Abstract
In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.
VIII. Regulatory and Supervisory Issues1
1. Context. The German financial sector is at a critical juncture. The international, European and domestic regulatory frameworks have progressed substantially since the last consultation. The FSB just completed its “Peer Review of Germany.” The ECB has started the Comprehensive Assessment process (CA), and will assume direct supervision of the twenty-one2 largest German banks in November 2014.
2. Important progress on the financial reform agenda. Major elements of the regulatory, supervisory and resolution frameworks are now in place, both at the European and domestic level. Efforts have been stepped up since the 2011 FSAP Update, even if some reforms are still ongoing. EU initiatives will continue to shape the direction and pace of German reforms.
3. Capital regulation. A milestone is the entry into force on January 1, 2014 of the Capital Requirements Directive (CRD IV) and Capital Requirements Regulation (CRR), which transposes Basel III in the European Union3. The largest cross-border German banks should also be impacted by the Basel III leverage ratio, whose features are being finalized at the global and European levels, and by the U.S. Fed’s rules on Foreign Banking Organizations (FBO)4 that could increase capital, leverage and funding requirements for foreign banks active in the United States. Recent confirmation on the tax deductibility of coupons on some types of eligible additional Tier 1 (AT1) capital instruments provides welcome clarity and should allow banks to issue capital instruments to replace AT1 instruments being phased out, and comply with higher leverage ratio requirements.
4. Domestic supervision. Supervisory efforts have been stepped up since the 2011 FSAP Update. Staffing at the supervisory authorities has been selectively expanded. The rigor of stress testing for banks has strengthened and now covers various types of scenarios. The number of on-site inspections has increased. Yet there is room for further progress. External auditors continue to play an important role in assessing credit risks, and in on-site inspections, which should not preclude the development of in-house expertise. Supervision could better incorporate the analysis of banks’ business models, risk culture and qualitative aspects in general. As highlighted by the 2011 FSAP Update and the 2014 FSB Peer Review, granting formal recommendations powers to supervisors on major acquisitions would be an important step. Stress-testing would be further enhanced by incorporating liquidity risk.
5. European supervision. The direct supervision of the largest euro area banks will be transferred to the ECB under the Single Supervisory Mechanism (SSM) this coming November. Germany should benefit from this re-enforced surveillance of systemically important banks (SIBs), as the cross-borders risks they generate are better monitored at the euro area level than at the domestic level. The coexistence of national and centralized supervisory frameworks is particularly striking in Germany. BaFin and the Bundesbank will remain very involved, assisting the ECB for the largest German banks in the context of Joint Supervisory Teams, and retaining direct supervision for some 1,800 smaller and domestically-focused banks.” While supervisory responsibilities will be shifted to the central level in only a few months, responsibilities for resolution will remain at the national level until the Single Resolution Mechanism (SRM) is fully in place in 2016. This will give additional incentives for national supervisors to remain closely involved in the surveillance of all banks during that period of time.
6. Domestic recovery and resolution. The adoption in August 2013 of the Act on Ring-fencing and Recovery and Resolution Planning for Credit Institutions and Financial Groups5 (the “Act”) provides a framework for recovery and resolution planning for financial institutions, as well as resolvability assessments. Together with the 2011 Bank Restructuring Act, it serves as the key framework for managing crises, restructuring weak banks and resolving non-viable banks. Another important aspect to enhance the resolvability of banks is the drafting of recovery and resolution plans. In April 2014, BaFin and the Bundesbank published details of the legal requirements for recovery plans in the Minimum Requirements for the Design of Recovery Plans.6 This circular will be the basis for the revision of the first recovery plans that were submitted to the supervisors by the end of last year. Beyond recovery plans written by the institutions themselves, BaFin will develop resolution plans which will be discussed with the Federal Agency for Financial Market Stabilization (FMSA) and the Bundesbank. BaFin has the power to transfer the assets and liabilities of the institution (e.g. to a bridge bank), and to request financial assistance from the German Restructuring Fund managed by the FMSA.7 The Restructuring Fund is building up, and has raised approximately €1.8 billion from the banks between 2011 and 2013. Up to €20 billion are available to the Fund as a federal loan in cases, if needed, and the Fund also has access to liquidity guarantees of up to €100 billion.
