Germany: Banking & Finance

The national authorities for banking regulation, supervision and resolution in Germany are the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “”BaFin“) and the German Central Bank (Deutsche Bundesbank).

In addition, the European Central Bank (“”ECB“) has direct supervisory powers over certain banks in Germany. Likewise, the Single Resolution Board (“SRB“) of the European Banking Union is directly responsible for questions regarding the resolution of banks supervised by the ECB (and certain other cross-border banking groups).

A banking license is required for the conduct of banking business. Section 1(1) of the German Banking Act (Kreditwesengesetz, “KWG“) enumerates the types of banking business as follows:

1. the acceptance of funds from others as deposits or of other unconditionally repayable funds from the public, unless the claim to repayment is securitised in the form of bearer or order bonds, irrespective of whether or not interest is paid (deposit business),
   1. the business specified in Section 1 (1) sentence 2 of the Pfandbrief Act (Pfandbriefgesetz) (Pfandbrief business),
2. the granting of money loans and acceptance credits (credit business),
3. the purchase of bills of exchange and cheques (discount business),
4. the purchase and sale of financial instruments in the credit institution’s own name for the account of others (principal broking services),
5. the safe custody and administration of securities for the account of others (safe custody business),
6. acting as a central depositary,
7. the entering into of a commitment to repurchase previously sold claims in respect of loans prior to their maturity,
8. the assumption of sureties, guarantees and other warranties on behalf of others (guarantee business),
9. the execution of cashless cheque collections (cheque collection business), bill collections (bill collection business) and the issuance of travellers’ cheques (travellers’ cheque business),
10. the purchase of financial instruments at the credit institution’s own risk for placing in the market or the assumption of equivalent guarantees (underwriting business).
11. Acting as central counterparty.

Yes, although all banking licenses are issued pursuant to Section 32 of the KWG, a license is issued for specific types of banking business and on the basis of a specific description of the types of business activity conducted by the relevant institution. Thus, if a licensed credit institution intends to conduct a type of banking business for which it does not yet have a license, it must apply for an extension of its existing license.

The KWG uses the term “credit institution” for banks. Thus, an entity holding a license for one or more types of banking business enumerated Section1(1) of the KWG (cf. our answer to question 2) is a “credit institution”. A credit institution holding a license for both, the deposit business and the lending business (points 1 and 2 of the KWG) is a “CRR credit institution”, because under Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (“CRR“), only entities holding a licensed for both the deposit business and the lending business are referred to a as “credit institutions” (point 1 of Art. 4(1) of the CRR). Thus, a CRR credit institution under the KWG is a credit institution under the CRR.

The CRR also uses the term “institutions” which refers to both credit institutions and investment firms under the CRR (point 3 of Art. 4(1) of the CRR).

Broker-dealer activities qualify as licensable services under the KWG or the Investment Firms Act (Wertpapierinstitutsgesetz, “WpIG“). A license for the provisions of banking services under Section 1(1) of the KWG does not automatically entitle a credit institution to provide such broker dealer activities. A credit institution that holds a license only for banking services, but not for broker dealer activities must therefore seek and extension of its existing license.

Payment services (including the issuance of e-money) qualify as licensable services under Section 10 of the Payment Services Act (Zahlungsdiensteaufsichtsgesetz, “ZAG“). The ZAG implements Directive (EU) 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market (“PSD 2“) and Directive 2009/110/EC of the European Parliament and of the Council of 16 September 2009 on the taking up, pursuit and prudential supervision of the business of electronic money institutions (“E-Money Directive“).

A bank holding a license for both the deposit business and the lending business (and therefore qualifies as a “credit institution” under paragraph (1) of Article 4(1) of the CRR) can provide payment services under the ZAG without holding an additional license under Section 10 of the ZAG.

Germany has not introduced a regulatory “sandbox” so far. However, as Regulation (EU) 2022/858 of the European Parliament and of the Council of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology (the “DLT Pilot Regulation“) applies directly in Germany, German market participants can rely on this regime when seeking a permission for the operation of a distributed ledger infrastructure. This implies, inter alia, that a crypto exchange can be operated in Germany under a permission pursuant to the DLT Pilot Regulation, without the need to obtain a license pursuant to Section 32 of the KWG of Section 15 of the WpIG.

