Sankar SoFFin 19-09-24 20-03-17 PRELIMINARY DRAFT... · 9/24/2019 · Title: Microsoft Word - Sankar SoFFin 19-09-24_20-03-17_PRELIMINARY_DRAFT.docx Created Date: 3/17/2020 9:03:26

PreliminaryYPFSDiscussionDraft|March2020

SoFFinCapitalInjections(DEGFC)PriyaSankar1

August6,2019

Abstract

TheinsolvencyofLehmanBrothersin2008andthesubsequentliquiditycrisisspurredtheGerman state to pass the Financial Market Stabilization Fund Act(Finanzmarktstabilisierungsfondsgesetz, “FMStFG”) establishing the Federal Agency forFinancial Market Supervision (Bundesanstalt für Finanzmarktstabilisierung), henceforthFMSA. Created in October 2008, it provided government support to ailing financialinstitutions.TheFMSAsupportedGermanbanksandmaintainedthestabilityoftheGermanbankingsystem,inpartbyestablishingaFinancialMarketStabilizationFund(SonderfondsFinanzmarktstabilisierung),henceforthSoFFin.SoFFincouldprovidecapitalinjectionsandriskshieldmeasuresof€80billion,andalsopossessedaguaranteeprovisionofupto€400billion.Theactualrecapitalizationspeakedat€29.4billioninlate2010.Capitalinjectionsrescued undercapitalized banks, and assisted in the government takeover of andrestructuringofHREGruppe(InternationalMonetaryFund2011,4-5).SoFFinwassupposedtoacceptapplicationsuntillate2009,butthiswasextendedseveraltimesuntil2010.(“FundfortheStabilizationoftheFinancialMarketStartsItsOperationsinGermany.”)SoFFinwaslaterreopenedin2012,finallyclosingin2015(BundesrepublikDeutscheland).GermanyhassincepassedaRestructuringActwhichactsasaframeworkforwindingdownbanksthatare“too big to fail,”making systemic risk support operations a permanent pillar of Germanbanking regulations (Pleister 2011, 5, 8). Though this law facilitates the resolution ofsystemically relevant banks, critics argue that it does not sufficiently clarify interagencycoordinationnordoes it establisha resolution forothernonbanksystemically importantfinancialinstitutions.Asoftheendof2018,SoFFinhas€14.6billionoutstandingfromcapitalinjections.

Keywords:CapitalInjections,SoFFin,Germany

1ResearchAssociate,[email protected]


AtaGlance

European liquidity crises and exposure to the subprimemortgage market in the United States created pressureaffecting the German banking sector. The failure ofLehmancreatedinterbankliquidityshortagesthroughoutEurope. In a bid to restore confidence in the financialsystem, European leadersmet onOctober 12, 2008 anddecided on a comprehensive framework to preservefinancialstabilityandsupportbanks.

Consequently, the German Parliament passed theFinancial Market Stabilization Fund Act(Finanzmarktstabilisierungsfondsgesetz, “FMStFG”) onOctober17,2008.ItcreatedaFederalAgencyforFinancialMarket Stabilization (Bundesanstalt fürFinanzmarktstabilisierung, “FMSA”), which created andadministeredthenewFinancialMarketStabilizationFund(Sonderfonds Finanzmarktstabilisierung “SoFFin”).SoFFin contained provisions for guarantees, capitalinjections, asset purchases, and nationalization ofdistressedfinancialinstitutionsinGermany.

Therecapitalizationprogramwaslimitedto€80billion,ofwhichamaximumof€29.4billionwasoutstandingattheend of 2010. Solvent financial institutions with Tier Icapital over 7% andmeeting Basel II regulatory capitalrequirementsplus2%wereeligibleiftheyagreedtolimitriskandsuspenddividendsafterrecapitalization.

The European Commission approved SoFFin and itsrecapitalizations scheme in accordance with Article 87(3)(b)oftheTreatyEstablishingtheEuropeanCommunity(2002),exemptingSoFFinfromthestateaidrulesduetoserious economic disturbances in Germany. As ofDecember2018,€14.6billionareoutstanding inCommerzbank,HypoRealEstate (sincenationalized)andPortigon(formerWestLB)withnoclearexitstrategy.ApplicationsforrecapitalizationaidunderSoFFinwereinitiallydueinDecember2009,laterextendedtoDecember2010.SoFFinwasreopenedin2012,withaclosuredatein2014,butultimatelyextendeduntil2015(BundesrepublikDeutscheland).

SummaryEvaluation

SoFFinisgenerallyassessedpositively.ItwasanecessitytomaintainfinancialstabilityinGermany.ItbolsteredthecapitalstructureofGermanfinancialinstitutions,easingsomepressurefrominterbankliquidityshortages,andlater,thesovereigndebtcrisis.ItlimitedthevulnerabilityofGermanfinancialinstitutionstosystemicrisk.However,criticshadconcernsaboutthestigmaassociatedwithseekingaid,andtheextensionsoftheeligibilitywindowaspotentialissueslimitingSoFFin’seffectiveness(Spiegel).

SummaryofKeyTerms

Purpose: Strengthen the capital of GermanfinancialinstitutionsandrestoreconfidenceinGermaneconomy. Announcement

DateOctober12,2008

OperationalDate

October17,2008

EndofIssuanceWindow

Dec.31,2009(initial)Dec.31,2010(extended)Reopenedin2012–closedDec.312015(BundesrepublikDeutscheland)

ProgramSize €70Bwithapossibleextensionof€10B

PeakUtilization

€29.4B(2010)

Eligibility AnyfinancialinstitutionParticipants AarealBank,

Commerzbank,HypoRealEstate,Portigon(formerWestLB)

Administrators FederalAgencyforFinancialMarketStabilization(BundesanstaltfurFinanzmarktstabilisierung)

SoFFin Capital Injections (Germany)


ContentsI. Overview...........................................................................................................................................1

Background........................................................................................................................................................1ProgramDescription.....................................................................................................................................1Outcomes............................................................................................................................................................3

II. KeyDesignDecisions....................................................................................................................41. TheSoFFincapitalinjectionsschemewasintroducedaspartofapackageinFMStFG,whichalsoincludedguaranteeandriskshieldprovisions................................................................42. ThelegalbasisoftherecapitalizationschemewasthepassageofFMStFG,theactwhichcreatedSoFFin.........................................................................................................................................43. TheEuropeanCommissionapprovedtheSoFFincapitalinjectionsschemeunderArticle87(3)(b)oftheECTreaty..................................................................................................................44. SoFFinanditscapitalinjectionsschemesweremanagedbytheFMSA,initiallyunderthepurviewoftheBundesbank,butlaterassignedtotheFederalMinistryofFinanceinJuly2009..................................................................................................................................................................55. TotalfundingforSoFFinanditscapitalinjectionsandriskshieldstrategies,werecappedat€80billion..........................................................................................................................................56. EligibleinstitutionsforcapitalinjectionsunderSoFFinincludedbanksandnonbankinstitutionslistedhere.......................................................................................................................................57. SoFFinmadesilentparticipations,andtheacquiredshareshadvaryingcharacteristicsdependingonindividualparticipants.........................................................................68. Inadditiontoexistinglimitationsondividendpaymentsandcompensation,theFederalGovernmentmayissueordinanceswithmoredetailedprovisionsoftheconditionsoftherecapitalization.................................................................................................................99. SoFFin’sstabilizationmeasureswereinitiallyavailableuntilDecember31,2009butweresubjecttoseveralextensions..............................................................................................................910. TherewerenoclearexitstrategiesforSoFFin’srecapitalizationinvolvement...............911. Germanyhasnewlegislationconcerninggovernmentinterventionsinthecaseoffinancialcrisis.....................................................................................................................................................10

III.Evaluation......................................................................................................................................10IV.References.....................................................................................................................................11V. KeyProgramDocuments..........................................................................................................14

SummaryofProgram.................................................................................................................................14Legal/RegulatoryGuidance.....................................................................................................................14PressReleases/Announcements...........................................................................................................15


Reports/Assessments................................................................................................................................15


