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«FESSUD FINANCIALISATION, ECONOMY, SOCIETY AND SUSTAINABLE DEVELOPMENT Working Paper Series No 55 Financial Regulation in Germany Daniel Detzer and ...»

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This project has received funding from the European Union’s Seventh Framework Programme

for research, technological development and demonstration under grant agreement no 266800

FESSUD

FINANCIALISATION, ECONOMY, SOCIETY AND SUSTAINABLE DEVELOPMENT

Working Paper Series

No 55

Financial Regulation in Germany

Daniel Detzer and Hansjörg Herr

ISSN 2052-8035

This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 Financial Regulation in Germany Daniel Detzer and Hansjörg Herr

Affiliations of authors:

Institute for International Political Economy, Berlin School of Economics and Law (www.ipe-berlin.org) Abstract: The paper is looking at the historical development of financial regulation in Germany. It is part of a series of papers that outline the development of financial regulation in other European countries such as France, Italy, Estonia, Slovenia, Hungary and Spain, and culminates in a synthesis aiming to understand what has changed in the regulatory structures of different countries because of the decisions made in the Single European Act and had the aim to create a single market also in the sphere of financial markets and what approaches have been taken to implement the long list of EU Directives following the act. This study is structured according to different areas of financial regulation and takes within each area a chronological approach detailing the main changes in each policy area. However, in the first part (section 1), a general overview of the German regulatory system is given and the main overarching changes are described. The second part (sections 4 – 14) focuses on policy areas that were heavily influenced by EU legislation. In the third part largely national regulations are analysed (section 15).

Thereafter a short look at the currently constructed banking union is taken. The last section concludes.

Key words: Financial Regulation, Banking Regulation, Germany Date of publication as FESSUD Working Paper: September, 2014 This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 Journal of Economic Literature classification: G18, G28, G38, K20

Contact details:

Daniel Detzer, Daniel.Detzer@hwr-berlin.de; Hansjörg Herr, hansherr@hwr-berlin.de Berlin School of Economics and Law, Badensche Str. 50 – 51, 10825 Berlin

Acknowledgments:

The research leading to these results has received funding from the European Union Seventh Framework Programme (FP7/2007-2013) under grant agreement n° 266800.

For helpful comments we would like to thank Natalia Budyldina, Barbara Schmitz and Tatjana Kulp. Remaining errors are, of course, ours.

Website: www.fessud.eu

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Table of Content List of Abbreviations

1 Introduction

2 A general overview about financial regulation in Germany

3 The institutional structure of financial supervision in Germany – a short overview of the main developments

4 Liberalisation of capital movements

5 Cross-border competition and permitted activities

6 Capital requirements

6.1 The national period

6.2 The introduction of Basel I

6.3 The introduction of Basel II

6.4 Reforms after the crisis and Basel III

7 Supervision on a consolidated basis

8 Supervision of financial groups and conglomerates

9 Large exposures

10 Investment services

11 Deposit guarantee

12 Crisis management schemes

13 Accounting

14 Corporate governance

15 National regulations

15.1 Antitrust enforcement and competition policy

15.2 Asset restrictions

15.3 Conflict of interest rules

15.4 Customer suitability requirements

15.5 Interest rate regulations

15.6 Liquidity requirements

This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 15.7 Restrictions on geographic reach