There is a “license light” for the distribution of investment funds. The distribution of investment funds does not require a license under Section 32 of the KWG or Section 15 of the WpIG, but only a permission under Section 34f of the German Industrial Code (Gewerbeordnung, “GewO“). Such permission is subject to significantly lower requirements compared to a license under Section 32 of the KWG or Section 15 of the WpIG. However, a license under Section 34f of the GewO entitles a distributor of investment funds only to a limited range of distribution activities. Such distribution activities must be limited to investment advice (Anlageberatung) and investment brokerage (Anlagevermittlung). In addition, the distributor may only engage in investment brokerage between the investor and certain regulated entities, including, but not limited to, banks licensed in Germany, banks licensed in another member state of the EU or other member states of the European Economic Area (“EEA“) that hold an “European passport” for the provision of financial services in Germany and fund management companies (Kapitalverwaltungsgesellschaften) licensed in Germany or in another member state of the EEA.

Crypto currencies qualify as financial instruments under the KWG and the WpIG. Providing financial services or banking services with respect to crypto currencies therefore requires a license. However, the mere issuance of an instrument (including a crypto currency) does not qualify as a regulated activity. Likewise, the sale of a crypto currency by the issuer upon the issuance of the crypto currency does not require a license for own account trading, unless the issuer is a credit institution or financial services institutions licensed under section 32 of the KWG or an investment firm licensed under section 15 of the WpIG and the aforementioned licenses do not cover the own account trading of crypto assets. Such entities must therefore apply for an extension of their license.

The custody of crypto currencies qualifies as a licensable investment service and requires a license under Section 32 of the KWG or under Section 15 of the WpIG.

Crypto assets do not qualify as deposits and they are not covered by deposit insurance. However, if a credit institution holds crypto assets in custody for a client, such crypto assets qualify as client assets (subject to specific provisions in the custody agreement). In case of an insolvency of the credit institution, the crypto assets do not form part of the insolvency estate of the credit institution. They can therefore be segregated pursuant to Section 47 of the Insolvency Code (Insolvenzordnung), provided, however, they can be distinguished from other client assets.

There are no specific provisions on capital requirements for crypto assets. However, under recent legislative proposals by the EU Commission for the implementation of the reformed Basel III rules, the EU Commission has proposed to introduce rules on the prudential treatment of crypto assets (Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards requirements for credit risk, credit valuation adjustment risk, operational risk, market risk and the output floor, 27 October 2021, COM(2021) 664 final 2021/0342 (COD)). This proposal merely provides that By 31 December 2025, the EU Commission shall review whether a dedicated prudential treatment should be developed for exposures to crypto assets (Art. 461b of the proposal). In its alternative proposal published on 4 February 2022, the European Parliament has changed this proposal to require the EU Commission to submit a legislative proposal by 30 June 2023 to implement a dedicated prudential treatment for crypto assets (Draft European Parliament Legislative Resolution on the proposal for a regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 and Directive 2014/59/EU as regards the prudential treatment of global systemically important institution groups with a multiple point of entry resolution strategy and a methodology for the indirect subscription of instruments eligible for meeting the minimum requirement for own funds and eligible liabilities (COM(2021)0665 – C9‑0398/2021 – 2021/0343(COD)). The European Parliament further proposes that until 30 December 2024, institutions shall apply a 1250% risk weight to their exposures to crypto-assets in the calculation of their own funds requirements.

The licensing process usually begins with a conversation with BaFin at an early stage of preparing the application. Albeit such conversation is not legally required, it is an established market practice. In such conversation, the business model of the potential applicant can be discussed with BaFin. This conversation also offers an opportunity to clarify specific details of the information that must be submitted as part of the application. It is also common to introduce the (potential) board members and other senior executives to BaFin in order to demonstrate that they possess the skills, knowledge and experience expected by BaFin.

The formal submission of the application is usually followed by a continuing dialogue between BaFin and the applying entity, i.e. BaFin usually asks questions and/or requests further information.

The average timing of the application process is approx. 9-12 months.

The cross-border activities are not permissible if they include licensable financial services and if such activities are conducted in a way that qualifies as provision of licensable financial services (or conduct of licensable activities) within Germany. This may be the case even if the foreign entity does not have any physical presence in Germany. Any form of targeting of the German market will trigger license requirements. A targeting of the German market means that a foreign entity solicits customers in Germany. Such solicitation of German customers may include, inter alia, advertisements in German media, sending e-mails or letters to customers in Germany and maintaining a website that specifically addresses the German market (for example, because the website has a German URL or includes German language Sections or because the content includes specific references to the German market). In contrast, a cross-border activity is not deemed to be provided in Germany (and therefore does not trigger German licensing requirements) if such activity is a response to a request from a German customer who approaches the foreign institution upon his or her own initiative, without having been solicited to do so (so-called “reverse-solicitation”). According to guidance provided by BaFin, in case of professional clients, there is a rebuttable presumption that a cross-border activity is based on a reverse solicitation by the German client, whereas in case of a retail client, there is a rebuttable presumption that the cross-border activity is based on a targeting of the German market.