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I. Overview

Background

ThefinancialtensionsinGermanystemmingfromtheGFCwereexacerbateddramaticallyin2008, amidst global turbulence (Bleuel 7). Germany’s financial market was globallyintegratedandsufferedfromexposuretotheAmericansubprimemortgagemarketsandthesubsequent disruptions on international money, interbank lending, and capital markets.Thesecreateduncertaintiesinthemarketwithrespecttopricedevelopments,transparencyofinformationandconfidenceamongstmarketparticipants.Marketforceswereunabletostabilizethefinancialsystemandrestoreconfidenceinthefinancialmarket.Germanyhasathree-pillarbankingsystem,consistingofprivatebanks,provinciallyownedLandesbanken and regional savings bank networks (Behr p. 1). The private banks andLandesbankenwerehitparticularlyhard,andregisteredalmostaquarterofEurope’swrite-downs by the end of September 2008 (Woll 115). Early on, the government askedrepresentatives of the financial industry to contribute to the rescue of individual banks(128).Whileaimingtorescuethefirstfailingbanksthroughtheprivatesector,bothIKBandHREwerenationalizedprimarilywithpublicfinancing(129).EurozonecountriesassembledonOctober12,2008andcreatedacomprehensiveplanofactiontorestoretheconfidenceandproperfunctioningofEuropeaneconomies(SummitofEuroAreaCountries2008).Acrucialpartofthisplanwas“providingfinancialinstitutionswith additional capital resources so as to continue to ensure theproper financingof theeconomy” and “allowing for an efficient recapitalization of distressed banks” (Summit ofEuroAreaCountries2008,2).Italsoinvolvedcreditlinesandguarantees.Germany shortly thereafter passed the Financial Market Stabilization Fund Act(Finanzmarktstabilisierungsfondsgesetz“FMStFG”)whichestablishedaFederalAgencyforFinancialMarketStabilization(Bundesanstalt fürFinanzmarktstabilisierung“FMSA”).TheFMSA administered the Financial Market Stabilization Fund (SonderfondsFinanzmarktstabilisierung “SoFFin” or the “Fund”) (FMStFG 2008, §3(a)). In 2008,Commerzbank was undercapitalized, and was recapitalized by SoFFin (FMSA 2019). By2009, HRE Gruppe, Aareal Bank, and Portigon (former WestLB) had also soughtrecapitalization.HREGruppeandWestLBwereeventuallynationalizedbySoFFin.ProgramDescription

TheFinancialMarketStabilizationFund,orSoFFin,wasaGermanfederalfundtostabilizethefinancialmarket,overcomingliquidityshortagesandcreatingtheframeworkconditionsfor a strengthening of the capital base of financial institutions. FMStFG had a tripartitestrategyforstabilizationusingSoFFinincludingguarantees,recapitalizationandriskshields(EuropeanCommissionOctober2008,p.2).TheFMStFGlimitedtotalguaranteesto€400billion,andtotalrecapitalizationandriskshieldfundsto€80billion.Theobjectiveofthisrecapitalization schemewas to ensure that existing solventGerman financial institutions


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were sufficiently capitalized so that they couldwithstandpotential losses and to restoreconfidenceintheGermaneconomy(p.1,2).The programme was initially voluntary and open to any financial institution, includinginsurance undertakings, pension funds, investment companies, operators of stock andfutures exchanges and their parent companies, financial holding companies, insuranceholding companies, andprivate-law entrusted owners of Landesbankenorganizedunderpubliclaw.(FMStFG2008,§2;Wollp.119)Eachindividualinstitutionneededtobesolvent,withaTier1ratioofatleast7%,oracommitmenttoreachingthisratiowithinthreemonths(EuropeanCommissionDecember2008,p.3).Theymustalsoadheretotherequirementofminimumregulatorycapital inBaselIIplustwopercentagepoints(p.4).Eachinstitutioncould apply for amaximum of €10 billion of recapitalization aid before the deadline ofDecember31,2009.(PetrovicandTutsch2009,36)TheFederalMinistryofFinancedecidedontheparticipationofSoFFininarecapitalizationschemewhenthereisasubstantialinterestonthepartofGermanyandthepurposesoughtbytheFederationcannotbetterandmoreeconomicallybeachievedbyothermeans(FMStFG2008,§7).SoFFincouldparticipateintherecapitalizationofafinancial-sectorenterprisebyacquiring shares or silent participations against a contribution and assuming othercomponents of the funds of these companies. Silent participation aid does not diluteshareholdercontrolandgivestheFederalRepublicnodirectinfluenceontheoperationsofabank(Mitchell88).InstitutionsreceivingcapitalinjectionsfromSoFFinmustpayinterestat a rate that averages from 7-9% annually, unless SoFFin recapitalizes with significantcontributions from the private sector. (Petrovic and Tutsch 2009, 38) The FederalGovernmentwasabletoissueordinanceswithmoredetailedprovisionsoftheconditionsoftherecapitalization,upperlimitsforthesizeandtypeoffunditems,andanyotherconditionsrequiredtosafeguardthepurposeoftheActunderthecontextofrecapitalization(FMStFG2008,§7).Financial institutions seeking to utilize one of the stabilization measures in SoFFinguaranteed a sustainable business policy and reduce or abandon any risky activities(PetrovicandTutsch2009,38).Recapitalizedentitieswerenotallowedtopaydividendsunless there existed sufficient incentives to repay the State first, and compensation forindividualmanagementmemberswaslimitedtoannualsalariesof€500,000.Bonusesweredisallowedwhilestatecapitalremainedinuse,anddividendweredistributableonlytotheGovernment. Recapitalized institutions also provided loans to SMEs. The FederalGovernmentwas empowered to issue additional requirements to these organizations onbusinessstrategy,useofmoniesreceivedandotherconditionssurroundingrecapitalizationfunds(FMStFG2008,§10).The federal government provides funding for SoFFin, though there are also mandatedcontributionsfromindividualGermanstatesandapossibleissuanceofdebtsecuritiesuptoamaximumof€100billion(Belkap.22;MayerBrown2009,p.1).TheFederalMinistryofFinancewasempoweredtoissueupto€70billionoftotalaidwithinSoFFin’sriskacquisitionandrecapitalizationprovisions,withapossibleextensionof€10billionwiththeconsentoftheBudgetCommitteeoftheDeutscherBundestag.ApplicationsforSoFFin’sstabilizationmeasures were initially due on December 31, 2009, at which time theywere no longeraccepted, though subsequent policies extended this deadline first to 2010, then it was


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reopened in 2012 with a deadline in 2014, and finally extended to 2015 (EuropeanCommission2010;BundesrepublikDeutscheland).AsofDecember2018,€14.6billionwereoutstandinginCommerzbank,HypoRealEstate(sincenationalized)andPortigon(formerlyWestLB) (FMSA 2019). There were no clear exit strategies set in advance for theseinvolvements.The Financial Market Stabilization Amendment Act, Financial Market StabilizationAccelerationAct,andtheRescueTakeoverAct,allofApril2009,modifiedandaugmentedthepowersenumeratedunderFMStFG(FMSA“History”).Specifically, theyprolonged thematuritylimitforsecurityissuancesguaranteedbySoFFinfrom30to60months,modifiedthecorporateandtakeoverlaws,andallowedaspecialsolutionforthecompleteacquisitionofailingfinancialinstitutionsbyGermany.Thislatterprovisionwasneverutilized.Though the European Committee Treaty Article 87(1) disallows State Aid to domesticbusinesses in a manner that affects competition in the EU, the EC approved SoFFin(European Commission October 2008, p. 6-9). This was justified by EC Treaty Article87(3)(b), permitting the recapitalizations, guarantees, and risk assumptions because ofeconomicdisturbances inGermany.Duringthe financialcrisis, theEuropeanCommissionmade several such exceptions to ensure a return to normal market functioning. TheDecember2008TemporaryFrameworkforStateAidallowedMemberStatestoaidthe“realeconomy”tomitigatetheeffectsofthecrisis(Lowep.3).Outcomes