7. European recovery and resolution. The adoption of the SRM in April 2014 is an important step toward a complete Banking Union. The SRM will cover all banks in countries that participate in SSM. It consists of (i) a Single Resolution Board (SRB) and a Single Resolution Fund (SRF). The €55 billion SRF, to be financed by bank levies raised at the national level, will be built over eight years. During the transition, the SRF will comprise national compartments, the resources accumulated in which will be progressively mutualized, starting with 40 percent of these resources in the first year of operation, and 60 percent by the end of the second year. The Bank Recovery and Resolution Directive (BRRD) will enter into force on January 1, 2015. It introduces the “bail-in” tool, which allows authorities to write down and convert some of a distressed bank’s liabilities, and which has to be made available by January 1, 2016.. The agreements on the SRM and the BRRD pave the way for renewed talks about the European Stability Mechanism (ESM) direct bank recapitalization after the SSM becomes effective, even if the process is yet untested and complex, and it remains unclear how this instrument would work.
8. Deposit insurance. Germany has harmonized the level and scope of deposit guarantee protection with EU standards, by instituting a harmonized and legally binding deposit guarantee of €100,000, backed by adequate prefunding8. However, it is not expected that amendments would lead to a unification of the statutory German deposit insurance schemes. Statutory and voluntary protection schemes are likely to continue to coexist, in spite of FSAP recommendation to reduce fragmentation.
9. Structural measures. On 29 January 2014, the EC proposed a draft regulation on structural measures improving resilience of EU credit institutions (the “Draft”) that adopts the main proposals by the High-Level Expert Group on reforming the structure of the EU banking sector (aka “Liikanen Report”)9. The Draft proposes to ban proprietary trading and exposure to hedge funds, and ring-fence some risky trading activities. In Germany, the 2013 Act amounts to a domestic interpretation of the Draft, and will fully be effective by July 2016, ahead of the expected European timeframe. The Act is separate, but broadly similar to the Draft (with some small differences on the treatment of market-making activities). The general principles applicable to the ring-fencing of certain types of risks and the financing of the trading entity are the same. In some instances, the scope of prohibitions is stricter under the German framework, and BaFin enjoys discretionary powers to decide on the applicable thresholds10.
Prepared by V. Le Leslé (SPR) and J. Vandenbussche (EUR).
The number initially announced by the ECB was twenty-four, but it was later decided that three out of these twenty four banks would remain under direct domestic supervision.
A phased-in implementation starts in 2014 for the minimum risk-weighted capital ratio, including the introduction of Common Equity Tier 1 (CET1) ratio. The implementation of the Liquidity Coverage Ratio (LCR) will also be phased in and will start in 2015. The full implementation of the Directive and Regulation will be complete in 2019.
The Federal Reserve Board issued final rules on FBO in February 2014. Implementation will start on July 1, 2016, except for the leverage ratio requirement that will be introduced on January 1, 2018.
Gesetz zur Abschirmung von Risiken und zur Planung der Sanierung und Abwicklung von Kreditinstituten und Finanzgruppen
Mindestanforderungen an die Ausgestaltung von Sanierungsplänen - MaSan
Based on the German Banking Act, all credit institutions have to contribute to the Restructuring Fund.
The amendment to the Act on Deposit Guarantee and Investor Compensation, which entered into force in June 2009
The proprietary trading ban would apply as of 1 January 2017 and the effective separation of other trading activities would apply as of 1 July 2018.
Additional analysis on the various national and regional initiatives for structural reforms is available in IMF SDN/13/13 “Creating a safer financial system: Will the Volcker, Vickers and Liikanen structural measures help?”