Another important case of state aid concerned the capital transfer in the early 90s to seven German regional public banks (Landesbanken) and the consequent abolition of the so- called state guarantees. The investigation originated from a complaint of the Association of German private banks stating that various Landesbanken received capital transfers in the form of public housing and other assets from the local governments, which partly or fully owned the banks, in order to satisfy increased minimum capital requirements, The allegation was that the transfers constituted state aid as they were remunerated below- market rate and created a distortion of competition in favor of the Landesbanken. The investigation was long and complicated, economically as well as politically. In 1999, the Commission adopted the first negative decision concerning the transfer to WestLB and it ordered a recovery of some €800 million. In 2003, the Court of First Instance, however, annulled the decision on the basis of lack of clarity in the calculations of the Commission. The Commission reopened the investigation, showed that the remuneration agreed by the local governments in return for the transfer of the assets was very low (less than 1%) and below the market rate, and ordered Germany to recover the appropriate amounts from the Landesbanken. The amounts to be recovered differed in size ranging from €6 million plus interest for Landesbank Hessen-Thüringen to €979 million plus interest for WestLB. The investigation also led to the gradual abandonment of the state guarantees for both Landesbanken and Saving Banks. This raised the question of whether the Landesbanken would change their asset investment strategies. According to some commentators (e.g., Herald Tribune, 21 October 2004), the Landesbanken would increasingly abandon arbitrage trading in securities with very low profit margins. The failure of Sachsen LB in August 2007 and its subsequent bailout for €17 billion may have indeed been a result of the aggressive strategy pursued by the bank after the removal of the state guarantees (FT, 22 August 2007).
The two landmark cases examined show the commitment of the Commission not to let uncontrolled aid to the banking sector proceed without check. The aim is to reach an appropriate balance with the legitimate objective to preserve financial stability. The doubt remains, however, whether the granted aids were the least costly methods of preserving