Ofamaximumof€80billion,actualrecapitalizationspeakedat€29.4billioninlate2010(InternationalMonetaryFund2011,4).Capital injectionsoccurred throughout2009and2010, much of which was directed to Hypo Real Estate (HRE) Gruppe, which wasnationalized(p.8).TheEuropeanCommissionapprovedextensionsofSoFFindeadlinesthatmadethispossible.(EuropeanCommissionHRE2011).TheinitialdeadlinewasDecember31,2009,presumingthecrisislastedthatlong,butGermanysuccessfullyappealedtohaveitextendedfirsttoJune3,2010andlatertoDecember31,2010(EuropeanCommission2010,p.1,2).As of December 31 2018, €14.6 billion remain outstanding from recapitalization underSoFFin(FMSA2019).SubstantialamountsofthisfundingwenttoHREGruppe,peakingat€9.8 billion in late 2011, Commerzbank, peaking at €18.2 billion in late 2010, Portigon(formerWestLB)peakingat€3billioninDecember2010,andAarealBank,peakingat€500million in2009.AarealBankhas repaid SoFFin’s contributions,while Commerzbankhas€5.1 billion outstanding, HRE Gruppe has €7.6 billion outstanding, and Portigon has €2billionoutstanding.IntheeventofSoFFin’sliquidation,theoutstandingpositionsaretobedistributed65%tothefederalgovernmentand35%totheLander,cappedat€7.7billion(Belkap.22).CostsassociatedwiththerescuesofLandesbankenbySoFFinaretobeborneintheirentiretybytherelevantLander.


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II. KeyDesignDecisions

1. The SoFFin capital injections scheme was introduced as part of a package inFMStFG,whichalsoincludedguaranteeandriskshieldprovisions.

The German government passed the Financial Market Stabilization Fund Act(Finanzmarktstabilisierungsfondsgesetz“FMStFG”),apackageofcrisisresponsemeasuresthatcreatedtheFinancialMarketStabilizationAgency(FMSA)(FMStFG2008,§3(a)).FMSAwasresponsibleformanagingthefundinSoFFin.FMStFGalsoestablishedSoFFin,whichwasto be used for three financial stability strategies: capital injections, guarantees, and riskshields(EuropeanCommissionOctober2008,p.2).Section7oftheFMStFGauthorizedtherecapitalizationschemeinparticular.2. SoFFin was funded primarily through Federal funding and mandatory state

contributions.

ThefederalgovernmentprovidesfundingforSoFFin(Belkap.22).However,statesarealsomandated to contribute to the Fund, and SoFFin may issue up to €100 billion of debtsecurities (Mayer Brown 2009, p. 1). The Federal Ministry of Finance capped total riskacquisitionandrecapitalisationsat€70billionwithapossibleextensionof€10billionwiththeconsentoftheBudgetCommitteeoftheDeutscherBundestag.WhenSoFFinisliquidated,theremainingpositionsare tobe issued65%to the federalgovernmentand35%to theLander,cappedat€7.7billion(Belkap.22).3. ThelegalbasisoftherecapitalizationschemewasthepassageofFMStFG,theact

whichcreatedSoFFin.Supplementaryactsfollowedin2009.

TheDeutscheBundesbankisresponsibleforthegeneraljurisdictionoftheFund,whichmayact,sueandbesuedinitsownname(FMStFG2008,§3).InApril2009,theRescueTakeoverAct allowed for the complete acquisition of stricken financial institution by the FederalRepublicofGermany,thoughitwasneverapplied(FMSA“History”).SoFFin can takepart in the recapitalizationof eligible financial sector enterprises in anysuitableform,suchasacquisitionsofsharesorsilentparticipationsinreturnforacapitalcontribution(EuropeanCommissionOctober2008,p.3).Itcanreceiveamarket-determinedremunerationthatmustbepreferredoverprofitsharingrightsofothershareholdersintherecapitalizedinstitution,likedividendorinterestpayments.4. TheEuropeanCommissionapprovedtheSoFFincapitalinjectionsschemeunder

Article87(3)(b)oftheECTreaty.

TheEuropeanCommissionbans “stateaid,”orgovernment interventions thatprivilegeaspecificcompany,industryorregioninawaythatdistortstradeorcompetition(EuropeanCommission2019).Capitalinjectionswouldnormallybesubjecttoagreatdealofscrutinyunderthisrule.However,theEuropeanCommission(EC)permittedcapitalinjectionsfromSoFFinduetoArticle87(3)(b)oftheECTreaty,whichpermitsstateaidto“remedyaseriousdisturbanceintheeconomyofaMemberState”(EuropeanCommissionOctober2008,p.6).


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TheECmadetheseexceptionsfrequentlyforEuropeancountriesin2008tohelpmitigatetheeffectsofthefinancialcrisis(Lowep.3).5. SoFFin and its capital injections schemes weremanaged by the FMSA, initially

underthepurviewoftheBundesbank,butlaterassignedtotheFederalMinistryofFinanceinJuly2009.

TheFederalMinistryofFinancecontrolsFMSA,apublic-lawfederalagency.TheFMSAismanagedbyathree-memberManagementCommitteeappointedbytheMinistryofFinancein consultationwith theBundesbank (FMStFG2008,§3(a)).An inter-ministerial SteeringCommittee decides on agency proposals, though the Federal Ministry of Finance isresponsible for the actual administration of the Fund (§4). The Steering Committee iscomposedofonemembereachfromtheFederalChancellery,MinistryofFinance,MinistryofJustice,MinistryofEconomicsandTechnology,andonememberproposedbytheLӓnder(provincialgovernments).2TheFederalGovernmenthas thecapacity tocreateguidelinesthat govern administration of the SoFFin fund, and does not required consent of theBundesrattodoso.AsofJanuary1,2018,SoFFinhasbeenmanagedbytheFederalMinistryof Finance, which has been funding it since its inception in 2008 (BundesrepublikDeutscheland).6. Individual capital injections were capped at €10 billion, and total funding for

SoFFin’scapitalinjectionsandriskshieldstrategieswascappedat€80billion.

TheFederalMinistryofFinancemaytakeloansofupto€70billioninordertofundSoFFinandthethreestrategiesforwhichitisresponsible(FMStFGSection92008,§9).Thereisapossibleextensionof10billionadditionalEuroswiththeconsentoftheBudgetCommitteeoftheDeutscherBundestag.Eachindividualinstitutionwaseligibleforamaximumof€10billionofrecapitalizationfundspriortothedeadlineofDecember31,2009.7. Participation in the plan was initially voluntary and open to any financial

institution,butasthecrisisworsened,SoFFinwasgiventhepowertonationalizebanksandexpropriateshares.

TheFederalMinistryofFinancedecidesontheparticipationofSoFFininarecapitalizationschemewhenthereisasubstantialinterestonthepartoftheFederationandthepurposesoughtbytheFederationcannotbetterandmoreeconomicallybeachievedbyothermeans(FMStFG 2008, §7). Each applicant to the recapitalization measure in SoFFin had toguaranteethattheirbusinessactivitieswereprudentandsolid,andthattheirriskyactivitieswerelimitedorabandoned.(FMStFG2008,§10;PetrovicandTutsch2009,38)TheFederalGovernmentcouldalsoissuemoredetailedprovisionsonaninstitution’sbusinessactivities.The application volume for SoFFin stabilization in 2008 amounted to € 176.9 billion, ofwhich €90 billion of guarantees and €8.2 billion of capital measures were granted(Bundesrepublik Deutscheland). In April 2009, the Rescue Takeover Act allowed for thecompleteacquisitionofstricken financial institutionbytheFederalRepublicofGermany,thoughitwasneverapplied(FMSA“History”).

2TheLӓnderarethestatesofGermany.


