said her office received notification of aid measures for the two banks in January.
The EU investigation will look at a euro17 billion (US$25.3 billion) credit line given to SachsenLB by other state-run savings banks, after it faced "serious liquidity problems" in August last year when it was unable to refinance one of its investment funds, the Commission said.
The probe will also look into euro9 billion (US$13.4 billion) given to IKB in a bailout package drawn up by the German government and a group of lenders led by German state development bank KfW.
IKB's problems sprang from its Rhineland Funding investment vehicle's apparent inability to cover its funding needs because of exposure to U.S. subprime real estate loans, made to borrowers with weak credit histories.
"We will in particular investigate whether the ... restructuring is capable of restoring the long term viability" of the banks, Kroes said.
She added the aid would also have to be assessed whether they could distort competition in European lending markets, giving the troubled banks an advantage over competitors unaffected by the credit crisis.
If EU regulators find the rescue plans violated state-aid rules, it could order the banks to return the funds.


Updated : 2021-03-01 16:20 GMT+08:00