Brussels Approves Germany's Rescue of IKB

IKB, Germany's first major victim of the current financial crisis, will be allowed to use state government money for a bailout, the European Commission ruled on Tuesday, Oct. 21.

The bailout "will allow for the restructuring of the bank, while the significant scaling back of IKB's activities will limit the distortion of competition created by the state support," the European Commission said.

IKB hit the headlines in July 2007 as the first major German bank to run into trouble because it had invested heavily into the US market for poorly secured housing loans known as sub-prime mortgages.

Bank sold to Lone Star

To keep the bank afloat, its major shareholder, state-owned bank KfW, joined with three banking associations to offer up to 9 billion euros in liquidity and risk protection.

Those measures caught the eye of the commission, which is tasked with overseeing the EU's strict rules on fair competition. On Feb. 27, commission officials launched a probe into the rescue.

In August, however, IKB was sold to the US-based investment fund Lone Star as part of a state-backed restructuring plan.

Under EU rules, state aid to companies in distress is allowed, but only if it restores the firm to long-term viability, including by making cuts in its activities, and is accompanied by a major investment by the rescued firm itself.

The commission decided that "the restructuring plan (is) capable of restoring the bank's long-term viability by refocusing its activity on core business, abandoning loss-making activities and improving cost and risk efficiency," the statement said.

The sale to Lone Star was seen as a significant contribution to the restructuring, while the reduction in IKB's activities "limits the distortions on the market created by the economic advantage it received through the state support," the statement said.