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TheinstitutionsreceivingrecapitalizationaidfromSoFFinwereAarealBank,Commerzbank,HypoRealEstateGruppe(HRE),andWestLandesbank(FMSA2019).SoFFin wasmeant to strengthen the capital base of institutions “within themeaning ofsection1(1b)oftheBankingAct,ofinsuranceundertakingsandpensionfundswithinthemeaningofsection1(1)numbers1and2oftheInsuranceSupervisionAct,ofinvestmentcompanieswithinthemeaningoftheInvestmentActaswellasoftheoperatorsofstockandfutures exchanges and their respective parent enterprises, insofar as these are financialholding companies, mixed financial holding companies, insurance holding companies ormixedinsuranceholdingcompaniesandtheabovementionedenterpriseshavetheirseatinGermany (financial-sector enterprises). Private-law entrusted ownersof Landesbanken organized under public law, even where the owners are not financialholding companies, shall alsobe considered to be financial-sector enterpriseswithin themeaningofthefirstsentenceabove.”(FMStFG2008,§2)TheseinstitutionsneededtohaveaTier1ratioofatleast7%,whichwasthethresholdforsolvency. If they did not meet this criterion, they were still eligible to apply for capitalinjectionsunder SoFFin if they committed to reaching itwithin threemonths (EuropeanCommissionDecember2008,p.3).ThisisincontrasttotheBaselIITierIratiorequirementtheninforceinGermanyof4%ofrisk-weightedassets.3TherewasalsoarequirementtoholdminimumregulatorycapitalunderBaselII(8%)plus2percentagepoints(EuropeanCommissionDecember2008,p.4).This requirement indicates thatSoFFin’sprovision toinjectcapitalwastargetedtowardssolventfinancialinstitutions.ItwasalsoanattempttorestoreconfidenceintheGermaneconomy(EuropeanCommissionOctober2008,p.2).8. SoFFinhaddiscretiontodeterminethenatureofitsequitypositioninfinancial

enterprises;ininitiallypreferrednonvotingsharesbutultimatelynationalizedtwobanksandacquiredcontrollingcommonstakes.

Section7of theFMStGactgaveSoFFindiscretion indetermining thenatureof itsequityposition in financialenterprises. ItbroadlyauthorizedSoFFinto“acquiresharesorsilent[non-voting]participationsandassumeothercomponentsoftheownfunds[equity]ofthesecompanies, including such created by the legislation of the Lander [provincialgovernments].”FMStFG2008,§7)Additionally,underSection3(2)No1FMStFV,SoFFinwasentitledtoreceiveanormalmarketremuneration.Asarule,SoFFinsoughtwastotakeaposition senior to other shareholders in recapitalized institutions, e.g. in particular apreferencedividendoraninterestpayment.SoFFinultimatelyinvestedinfourbanks.Inthreeofthosebanks(Commerzbank,Aareal,andWestLB),itfirsttooksilentparticipations—atypeofpreferredsharewithoutvotingrights,

3WhilethisisnotexplicitlydescribedinBaselII,PartIISectionIdescribesthecalculationofminimumcapitalrequirementsasfollows:“Part2presentsthecalculationofthetotalminimumcapitalrequirementsforcredit,marketandoperationalrisk.Thecapitalratioiscalculatedusingthedefinitionofregulatorycapitalandrisk-weightedassets.Thetotalcapitalratiomustbenolowerthan8%.Tier2capitalislimitedto100%ofTier1capital.”Withtheserequirements,theminimumacceptableamountofTier1capitalis4%,with4%ofTier2capitaltoadheretothetotalcapitalratiorequirementof8%.(BaselCommitteeonBankingSupervision)


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thatwasseniortoexistingcommonandpreferredshareholders.Aarealneedednofurthersupportandwasabletopaybackthegovernmentby2014(FMSA“HistoricalOverviewofFinancial Market Stabilization Fund FMS (SoFFin) Measures”). In other cases the initialcapital injections proved insufficient. SoFFin later acquired a 25% stake in the commonequityofCommerzbankandfullynationalizedWestLB.SoFFinfirstextendedcredittoHREin2008andfullynationalizedthebankin2009(Reuters).WestLBandHREwereultimatelywounddownbywind-downagenciesthatSoFFincreated(BundesrepublikDeutscheland).CapitalinjectionstoCommerzbankwereannouncedonDecember19,2008(Commerzbank2008PressRelease).SoFFinmadeasilentparticipationof€8.2billioninonetrancheasofDecember31,2008withannualinterestof9%paidonthesilentparticipation(Mitchell88).Incaseofinsolvencyandliquidationthedebtissubordinatetoallexistingdebt,paripassuwithfuturehybridofferings,andseniortoshareholders(Commerzbank2008TermSheet,p.1). The silent participation is perpetual and can be terminated by Commerzbank withapproval from the Ministry of Finance (Commerzbank 2008 Press Release). It will beredeemedatnominalvalue.Therewillnotbeadividendforthefirstyear,butinyearswithdividendpayments,theinterestrateapplicableforthesilentparticipationwillincrease.Foreach€4.4millionofdividend,1basispointistobeadded(Commerzbank2008TermSheet,p.1).Thefirst€4.1billionofthecontributionhasaninterestrateof8.5%andthesecond€4.1 billion has an interest rate of 5.5% (Levitin). To avoid legal limits on state aid toindividualbanks,CommerzbankandDresdnerBankseparatelysoughtadditionalaidinearly2009,priortoCommerzbank’splannedacquisitionofDresdnerBank(Mitchell89).Thestaterefused this request, but eventually acquiesced to a €10 billion contribution toCommerzbankafterthreatsofabandoningthemerger.DresdnerBankwasstrugglingduetoits real estate investmentsandwouldhaveotherwise requirednationalization to save it,whichtheGermanstatesoughttoavoid.Ofthe€10billionthestatecontributed,€8.2billionwas an additional silent participation, but €1.8 billion consisted of ordinary sharesamountingtoa25%stake(Clark).ThiswasthefirsttimeSoFFinhadtakenadirectpositionin a financial institution, and its contributions secured it veto power over decisions atCommerzbank(Mitchell89).Italsoreceivedthreeseatsonthebankboard,thoughitdidnotintend to influence any decision-making, or dilute ownership control by privateshareholders. Commerzbank had a nine-member board in 2009 (Commerzbank AnnualReport2009p.32).AarealBankhadsufficient cashandcapitalbase throughout the2009 financialyear, andsought SoFFin support to strengthen it against further turbulence in financial markets(AarealAnnualReport2009,p.85).SoFFininjectionstoAarealbankin2009amountedto€525millionwith9%annualinterest(AarealQ12009InterimReport,p.17).Toexpeditetherepaymentof thesilentparticipation,Aarealbankdidnot issuedividends in2008or2009(AarealAnnualReport2009,p.71).AarealBankrefrainedfrompayingitssupervisoryboardanyvariablecompensation.In2009,WestLB,amajorLandesbankwith€288.1Billionofassetsatyearend2008,waslargeenoughtobeconsideredarisk(EuropeanCommissionOctober2009).ItsexposuretoAmericansubprimeassetswasaproblemfirstrealizedinlossesof€2.5billiononitssubprimeportfolio(Mitchell93).InNovember2009,shareholdersalongwiththeGermangovernmentagreedtoestablishabadbank,ErsteAbwicklungsanstalt.Ittookovera


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portfolioofriskpositionsandriskyassetsthatwouldhaveotherwisenegativelyimpactedtheperformanceofWestLB.ThecapitalinjectionfromSoFFintoWestLBamountedto€3billioninthreeinstallments(EuropeanCommissionDecember2011,§2(b)(i)).First,€672millionwereinjectedonDecember23,2009,€1.5billionwereinjectedonJanuary4,2010,and€828millionwereinjectedonApril30,2010.Itwasintheformofanon-callablesilentparticipation,whichwasoptionallyconvertibleintoordinarysharesafterJuly1,2010.ThetermsdictatethatSoFFincannotbecomeamajorityshareholderofthecompany.IfWestLBshowsasufficientyear-endprofit,thetermsofthesilentparticipationprovidefora10%remunerationperannum.Inthecaseofloss,thesilentparticipationwillparticipateparipassuinthelossesandwillforgoremuneration.HypoRealEstate(HRE)wasnationalizedbySoFFin(EuropeanCommissionMay2009,p.2).Acreditlinewasextendedtoitin2008,andSoFFinsubsequentlymadeapublictakeoverbidtoacquireallsharesinHRE.ThoughSoFFincouldhavenationalizedHREbylawhaditsbidbeenunsuccessful,itacquired38.65%ofsharesinthebid.ThisgaveSoFFin47.31%stakeinHRE,andduetolowshareholderattendanceinthegeneralassembly,SoFFinhaddefactocontrolofHRE.InApril2009,SoFFinsubmittedanoffertoHREshareholderstopurchasesharesat€1.39pershare:

