Germany’s WestLB Bank won European Commission approval on Wednesday for rescue aid from North Rhine-Westphalia state to protect against volatility in its 23 billion euro ($35.8 billion) structured investment portfolio.
WestLB has been plagued with problems because its investments exposed it to the U.S. sub-prime crisis.
The local government has said it will cover up to 5 billion euros in losses from risky investments made by WestLB.
The Commission, executive arm of the European Union, said the shield was in line with rules on rescue aid.
“Strict conditions ensure that the aid is limited in time and reversible. The approval of the rescue aid does not prejudice the Commission’s assessment of the restructuring plan Germany has committed to submit by 8th August 2008,” the Commission said in a statement.
If the Commission approves the restructuring plan after Aug. 8, WestLB will have to shrink in size to offset the competitive advantage of state help.
Rescue aid like that granted on Wednesday may be loans or guarantees that usually last no more than six months. The total of 5 billion euros in guarantees and assistance agreed by WestLB’s owners will be used to finance a special purpose company and cover any losses it may face.
The arrangement provides crucial support to the bank’s credit rating. A lower rating would raise its borrowing costs, crimping business.
WestLB has been battered by trading losses and asset writedowns, prompting repeated emergency measures as the bank’s problems worsened.
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