2.6 Funding Transactions and Community Law 19IKB did not formally own the conduit (because IKB wanted to keep the conduit
off its balance sheet) but controlled it and provided some of its funding (in order
to profit from speculation in the US market).
Now, IKB had invested in US asset-backed securities through its conduit. The
value of the assets that backed the securities decreased because of problems with
subprime loans. This made it more difficult for Rhineland Funding to borrow in
the commercial-paper market, and caused a liquidity crisis in the conduit.
IKB tried to rescue its conduit. As IKB did not any more have access to short-
term commercial paper through its conduit, it had to lend more money to the con-
duit. Simultaneously, it had to turn to the interbank market to address its own
short-term cash needs. However, fears for banks’ high risk exposures in general,
and IKB’s own exposures in particular, made it difficult for IKB to borrow money
from the interbank market. Other banks feared that IKB might collapse. This
caused a liquidity crisis in the bank.
IKB had to be rescued by the regulators and other German banks. The esti-
mated total cost of rescuing this small bank was €10.7 billion, of which KfW (a
state-owned bank) and the Federal State paid €9.2 billion (for state aids, see Vol-
ume II). In August 2008, Loan Star, a Texas bank, acquired IKB for an estimated
€115 million.
2.6 Funding Transactions and Community Law..........................................
Gathering information about the regulation of funding transactions in the EU is a
time-consuming exercise. Funding transactions are governed or influenced by
many areas of law. Legal rules exist at different levels (international, Community,
national, market place, internal). Unlike the US, the EU does not have a unified
and coherent system of securities law. The relevant market practice can depend on
the location of the market in a certain Member State. The only thing common to
such legal rules and practices is that they form the legal framework within which
the firm operates.