“TheManagementBoardandSupervisoryBoardofHypoRealEstateHoldingAGhaveresolved to propose an increase of the registered share capital against cashcontributions,excludingshareholders'pre-emptivesubscriptionrights,pursuanttosections182etseq.AktGinconjunctionwithsection7FMStFG,toanExtraordinaryGeneral Meeting on 2 June, 2009. To strengthen the Company's capital base in asustainedmanner,itwasproposedtoincreasetheCompany'sregisteredsharecapital(Grundkapital)of€693,253,560bycashcontributionsofupto€5,639,282,040toatotalofupto€6,332,535,600,throughtheissuanceofupto1,879,760,680newno-parvaluebearershares”(HREPressRelease2009).

SoFFinwillsubscribenewsharesatthelowestpricetoobtaina90%stakeinthecompany(SoFFin2009PresseRelease).SoFFinintendedtoincreaseHREequityfrom€700milliontoaround€6.3billion,diluting thestakeofexistingshareholders (DW2009). InOctoberof2009,SoFFinsqueezedoutremainingminorityshareholdersbyforcinganofferof€1.30ashare, fullynationalizingHRE(Reuters2009).MinorityshareholderJCFlowerstooklegalactionagainstthefullnationalizationofHREGruppealongwithothershareholders,andfileda complaint with the European Union. However, they lost this challenge, and the 2011decision of the Munich courts was that Germany had a legal basis for the forcednationalizationofHREGruppe(Wilson).

As of December 2018, €14.6 billion are outstanding in Commerzbank, Hypo Real Estate(sincenationalized)andPortigon(formerWestLB)(FMSA2019).SoFFinhasnoclearexitstrategyfortheseinvolvements.


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9. Inadditiontoexistinglimitationsondividendpaymentsandcompensation,theFederalGovernmentmayissueordinanceswithmoredetailedprovisionsoftheconditionsoftherecapitalization.

Theseincludetheconsiderationoftherecapitalization,upperlimitsfortheparticipationinown fund itemsof individual organizations aswell asparticular typesof fund items, theconditionsunderwhichtheFundmayresellitsparticipationintheownfunditems,andanyother conditions required to safeguard the purpose of the Act under the context ofrecapitalization (FMStFG 2008, §7). Financial enterprises seeking to utilize one of thestabilizationmeasuresinSoFFinhavetoguaranteeaprudentbusinesspolicy.Participantswereobligatedtoprovideloanstosmallandmedium-sizedenterprises(SMEs)(PetrovicandTutsch2009,38).TheywerenotallowedtopaydividendstoanyshareholdersbeforetheState,and individualsmanagingeach firmwere limitedto€500,000 inannualcompensation.Theywerenotallowedtoreceivebonuses.The Federal Government was empowered to issue additional requirements to theseorganizationsonbusinessstrategy,useofmoniesreceived,remunerationoftheirbodiesandemployees,theleveloftheirownfunds,distributionofdividends,theperiodwithinwhichto fulfill requirements, measures to avoid distortions of competition, the way in whichaccount is to be rendered to the Fund, an undertaking on compliance with the aboveenumerated requirements to be given by the authorized representative body with theconsentofthesupervisorybodyandtobepublished,andanyotherconditionsrequiredtosafeguardthepurposeoftheFMStFG(FMStFG2008,§10).10. SoFFin’sstabilizationmeasureswereinitiallyavailableuntilDecember31,2009

butweresubjecttoseveralextensions.

The initial deadline for applications for recapitalization funds was December 31, 2009,providedthecrisislastedthatlong(EuropeanCommissionDecember2008,p.1).However,with approval from the European Commission, Germany successfully appealed to haveextendedthreetimestoDecember31,2010(EuropeanCommission2010,p.2).SoFFinwasreopenedin2012withafinalclosurein2015(BundesrepublikDeutscheland)11. TherewerenoclearexitstrategiesforSoFFin’srecapitalizationinvolvement.

As of December 2018, €14.6 billion are outstanding in Commerzbank, Hypo Real Estate(sincenationalized)andPortigon(formerWestLB)(FMSA2019).SoFFinhasannouncednoclearplanstoexitthesecapitalinjections,norhasFMStFGdelineatedanyclearstrategies.Firms may repurchase their shares from SoFFin or sell them to a third party to exitinvolvementwithSoFFin,buttherewasnoexplicittimelinerequiredforthisexit(EuropeanCommission October 2008, p. 3). There was a commitment from German authorities topresentrestructuringplanstofinancialenterprisesthathadreceivedcapitalinjectionsbuthadnotundertakenabuybackplanfortheirshareswithinsixmonths(p.4).Thisdeadlinewasextendedinsixmonthincrementsifthecrisisweretocontinue,andwasnotrequiredifthefinancialinstitutionwasfundamentallysound(EuropeanCommissionDecember2008,p.6).ThoughSoFFinhasthismechanismforexitingrecapitalizations,scholarscriticizethefactthatitdidnotdelineateatimetablefordoingso(Bleuel20).


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12. Germanyhasnewlegislationconcerninggovernmentinterventionsinthecaseoffinancialcrisis.

GermanypassedtheBankRestructuringActinJanuary2011(DeutscheBundesbank,p.62).ThisactstrengthenedthecoordinationofvariousGermanfederalagenciesandEuropeanagencies in order to better dealwith distressed systemically important banks. It createsprocedures to recover struggling banks and reorganize insolvent ones by the FederalFinancialSupervisoryAuthority(BaFin),thesuccessortoFMSA(p.61-63).ThesemeasureswillbefundedbyaRestructuringFundtowhichallbanksarerequiredtocontribute(p.72-74).

III. Evaluation

Assessments of SoFFin’s overall effectiveness from the IMF and academic scholars aregenerallypositiveinnature,andagreethatitcontributedtomaintainingfinancialstabilityandlimitinglossesinGermanyduringtheglobalfinancialcrisis.ItalsocreatedmechanismsforresolvingproblembanksandstrengthensthebroadercrisismanagementframeworkinGermany(InternationalMonetaryFund2011,4).SoFFinwasconsidered tohavemechanisms to combat short-term issuesof liquidityandconfidence, but also helped achieve some long-term goals like encouraging executiveresponsibilitybyrestrictingcompensationwhileusingSoFFinfunds(PetrovicandTutsch2009,38).Ontheotherhand,itwasalsocriticizedfornotadequatelyaddressingtheissuesoflackoftransparencyregardingbankassetsandperformance(Bleuel18).Inaddition,itdidnotaddresslong-termissuesofbankconcentrationorliabilitiesforlosses(p.19).Thevoluntary nature of the program was somewhat stigmatizing, in contrast to the forcedrecapitalizationsof theUnitedStatesor collectivebanking industryplan inFrance (Woll128).SoFFin also does not have a clear exit strategy, and this is particularly an issue for therecapitalization fundsofwhich€14.6billionremainoutstanding(InternationalMonetaryFund2011p.4).Inaddition,therelationshipbetweenSoFFin’srestructuringfundandthedepositinsuranceschemesandmutualprotectionschemesmustbeclarified.(p.5)TheIMFstronglyrecommendsclarifyinganexitstrategyforcurrentcapitalinvolvementsandeitherraisingprivatecapitalormodifyingbankbalancesheetsinordertolimitfuturedemandforcapitalinjections(p.13).SoFFin isnot constructed to coordinatewithotherEuropeanandGerman institutions tocomprehensivelyaddressfailingbanks(InternationalMonetaryFund2011p.4).SoFFinalsodealtwithsomeconflictsof interest,astheCEOofCommerzbanksatontheboardof theBundesbank, allowing banks to negotiate favorable terms for actual recapitalization aid(Mitchell 100). Germany has since passed a Restructuring Act that finances itsrecapitalizationfundbycollectingduesfromsystemicallyimportantbanks.(p.7)ThisActalso contains provisions to recover and restructure illiquid or insolvent banks incoordinationwith other German and European agencies, especially if the bank operatesacrossborders.(DeutscheBundesbank62-74)