There are no restrictions regarding the type of entities that can operate banks, except that a bank cannot be operated by a single merchant (Einzelkaufmann). Most private banks are organized as stock corporations (Aktiengesellschaften – AG) or limited liability companies (Gesellschaften mit beschränkter Haftung – GmbH), but there are also private banks organized as partnerships (offene Handelsgesellschaften). The public saving banks (Sparkassen) are typically (but exceptions apply) organized as public law entities (Anstalten des öffentlichen Rechts), whereas the cooperative banks (Volksbanken) are organized as cooperative organiations (Genossenschaften).

The main requirement for a bank is the requirement to maintain a duly organized business organization that ensures that the bank complies with all applicable laws and is able to conduct its business (Section 25a of the KWG). This includes, inter alia,

1. a sustainable business strategy and a corresponding risk strategy;
2. the continuous monitoring of the risks involved in the bank’s business (including calculation of potential losses in case of a stress scenario):
3. a system of internal control, including a risk control function and a compliance function;
4. contingency planning, in particular with respect to IT-related risks;
5. an adequate, transparent and sustainability-oriented remuneration system;
6. record keeping that allows a complete supervision of the bank’s business activity;
7. a whistle-blower facility;
8. requirements regarding the outsourcing of business activities (for example, the bank must ensure that an outsourcing does not compromise the supervisory authority’s ability to monitor the outsourced activities; and
9. an anti-money laundering and anti-terrorist financing infrastructure.

Requirements for remuneration policies are set out in the Regulation on Renumeration in Institutions (Institutsvergütungsverordnung, “InstitutsVergV“).

General requirements

The remuneration strategy and systems must be aligned with the institution’s business and risk strategy (cf. our response to question 12). The principles of the remuneration systems must be laid down in organizational guidelines, which shall include, in particular, the design and adjustments of the remuneration systems, the composition of remuneration, the respective responsibilities and a concept for the determination and approval of compensation payments.

The ratio between variable and fixed remuneration must be appropriate (Section 5 of the InstitutsVergV). The ratio is considered to be appropriate if, on the one hand, staff members are not significantly dependent on variable remuneration and, on the other hand, the variable remuneration component can provide an effective behavioral incentive (Section 6(1) of the InstitutsVergV).

This means, inter alia, that there must be no incentives for the employees to take disproportionately high risks. Such incentives exist in particular if employees are significantly dependent on variable remuneration, or if entitlements to payments relating to the termination of activities are established in individual contracts and their amount remains unchanged despite any negative individual performance contributions or misconduct (Section 5(3) of the InstitutsVergV). More generally, remuneration systems are not appropriately designed if entitlements to variable remuneration are unaffected by negative performance contributions (Section 5(2) of the InstitutsVergV).

Requirements for the remuneration of members of the management board

Section 10 of the InstitutsVergV stipulates special requirements for the remuneration of members of the management board (Geschäftsleiter). When determining the remuneration of an individual member of the management board, the supervisory board (Verwaltungs- oder Aufsichtsorgan) must ensure that such remuneration

1. is appropriate in relation to the tasks and performance of the member of the management board (Geschäftsleiter oder Geschäftsleiterin) as well as the (economic) situation of the institution; and
2. does not exceed the customary remuneration, unless particular reasons so require.

Special requirements applicable to significant institutions

Sections 18 et seqq. contain special requirements that apply to significant institutions as referred to in Section 1(3c) of the KWG. This includes, inter alia, institutions having a balance sheet exceeding EUR 15 billion during the last 4 financial years.

Special rules apply to “risk takers” in significant institutions. Risk takers include all employees who have a significant impact on the risk profile of the institution (section 1(21) of the KWG). In significant institutions, risk takers include in particular, the members of the management board and the supervisory board and the employees directly subordinated to the management board, employees responsible for the management of the control function and other significant functions of the institution and employees that were entitled to a total remuneration of at least EUR 500,000 in the previous financial year, subject to certain further conditions (section 25a(5b) of the KWG).