16 The Banking Union – a German perspective

16.1 The current state of the Banking Union

16.2 The debate in Germany

17 Conclusions

18 Sources

19 Appendix

19.1 Liberalisation of capital movements

19.2 Cross-border competition and permitted activities

19.3 Capital requirements

19.4 Supervision on a consolidated basis

19.5 Supervision of financial groups and conglomerates

19.6 Large exposures

19.7 Investment services

19.8 Deposit guarantee

19.9 Crisis management schemes

19.10 Accounting

19.11 Corporate governance

19.12 National regulation

This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 List of Abbreviations AT1 additional tier-1 capital BaFin Bundesanstalt für Finanzdienstleistungsaufsicht, Federal Agency for Financial Market Supervision BAKred Bundesaufsichtsamt für das Kreditwesen, Federal Banking Supervisory Office BAV Bundesaufsichtsamt für das Versicherungs- und Bausparwesen, Federal Supervisory Office for Insurance and Home Loans BAWe Bundesaufsichtsamt für den Wertpapierhandel Federal Securities Supervisory Office BRRD Banking Recovery and Resolution Directive CEBS Committee of European Banking Supervisors CET1 common equity tier-1 capital CRD-IV Capital Requirements Directive IV CRR Capital Requirements Regulation EAD Exposure at Default EEC European Economic Community EU European Union FSB Financial Stability Board FMSA Bundesanstalt für Finanzmarktstabilisierung, Federal Agency for Financial Market Stabilisation FRUG Finanzmarktrichtlinie-Umsetzungsgesetz, Act Implementing the Markets in Financial Instruments Directive and Implementing Directive of the Commission G-SIIs global systemically important institutions IAS International Accounting Standards IFRS International Financial Reporting Standards IMM Internal Model Method IRB internal rating-based approach p.45 IRB internal risk-based approach p.46 IRC incremental default and migration risk charge LCR liquidity coverage requirement LGD loss given default M effective maturity MAD Market Abuse Directive MAK Mindestanforderungen an das Kreditgeschäft, Minimum requirements for the Credit Business of Credit Institutions MaRisk Mindestanforderungen an das Risikomanagement, Minimum Requirements for Risk Management MiFID Markets in Financial Instruments Directive This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 NFSR Net Stable Funding Ratio O-SIIs other systemically important institutions PD probability of default RechKredV Verordnung über die Rechnungslegung der Kreditinstitute, Pursuant to the Order concerning the accounting of credit institutions SM Standardised Method SME small- and medium- sized enterprises SoFFin Special Fund for Financial Market Stabilisation SPV Special Purpose Vehicle SRB Single Resolution Board SRM Single Resolution Mechanism SSM Single Supervisory Mechanism T2 tier-2 capital US United States US-GAAP United States Generally Accepted Accounting Principles VaR Value at Risk This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 1 Introduction After the financial crisis in 2008 a variety of reforms of the regulatory framework for banks and financial markets were introduced. In September 2009 the G20 meeting in Pittsburgh decided to introduce comprehensive regulations in the sphere of financial markets. The Basel III recommendations from 2010 included tightened equity holdings of banks and for the first time regulatory tools aimed at liquidity holdings of banks. Substantial parts of Basel III are or are planned to be introduced in the the European Union (EU) and other industrial countries. The EU also is in the process of establishing a banking union with common supervision, an EU-wide winding-up regime for over-indebted banks, and, eventually, common or at least harmonised deposit insurance schemes. Through the CRD IV (Capital Requirements Directive) package from 2013 the Basel III rules were initiated in the EU quite fast. In the United States (US) the Dodd-Frank Act from 2010 introduced many regulatory reforms. At the same time other national governments started their own reform projects, too. Currently most of the reforms aim directly at solving those problems that were unveiled during the Financial Crisis and the following Great Recession. However, this reactive regulatory approach leaves the general structure of the financial system unchanged. According to the Levy Institute, “[…] the current approach to regulation seeks to remedy the present moment by applying to existing financial institutions and their existing business models a series of cosmetic changes. […] Effective proposals can only emerge from analysis of the longer-term structural changes.” (Levy Institute, 2012, p. 7).

This study contributes to identifying those long-term changes which made the financial system so fragile that a relatively small segment in the world financial market, the subprime mortgage market in the US, led to the deepest financial crisis since the 1930s.

The paper is looking at the historical development of financial regulation in Germany. It is part of a series of papers that outline the development of financial regulation in other European countries such as France, Italy, Estonia, Slovenia, Hungary and Spain, and culminates in a synthesis aiming to understand what has changed in the regulatory This project has received funding from the European Union’s Seventh Framework Programme for research, technological development and demonstration under grant agreement no 266800 structures of different countries because of the decisions made in the Single European Act which came into effect in 1987 and had the aim to create a single market also in the sphere of financial markets and what different approaches have been taken to implement the long list of EU Directives which followed the Act.

This study is structured according to different areas of financial regulation and takes within each area a chronological approach detailing the main changes in each policy area.

However, in the first part (section 1), a general overview of the German regulatory system is given and the main overarching changes are described. The second part (sections 4 –

14) focuses on policy areas that were heavily influenced by EU legislation. In the third part largely national regulations and policy areas less heavily affected by EU legislation are analysed (section 15). Thereafter a short look at the currently constructed banking union, as the most recent EU reform project, is taken. Here, we try not to describe the features of those new supervisory and regulatory structures in detail but rather to give an overview about the main concerns, criticisms and opinions in Germany on this topic. The last section concludes. To get an overview about the main developments in each policy area, the reader is referred to the tables in the appendix.

–  –  –

2 A general overview about financial regulation in Germany1 In Germany, banking regulation was established relatively late during the banking crisis in 1931 when Chancellor Heinrich Brüning established it by emergency decree. In 1934 the Law of the German Reich on Banking2 was implemented, whereby all credit institutions were put under supervision. The Banking Act3 established in 1961, which is still the central law governing banking today, was based on this law (Lütz 2002, pp. 116 – 33). The law established the Federal Banking Supervisory Office4 (BAKred) as a new supervisory authority on a federal level. It shared supervisory tasks with the Bank of the German states5, the predecessor of the Deutsche Bundesbank, the German central bank. It was central to the German banking regulation that it was restricted to set certain standards, like liquidity or capital requirements, but that direct intervention into banks’ business decisions remained limited. Limits on banking activities, portfolio composition, interest rate regulations or branching restrictions were not important in Germany or were abolished much earlier than in other countries (Detzer et al., 2013, pp. 115-36).

Germany has always followed the universal banking principle; hence, there are only few restrictions on types of financial service activities banks can pursue. At the same time the Banking Act has a very encompassing definition of banking so that many financial service activities, which are not regarded as banking in many other countries, have been monopolised by the banking sector. This limits the development of non-bank financial actors to certain restricted areas (for example building and loans, insurance, securities The overview in this section is an extended version of a similar overview given in Detzer (2014).

Reichsgesetz über das Kreditwesen Gesetz über das Kreditwesen Bundesaufsichtsamt für das Kreditwesen Bank deutscher Länder

–  –  –

industries) that are governed by special laws. Due to their restrictions on assets and liabilities, those actors do not compete with the main business areas of banks. This encompassing regulatory framework limited regulatory arbitrage and development of a shadow banking system in Germany (Vitols, 1995).

While banking was regulated tightly, financial market regulation was underdeveloped.



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