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EU Opens Probe of 5 German Banks

November 13, 2002

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BRUSSELS, Belgium (AP) _ The European Commission said Wednesday it has opened an investigation into five banks, owned by German states, that may have received a total of $3.5 billion in illegal government aid.

The five _ NordLB, Landesbank Kiel, Hessische Landesbank, Hamburgische Landesbank and BayernLB_ will have to repay the funds if the EU finds the aid amounted to illegal subsidies that distorted competition.

A preliminary EU probe found the five banks received 3.5 billion euros from the state governments that own them thereby increasing their lending capacity.

The Commission said the assistance, given in the 1990s, was in the form of real estate and housing loan portfolios for which the banks paid insufficient compensation.

EU competition commissioner Mario Monti said such transfers may violate EU antitrust rules as the capital injections could have given the banks an unfair edge over competitors.

``These cases are the natural consequences of our efforts to promote fair competition in the banking sector in Germany,″ Monti said in a statement.

Under German banking rules, all banks must hold a minimum 8 percent in funds equivalent to their loans.

With these transfers from state governments, the Commission said the five German banks could expand their business by at least 40 billion euros ($40 billion).

The German finance ministry agreed this year to reduce subsidies for the five Landesbanken and phase them out almost completely by July 2005.

But in September, Monti wrote to the German authorities complaining Berlin was not sticking to the bargain.

Germany’s private banks long have complained the state guarantees for loans amount to unfair subsidies.

The guarantees protect the public banks from bankruptcy or liquidity problems caused by bad loans. Credit ratings agencies award the Landesbanken triple A ratings, allowing them to borrow more cheaply than their commercial competitors.

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