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Germany’s Financial Regulators Issue Guidance on Bank Capital Requirements

New Guidance on Capital Requirements for German Banks

The European Central Bank (ECB) and the German Federal Financial Supervisory Authority (BaFin) have published new guidance on capital requirements for banks in Germany. This move comes after a series of losses experienced by some institutions in their first year or two of operation.

According to the guidance, the ECB expects banks to maintain a minimum regulatory capital standard that is significantly higher than that required for more mature institutions. New banks will be subject to stricter capital requirements in the first three years of operation.

Obtaining a Banking Licence

Process and Fees

The process of obtaining a banking licence in Germany typically takes six to 18 months, depending on the complexity of the application and the business plan of the new bank. The application fee for a banking licence ranges from €5,000 to €20,000, with additional legal fees ranging from €75,000 to €150,000 (plus value added tax).

Funding Strategies

German banks typically fund their balance sheets through a combination of:

  • Equity
  • Subordinated debt
  • Medium and long-term senior debt
  • Customer deposits
  • Shorter-term liabilities such as commercial paper and wholesale deposits

BaFin and the Deutsche Bundesbank continuously monitor the financial stability of German banks to ensure that they have sufficient funds to cover their risks.

Minimum Capital Requirements

German banks are required to maintain at least three minimum capital ratios:

  • Hard-core capital ratio: 4.5%
  • Core capital ratio: 6%
  • Total capital ratio: 8%

In addition, BaFin and the ECB check whether liquidity is sufficient by ensuring that institutions invest their funds in a way that guarantees solvency at all times.

Enforcement of Capital Adequacy Guidelines

The enforcement of these capital adequacy guidelines falls within the supervisory mandate of BaFin and the ECB. Authorities can take measures to improve an institution’s own funds and liquidity, including:

  • Issuing instructions for business management
  • Prohibiting deposits and loans if necessary

By implementing these guidelines, German financial regulators aim to ensure the stability and reliability of the country’s banking system.