Banks, EU – Baltic States, Financial Services, Latvia

Under the EC Treaty rules, the European Commission has an obligation to start an in-depth investigation into state support measures for big companies. At the end of July, the Commission started the procedure against the Latvian JSC Parex Banka.

Reviewing member state’s aid rules is the first step towards finding a viable long-term solution for the bank, in close contact with the Latvian authorities. Commission opened in-depth investigation into aid package for Latvian JSC Parex Banka on 29^th July, 2009.

Background

The bank was founded in 1992 by two individuals who were majority owners through all bank’s years until the Latvian Government took decision to buy-out their shares at the end of 2008.

Parex Banka is the second largest bank in Latvia in terms of assets. It is a universal bank offering the full range of banking products directly and through specialised subsidiaries and branches in Stockholm, Tallinn, Hamburg and Berlin, as well as through its 11 representative offices in 9 other countries.

A restructuring plan for Parex Banka was submitted to the Commission on 11 May 2009. The Commission now will examine whether the restructuring plan will enable Parex to return to long-term viability while avoiding undue distortions of competition. The opening of an investigation is common for state interventions in the banking sector. It ensures legal certainty for the concerned market players and gives interested parties the possibility to submit comments on the proposed measures. It does not prejudge the outcome of the investigation procedure.

Commission’s measures

On 24 November 2008, the European Commission approved rescue aid in the form of liquidity support, state guarantees and a recapitalisation measure in favour of Parex Banka in line with the EU rules on emergency aid for banks. On 11 May 2009, the Commission approved amendments to the recapitalisation measure enabling Latvia to acquire newly issued ordinary shares and subordinated debt with the aim to strengthen the bank's capital basis.

A rescue package for Parex Banka in the form of state guarantees, liquidity support and a recapitalisation measure was approved several times by the Commission’s decisions (24 November 2008, 11 February 2009 and 11 May 2009).

 In line with the Commission's decision on the rescue aid, Latvia notified the EU on 11 May 2009 about the government’s restructuring plan for Parex Banka. The plan included the implementation of a new business strategy as well as a number of restructuring aid measures consisting of a liquidity support, a prolongation of state guarantees, as well as potential new state guarantees to ensure further funding of the bank and capital injections.

The Commission's detailed investigation, covering all abovementioned measures, will lead to thorough evaluation of the following issues:

• whether the planned measures are capable of restoring the long-term viability of Parex Banka;
• whether state support is limited to the minimum necessary, and
• whether the proposed Latvian measures to limit potential distortions of competition are in proportion to the distortive effects of the aid.

The opening of a formal investigation procedure does not prejudge whether the measures concerned are in line with the EU State aid rules, the Commission argued. It is a necessary step to ensure legal certainty for the aid beneficiaries and their business partners and provides an opportunity to take account of comments from interested parties.

Commission’s opinion

“The Commission has to carry out an in-depth investigation into the aid package for Parex Banka to determine whether it is accompanied by a realistic project to address the problems that led to the current situation. This way we ensure legal certainty for all actors concerned and allow interested third parties to give their views”.

EU Competition Commissioner, Ms. Neelie Kroes.

The Commission’s decision version is publicly available under the case number nr.289/2009 in the State Aid Register on the DG Competition website, though only after any confidentiality issues have been resolved.

New publications of state aid decisions on the internet and in the EU Official Journal are listed in the State Aid Weekly e-News .