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IV. References

Aareal Bank. 2009. “Aareal Bank AG - Annual Report 2009.” https://www.aareal-bank.com/fileadmin/downloadlist/DAM_Content/IR/Finanzberichte/2009/091231_gb_ag_en.pdfAareal Bank. 2009. “Aareal BankGroup – InterimReport: 1 January to 31March 2009.”http://www.equitystory.com/download/companies/aareal/Quarterly%20Reports/DE0005408116-Q1-2009-EQ-E-00.pdfBasel Committee on Banking Supervision. 2004. “International Convergence of CapitalMeasurement and Capital Standards A Revised Framework”https://www.bis.org/publ/bcbs107.pdfBehr,Patrick,andReinhardSchmidt.“SAFESustainableArchitectureforFinanceinEurope.”SAFESustainableArchitectureforFinanceinEurope.HouseofFinance-GoetheUniversity,November 2015. https://safe-frankfurt.de/fileadmin/user_upload/editor_common/Policy_Center/Behr_Schmidt_German_Banking_System.pdf.Belka, Marek, and Tamim Bayoumi. “ February 8, 2010 2010 Germany: 2010 Article IVConsultation—StaffReport;PublicInformationNoticeontheExecutiveBoardDiscussion;andStatementby theExecutiveDirector forGermany .”February8,20102010Germany:2010ArticleIVConsultation—StaffReport;PublicInformationNoticeontheExecutiveBoardDiscussion; and Statement by the Executive Director for Germany , 2010.https://www.imf.org/~/media/Websites/IMF/imported-full-text-pdf/external/pubs/ft/scr/2010/_cr1085.ashxBleuel,Hans-H.2009.“TheGermanbankingsystemandtheglobalfinancialcrisis:causes,developmentsandpolicyresponses.”DusseldorfWorkingPapers inAppliedManagementandEconomics.http://ssrn.com/abstract=1365813BundesrepublikDeutscheland.2019.“FinancialMarketStabilization.”Accessed26August2019.https://www.deutsche-finanzagentur.de/de/finanzmarkt-stabilisierung/Clark, Nick. “German Government Injects €10bn into Commerzbank.” The Independent.Independent Digital News and Media, October 22, 2011.https://www.independent.co.uk/news/business/news/german-government-injects-euro10bn-into-commerzbank-1242797.html.Commerzbank.2008.PressRelease.“CommerzbankandSoFFinagreeloanprogrammeforMittelstand (SME).”https://www.commerzbank.de/en/hauptnavigation/presse/pressemitteilungen/archiv1/2008/quartal_08_04/presse_archiv_detail_08_04_4919.htmlCommerzbank. 2008. “Term Sheet: SoFFin.”https://www.commerzbank.de/media/aktionaere/vortrag_1/2008_4/081219_SoFFin_Term-Sheet.pdf


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Commerzbank. 2009. “Annual Report 2009.”https://www.commerzbank.de/media/aktionaere/service/archive/konzern/2010_2/CBK_2009_Annual-Report_2.pdfDeutscheBundesbank.2011.“FundamentalFeaturesoftheGermanBankRestructuringAct.”Monthly Report June 2011.https://www.bundesbank.de/resource/blob/707210/d60f5843069da07d666b02f2e8706c8f/mL/2011-06-fundamental-features-german-bank-restructuring-act-data.pdfDW. 2009. “German Government to take control of Hypo Real Estate.”https://www.dw.com/en/german-government-to-take-control-of-hypo-real-estate/a-4204982EuropeanCommission.October2008.“C(2008)6422:StateaidschemeNoN512/2008–Germany Rescue package for credit institutions in Germany.”http://ec.europa.eu/competition/state_aid/cases/227880/227880_882424_41_1.pdfEuropeanCommission.December2008.“C(2008)8629fin:StateaidN625/2008–GermanyRescue package for financial institutions in Germany.”http://ec.europa.eu/competition/state_aid/cases/228814/228814_961037_27_1.pdfEuropeanCommission.May2009.“C(2009)3994:Notificationof14April2009pursuanttoArticle 4 of Council Regulation (EC) No 139/2004.”https://ec.europa.eu/competition/mergers/cases/decisions/M5508_20090514_20310_265129_EN.pdfEuropean Commission. October 2009. “IP/09/1434: State aid: Commission approvestemporaryadditionalaidtoGermanLandesbankWestLB.:https://europa.eu/rapid/press-release_IP-09-1434_en.htm?locale=enEuropean Commission. June 2010. “C(2010) 4261 fin: State aid N 222/2010 – ThirdExtensions of the German Rescue package for financial institutions in Germany.”https://ec.europa.eu/competition/state_aid/cases/236503/236503_1111002_31_2.pdfEuropeanCommission.July2011.“C(2011)5157fin–CommissionDecisionof18July2011ON THE STATE AID C 15/2009 (ex N 196/2009), which Germany implemented and isplanning to implement for Hypo Real Estate.”https://ec.europa.eu/competition/state_aid/cases/231241/231241_1279613_551_2.pdfEuropean Commission. December 2011. “C(2013/245 EU: Commission Decision of 20December2011ontheStateaidC40/2009andC43/2008fortherestructuringofWestLBAG (notified under document C(2011) 9395)” Accessed 26 August 2019. https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A32013D0245European Commission. 2019. “State Aid Control.”https://ec.europa.eu/competition/state_aid/overview/index_en.htmlFMSA. 2019. “Historical Overview of Financial Market Stabilization Fund FMS (SoFFin)Measures.” Accessed 26 August 2019. https://www.deutsche-finanzagentur.de/fileadmin/user_upload/finanzmarktstabilisierung/FMS-Massnahmen_en.pdf


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FMSA.2019.“History.”Accessed26August2019.https://www.fmsa.de/en/history/FMStFG. 2008. “Financial Market Stabilization Fund Act.” Accessed 26 August 2019.https://www.bafin.de/SharedDocs/Veroeffentlichungen/EN/Aufsichtsrecht/Gesetz/FMStFG_en.html;jsessionid=E0BE9D289E013940DCC914BA42C09CF1.1_cid372?nn=8379954#doc7863566bodyText13“FundfortheStabilizationoftheFinancialMarketStartsItsOperationsinGermany.”FederalAgency for Financial Market Stabilisation - Bundesanstalt für Finanzmarktstabilisierung.Federal Agency for Financial Market Stabilisation, October 27, 2008.https://www.fmsa.de/en/press/details/mitteilung/309/.Hypo Real Estate. 2009. Press Release. “Hypo Real Estate Holding AG issues Statementregarding the Takeover Offer by SoFFin”https://web.archive.org/web/20110712234038/http:/www.hyporealestate.com/eng/pdf/042409_PI-Stellungnahme_Endfassung_Engl.pdfInternational Monetary Fund. 2011. “Germany: Technical Note on Crisis ManagementArrangements.” Germany: Technical Note on Crisis Management Arrangements.https://www.imf.org/external/pubs/ft/scr/2011/cr11368.pdfLevitin,Michael.“CommerzbankAsksStatefor€8.2bn-FirstGermanBanktoUseBailoutFund.” The Telegraph. Telegraph Media Group, November 3, 2008.https://www.telegraph.co.uk/finance/newsbysector/banksandfinance/3372831/Commerzbank-asks-state-for-8.2bn-first-German-bank-to-use-bailout-fund.html.Lowe, Philip. “State Aid Policy in the Context of the Financial Crisis.” Competition PolicyNewsletter 2009, no. 2 (2009): 3–8.https://ec.europa.eu/competition/publications/cpn/2009_2_1.pdf.Mayer Brown. 2009. “Summary of Government Interventions: Germany”https://www.mayerbrown.com/public_docs/0272fin_Summary_Government_Interventions_Germany.pdfMitchell, Christopher. 2016. Saving the Market from Itself: The Politics of FinancialIntervention.CambridgeUniversityPress.Petrovic, Ana and Ralph Tutsch. 2009. “National Measures in Response to the CurrentFinancial Crisis.” European Central Bank Legal Working Paper Series, no. 8.http://ssrn.com/abstract_id=1430489Pleister, Christopher. 2011. “The Federal Agency for Financial Market Stabilisation inGermany: fromRescuing toRestructuring.”OECD Journal: FinancialMarket Trends 2011,issue2.https://www.oecd.org/finance/financial-markets/48989210.pdfReuters. 2009. “Hypo Real Estate Is Nationalised with Squeeze Out.” Thomson Reuters,https://www.reuters.com/article/hyporeal-idUSLD67573320091013SoFFin.2009.PresseRelease.“SoFFinholds47.31percentofHypoRealEstateHoldingAG(HRE)afterexpirationofacceptanceperiod–thetakeovertostabilizeHREbytheFederalRepublic of Germany can be continued swiftly.”


