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Regulatory Capital and Liquidity Requirements in Germany

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Funding Layers for Banks in Germany

Banks in Germany fund their balance sheets in layers, starting with a capital base comprising equity, subordinated debt, and hybrids of the two, plus medium and long-term senior debt. The next layer consists of customer deposits, which are assumed to be stable in most circumstances, and the final layer comprises various shorter-term liabilities, such as:

  • Commercial paper
  • Certificates of deposit
  • Short-term bonds
  • Repurchase agreements
  • Swapped foreign exchange liabilities
  • Wholesale deposits

Minimum Capital Requirements for Banks in Germany

German banks must at all times meet the following minimum capital requirements:

  • A hard-core capital ratio of 4.5%
  • A core capital ratio of 6%
  • A total capital ratio of 8%

Yes, there are regulatory requirements related to liquidity that apply to banks in Germany. The Federal Financial Supervisory Authority (BaFin) and the European Central Bank (ECB) check whether liquidity is sufficient, meaning whether institutions invest their funds in such a way that solvency is guaranteed at all times (Section 11 of the Banking Act). As part of the supervisory review process, BaFin also monitors risks that are not required to be backed by own funds under the Capital Requirements Regulation (CRR).

Core Elements of the Supervisory Review Process

The core elements of this process are:

  • Establishment of adequate risk management systems
  • Monitoring of these systems by the supervisory authority

The ECB requires German credit institutions to hold compulsory reserves, which are calculated as a percentage of their deposits. However, the exact reserve requirement is not specified in this text.