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German Banking Regulation Compliance Under Scrutiny
The Backbone of German Banking Supervision Framework
BERLIN - The German Banking Act is a critical component of the country’s banking supervision framework, providing a legal basis for the oversight of credit institutions and financial services providers. As part of the European Union’s Single Supervisory Mechanism, the European Central Bank (ECB) must take into account Germany’s national implementation of CRD IV when supervising German banks.
Primary Purpose of the Banking Act
The primary purpose of the Banking Act is to prevent undesirable developments in the banking sector that could compromise asset safety, hinder the proper conduct of banking business or provision of financial services, or cause significant economic harm. This objective is pursued in the public interest.
A Long History of Regulatory Development
Germany’s first Banking Act was enacted as far back as 1934, establishing the foundations for current banking supervision legislation. The key milestones in the development of the Banking Act include:
- Introduction of General Authorization Requirement: The Act introduced a general authorization requirement for banks.
- Rules on Capital and Liquidity: Rules were established to regulate capital and liquidity requirements for banks.
- Lending Regulations: Lending regulations were introduced to ensure that banks lent money responsibly.
- Duties to Report and Disclose Information: Banks were required to report and disclose information to regulatory authorities.
Significant Revisions in the Late 1990s
Significant revisions to the Banking Act were made in 1961 with the introduction of capital requirements. However, these initial rules only set out general principles related to capital. The implementation of the Investment Services and Capital Adequacy Directives through the 6th Act Amending the Banking Act and the Third Financial Market Promotion Act in 1998 resulted in a comprehensive overhaul of German banking supervision law.
Basel Accord Implementation
Germany made further extensive changes to banking supervision law with the adoption of the Basel II framework into EU directives. The key changes include:
- Comprehensive Expansion of Capital Requirements: The Act Implementing the recast Banking Directive and the recast Capital Adequacy Directive comprehensively expanded capital requirements.
- Provisions Governing the Trading Book and Non-Trading Book: Provisions were introduced to govern the trading book and non-trading book.
- Cooperation between Supervisory Authorities within the European Economic Area: Cooperation between supervisory authorities was established within the European Economic Area.
- Institutions’ Organizational Duties: Institutions were required to establish organizational duties.
The standards set by Basel II were carried forward into the Basel III regime. The relevant rules for EU member states are found in the Capital Requirements Regulation (CRR) and the Capital Requirements Directive IV (CRD IV), which has been transposed into national law through the Act Implementing the Capital Requirements Directive (CRD IV-Umsetzungsgesetz).