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https://www.fmsa.de/fileadmin/user_upload_fmsa/Pressemitteilungen/englisch/20090507_PM_FMS-WM_en.pdfSpiegel Online. 2008. “Financial Crisis: Germany's No. 2 Bank Taps Government RescueFund.” https://www.spiegel.de/international/germany/financial-crisis-germany-s-no-2-bank-taps-government-rescue-fund-a-588050.htmlSummitoftheEuroAreaCountries.2008.“DeclarationonaConcertedEuropeanActionPlanof the Euro Area Countries.”http://ec.europa.eu/economy_finance/publications/pages/publication13260_en.pdfWilson,James.2011.“HREinCourtVictoryoverStakeSqueeze.”FinancialTimes.FinancialTimes. January 20, 2011. https://www.ft.com/content/0effe4c6-247c-11e0-8c0e-00144feab49a.Woll, Cornelia. The Power of Inaction Bank Bailouts in Comparison. Ithaca, NY: CornellUniversityPress,2014.

V. KeyProgramDocuments

SummaryofProgram

ActontheEstablishmentofaFinancial-MarketStabilisationFund–EnglishtranslationofFMStFG,legislationauthorizingSoFFinLegal/RegulatoryGuidance

EuropeanCommissionDecisionOctober27,2008(C(2008)6422)–ECinitialapprovalofSoFFinEuropeanCommissionDecisionDecember12,2008 (C(2008)8629 fin)–ECapprovalofamendedSoFFinEuropeanCommissionDecisionMay14,2009(C(2009)3994fin)–ECapprovalofHREaidEuropean Commission Decision October 7, 2009 (IP/09/1434) – EC approval of aid toWestLB

EuropeanCommissionDecision June23,2010(C(2010)4261 final)– finalECapprovalofextensionofSoFFinuntilDecember31,2010


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European Commission Decision July 18, 2011 (C(2011) 5157 fin) – EC approval of HREacquisition

European Commission Decision December 20, 2011 (C(2011) 245 fin) – EC approval ofWestLBrestructuringplanPressReleases/Announcements

SoFFin holds 47.31 percent of Hypo Real Estate Holding AG (HRE) after expiration ofacceptanceperiod–thetakeovertostabilizeHREbytheFederalRepublicofGermanycanbecontinuedswiftly.-PressReleaseannouncingHREtakeoverArchive of press releases related to SoFFin from 2008-2017https://www.fmsa.de/en/press/Reports/Assessments

TheGermanbankingsystemandtheglobalfinancialcrisis:causes,developmentsandpolicyresponses (Bleuel 2009)– paper providing context for financial crisis in Germany andanalyzingpolicyresponses,includingSoFFinhttp://ssrn.com/abstract=1365813FundamentalFeaturesoftheGermanBankRestructuringAct(DeutscheBundesbank2011)- paper describing the Restructuring Act and how it improves on FMStFG’s flawshttps://www.bundesbank.de/resource/blob/707210/d60f5843069da07d666b02f2e8706c8f/mL/2011-06-fundamental-features-german-bank-restructuring-act-data.pdf

VI. Appendix

FinancialStatementsofSoFFinbyyear:(BundesrepublikDeutscheland)ReportFY2008Intheshortfinancialyear2008,SoFFingeneratednet incomeof€55.2million.ThiswastransferredinfulltotheequityofSoFFin.The most important source of net income for the year was provisions for guaranteesamountingto€4.0millionandcommissionsfromguaranteesamountingto€51.4million.Inaddition, SoFFin generated interest income from its credit balances amounting to€11.6million.Ontheotherhand,SoFFin'sexpensesof€11.7millionstemmedfromtheborrowingtofinancethesilentparticipationinCommerzbankAG.TheapplicationvolumeforSoFFinstabilizationassistanceamountedto€176.9billionasat31.12.2008. Contracts amounting to € 90 billion were signed for the granting ofguarantees. Capital measures of € 8.2 billion were granted. Risk assumptions were notcarriedoutuntiltheendof2008.


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TheFinanzmarktstabilisierungsanstalt (FMSA) had18 employees onDecember 31, 2008(includingthesteeringcommittee).FMSA'sadministrationofSoFFinwasfullycoveredbythe flat-rate revenue generated by FMSA in the short financial year 2008, which FMSAinvoicedtotheapplicantinstitutions.Reportonthe2009financialyearTheSpecialFundFinancialMarketStabilization(SoFFin),whichismanagedbytheGermanFederal Financial Market Stabilization Authority (FMSA), closes the year 2009 with ashortfall of 4.26 billion euros. This is the result of the valuation result, which squeezesoperatingsurplusesamountingto€497million.The participations of SoFFin in Hypo Real Estate Group AG and its subsidiary DeutschePfandbriefbankAGwerereducedinvalueby4.75billioneuros,4.1billioneurosinequitiesand0.65billioneurosinsilentparticipations,TheremainingparticipationsofSoFFinwerealsoaccountedforunchangedaccordingtotheregulationsoftheHGBatthepurchaseprice.SoFFin'soperatingprofitof€497millioncomprises€690millionofcommissionincomeforproviding guarantees to financial services institutions and correspondingdrawdownsonguarantees,€214millionofinterestondepositsandasilentparticipation,less€407million.Euroforinterestandinterest-likeexpenses.FMSA, which manages the fund, closed the year 2009 with net income of EUR 2.03million. For the administration of the fund, it received remuneration packages from theapplicant institutes amounting to 12.1 million euros. By contrast, operating expensesamountedto€10.1million.Theconsultancycostschargedtotheapplicantinstitutionswerenottakenintoaccount.ThecostsofmanagingSoFFinwerethusfullycoveredbyrevenueinthe past financial year. On December 31, 2009, FMSA had 39 employees including theExecutive Committee. It is subject to the ongoing review by the Federal Court of Audit,wherebytheannualaudithasbeencarriedoutbyanauditorandmustbeaudited.AsofDecember31,2009,theapplicationvolumeforSoFFinstabilizationaidamountedto€230.9billion.Forthegrantingofguarantees,contractsworth160.7billioneuroshadbeensignedasofthisdate.CapitalmeasuresamountingtoEUR28.0billionweregranted.Currentcontractsforrisktransferdidnotexistattheendof2009.WiththeActontheFurtherDevelopmentofFinancialMarketStabilizationofJuly22,2009,FMSA became an independent Federal Institution in the business area of the FederalMinistry of Finance. In addition, the instruments of the FMSAwere extended to include"guaranteestospecialpurposeentities"and"FederalSettlementOffices".TheapplicationdeadlineforGuaranteestoSpecialPurposeEntitiesexpiredonJanuary22,2010,withoutrecoursetothisinstrument.The"ErsteAbwicklungsanstalt"wasestablishedbythespin-offofatrancheofassetsfromWestLBinDecember2009andwillcoveratotalvolumeof77billion euros after the end of the process in April 2010. Another application for theestablishmentofawinding-upinstitutionwasmadebyHypoRealEstateHoldingAGandiscurrently being examined by FMSA and the EU Commission. Provided that the EUCommission and the committees of SoFFin vote in favor, it is planned to conclude thecorrespondingspin-offsoftheHREGroupbytheendofSeptember2010.


