European Union regulators said Wednesday they would investigate the German government bailout of one of Germany's largest state-owned savings banks, Sparkasse KoelnBonn.
The European Commission said it doubted whether a ⁈llion ($953 million) recapitalization from the cities of Cologne and Bonn met EU state subsidy rules because the bank may have paid a lower interest rate than any private investor would have agreed to earlier this year.
The EU executive said the payment terms that Sparkasse KoelnBonn agreed with public authorities did not seem to have reflected that "the market for hybrid instruments had completely dried up at the end of 2008/beginning of 2009."
It also called on the bank to put forward a "realistic restructuring plan to address the problems that led to the current situation, without giving the bank an unfair advantage over its competitors."
This can require banks to sell off units and make major cut backs to eliminate any harm to competition caused by a large government subsidy.
Governments can lend money to companies without violating state aid rules if the loan is made on the same terms, with the same level of remuneration, that a market investor would expect. A loan on more favorable terms may be a state subsidy that must meet certain conditions.
The bank had agreed to pay a public body owned by the two city governments a rate of 8 percent in return for issuing certificates of participation and a rate of 7.25 percent plus the 12-month Euribor rate for so-called "silent participation" where investors did not get voting rights.