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Reportonthe2010financialyearTheFinancialMarketStabilizationFund(SoFFin),whichismanagedbytheGermanFederalFinancialMarket StabilizationAuthority (FMSA), is closing 2010with a deficit of € 4.80billion.Thisessentiallyresultsfromascheduledprovisioninconnectionwiththestatutoryloss-absorbingobligationoftheConfederationvis-à-visFMSWertmanagement,thewinding-upinstitutionforformerassetsoftheHypoRealEstateGroup(HRE)intheamountofEUR3.87billionandthevaluationresultofthefund.Aspartofthespin-offofnon-strategicbusinessareasandriskpositionsfromHREtoFMSWertmanagementasofSeptember30,2010,SoFFinhasincurredaloss-absorbingobligationvis-à-vis FMSWertmanagement. For this purpose, SoFFin has formed a provision in theamountof€3.87billion,fromwhichthecapitalinjectionwillbefinancedin2011.ThisisalreadyincludedinthetotalamountofcapitalgrantsforHREtotaling€9.95billionnotifiedtotheEuropeanCommission.ThevaluationresultreflectsthevalueadjustmentstotheinvestmentsoftheFundaccordingtotheprudenceprinciple.Afinalstatementabouttheactualcostsofthestabilizationofthefinancial market will only be possible after the repayment of all investments and theliquidationoftheliquidationinstitutions.Payments for interest and similar expenses of the Fund of EUR 809 million were fullycoveredbyincomefromcommissionincomeonguaranteesprovidedtofinancialservicesinstitutions and guarantees taken up amounting to EUR 933million. In addition, SoFFingeneratedinterestincomeonbalancesaswellasasilentparticipationintheamountof€49millionand€142millioninotheroperatingincome.FMSAclosedtheyear2010withanetlossofEUR4.38million.FortheadministrationoftheSoFFinitreceivedfromtheapplyinginstitutescompensationflatrateintheamountof4.39million euro. FMSA generated interest income and other operating income of EUR 0.14million. By contrast, operating expenses amounted to 8.91 million euros; These areessentiallypersonnelandmaterialcosts.However,theshortfalliscoveredbysurplusesfromprevious years, so that therewas no allocation requirement from the federal budget for2010.OnDecember31,2010,FMSAhad56employeesincludingtheExecutiveCommittee.Theirannualaccountsareauditedbyanauditor. It isalsosubjecttotheongoingreviewbytheFederalCourtofAudit and the legal and technical supervisionof theFederalMinistryofFinance.As of December 31, 2010, there were liquidity guarantees of € 64 billion at nineinstitutions. Inaddition,SoFFinhadgrantedcapitalmeasuresworthEUR29billion.Newsupportmeasures have not been granted by SoFFin since 31December 2010. However,SoFFincontinuestoassumetheresponsibilitiesbasedontheexistingstabilizationmeasures,suchasthecontrollingofthemeasuresimposedbythemeasuresandthelegalsupervisionoftheresolutioninstitutions.As of April 30, 2011, the volume of guaranteed guarantees has been reduced to € 36billion.Thelatestduedateisthebeginningof2015.Accordingtothecurrentstate,noloss


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can be expected. The recapitalisations are due to the repayment of SoFFin's investmentannouncedbyCommerzbankAGforthefirsthalfoftheyeartoaroundEUR18billion.Inconnection with the repayment of the silent participations, SoFFin will receive fromCommerzbankAGafeeofEUR1.03billion.With the entry into force of the Restructuring Fund Act at the beginning of 2011, thelegislatorhasalsotransferredtheadministrationoftheRestructuringFundtoFMSA.Thus,FMSAhasbecomeapermanentpillarofthearchitectureofthefinancialcenterGermany.Forthefirsttimein2011,itwilllevythebanklevythatgoesintotherestructuringfund.Heisthusfinancingtheinstrumentsavailabletohimaspartofthereorganizationprocedureforbankstostabilizethefinancialsystem.Ifitisnotpossibletocovertheneedforfundsontime,includingthroughspecialcontributions,therestructuringfundmayborrow.Hewasgrantedaguaranteeof100billioneurosandacreditauthorizationforrecapitalizationmeasuresof20billioneuros.Reportonthe2011FinancialYearA.OverviewofBusinessDevelopmentThe FinancialMarket Stabilization Fund (SoFFin), whose business is run by the FederalInstitutionforFinancialMarketStabilization(FMSA),theyear2011closeswithadeficitofEUR13.1billion.Thenetlossfor2011mainlyresultsfromadditionstoprovisionsforthelosscompensationobligationofSoFFintowardsFMSWertmanagement(FMS-WM)amountingto11.4billioneuros.Thesearelargelyattributabletothesovereigndebtcrisisandtheassociatedwrite-downsoftheliquidationinstitutiononitsexposuretoGreece.FurtherexpensesofSoFFinareduetodepreciationonparticipationsintheamountof4.13billioneurosand0.42billioneurosincurredthroughinterestexpense.Totalexpensesof€15.95billionincludeincomeof2.85billioneuros.The risk volumes transferred to the liquidation institutions decreased in the year 2011comparedtotheendofthepreviousyearsignificantly.Thevolumeofoutstandingguaranteesdecreasedby49%to28.2billioneuros.Thestockofrecapitalizationmeasuresgranteddecreasedby32%or19.8billioneuros.Reportonthe2012financialyearA.OVERVIEWOFBUSINESSDEVELOPMENTTheFinancialMarketStabilizationFund(SoFFin),whosebusiness isrunby theFinancialMarketStabilization(FMSA)closestheyear2012withanetincomeofEUR580million.The2012netincomemainlyresultsfromvaluationeffects.TherebyOtheroperating income totaledEUR1.43billion.Theyrelate to thepartial releaseof theprovisionforthelosscompensationobligationtotheFMSValueManagement(FMS-WM)inthe amount of EUR 1.39 billion and the write-up on the silent investment in DeutschePfandbriefbankAG(pbb)intheamountofEUR0.04billion.


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SoFFin'srevenuesamountedtoEUR0.13billionandstemmedfromcommissionsforgrantedguaranteesandtheprovisionofaloss-sharingframeworktotheFirstResolutionInstitution(EAA).Inaddition,SoFFinhasEUR0.03BillionincomeforthesilentparticipationinAarealBankAG.ThetotalincomeofEUR1.59billionincludesexpensestotalingEUR1.01Billion,resultingfrom value adjustments to equity investments (totaling EUR 0.74 billion) and interestexpensesofEUR0.27billion.ThevolumeofoutstandingSoFFinguaranteesdecreasedcomparedto31December2011byalmost87%toEUR3.7billion.Thestockofgrantedrecapitalizationmeasuresbeforevalueadjustmentswas2012byEUR1.0billiontoEUR18.8billionbytakingoverpartofthesilentparticipation at WestLB AG through the state of NRW. In return, SoFFin took over oneSubordinatelosscompensationobligationofthesameamountattheEAA.Part of the claim of the FMS World Cup against SoFFin due to the loss compensationobligationwasmadein2012withapaymenttotheFMSWorldCupintheamountofEUR2.0Billion.FurtherlosscompensationpaymentstotheFMSWorldCupamountingtoatotalofEUR7.3billionweremadeafterthebalancesheetdate.Reasonfortheearlycompensationisthereductionofthetotalcosttothetaxpayer,addingtherefinancingadvantageusedbythefederalgovernment.TherepaymentofthelosscompensationobligationtotheFMS-WMin2012willleadtoincreasedrefinancingcostsforSoFFin.In 2012, no new measures under the Financial Market Stabilization Act granted. Theuncoveredshortfallaccruedto31December2012hasbeenreduceddowntoapprox.EUR21.5billion.