For risk takers the payout of a substantial portion, in any event at least 40 percent, of the variable remuneration component must be spread over a deferral period of at least four years. Depending on the position of the risk taker, this may be increased to the spread of a minimum of 60 percent over a period of a minimum of five years (Section 20(1) of the InstitutsVergV). These figures also apply to risk takers who are members of the management board.

In Germany, there is no national implementation of the Basel III framework. Rather, the CRR applies directly. We are not aware of any major deviations of the CRR from the Basel III framework.

The requirement to calculate the leverage ratio, including the methodology for such calculation, is set out in Art. 429 of the CRR. The leverage ratio is calculated as a credit institution’s Tier 1 capital divided by its total exposure measure.

The EU has implemented the Basel III liquidity requirements, including the liquidity coverage ratio (“LCR“) and the net stable funding ration (“NSFR“) in the CRR and delegated regulations that supplement the CRR.

LCR

Pursuant to Art. 412(1) of the CRR, Institutions are obliged to hold liquid assets, the sum of the values of which covers the liquidity outflows less the liquidity inflows under stressed conditions so as to ensure that institutions maintain levels of liquidity buffers which are adequate to face any possible imbalance between liquidity inflows and outflows under gravely stressed conditions over a period of thirty days.

Details on the LCR are set out in Commission Delegated Regulation (EU) 2015/61 of 10 October 2014 to supplement Regulation (EU) No 575/2013 of the European Parliament and the Council with regard to liquidity coverage requirement for Credit Institutions. Pursuant to Art. 4(1) of Commission Delegated Regulation (EU) 2015/61, the LCR shall be equal to the ratio of a credit institution’s liquidity buffer to its net liquidity outflows over a 30 calendar day stress period and shall be expressed as a percentage. The LCR must be at least 100% (Art. 4(2) of Commission Delegated Regulation (EU) 2015/61 requires Institutions to maintain a LCR of at least 100%). Commission Delegated Regulation (EU) 2015/61 contains further details on how to determine the liquidity buffer, the assumptions that apply to a stress scenario and the calculation of the net liquidity outflow.

NSFR

Pursuant to Art. 428b(1) of the CRR, the NSFR is calculated by dividing the available stable funding by the required stable funding. The NSFR is expressed as a percentage. Institutions have to maintain a NSFR of at least 100% (Art. 428b(2) of the CRR).

Banks are under an obligation to publish their financial statements (Sections 340, 264 and 325 of the German Commercial Code (Handelsgesetzbuch). There is no general obligation to publish interim reporting. Such an obligation can arise if banks are issue shares or debt securities, In such case, they have to publish a semi-annual interim report. A quarterly reporting may arise as a consequence of a listing on a regulated market. However, such requirement is not a bank-specific requirement.

Art. 10a to Art. 25 of the CRR provide for a supervision on a consolidated basis. Consolidated supervision means that several separate legal entities are treated as a single entity for the purpose of certain supervisory requirements and one of these entities is responsible for compliance of these entities on a consolidated basis. The requirements that must be complied with on a consolidated basis include, inter alia,

1. Capital requirements (Part Three of the CRR);
2. Large exposures (Part Four of the CRR) ;
3. Liquidity requirements (Part Six of the CRR) ;
4. Leverage ratio (Part Seven of the CRR) ;
5. Reporting obligations (Part Seven A of the CRR; and
6. Disclosure requirements (Part 8 of the CRR).

Which entity that is responsible for compliance on a consolidated basis depends on the type of entities that are subject to consolidation as well as on the specific requirement.

While the aforementioned consolidation requirements only apply to credit institutions as defined in pint 1 of Art. 4(1) of the CRR (which means banks that hold a license for the deposit business and the lending business), Section 10a of the KWG extends the application of the CRR requirements for consolidated supervision to other credit institutions as defined in Section 1(1) of the KWG that do not hold a license for the deposit business and the lending business.

Pursuant to Section 2c(1) of the KWG, anyone who has the intention to acquire a qualifying holding in a credit institution has to notify the BaFin as well as the Bundesbank thereof. A qualifying holding means “a direct or indirect holding in an undertaking which represents 10% or more of the capital or of the voting rights or which makes it possible to exercise a significant influence over the management of that undertaking” (point 36 of Art. 4(1) of the CRR). This means that the notification requirement does not only apply to the direct acquirer but also to its shareholders and other entities that may indirectly acquire a significant influence on the credit institution. Further notification requirements apply to anyone intending to acquire a direct or indirect holding that reaches or exceeds 20%, 30% or 50% of the capital or voting rights in the credit institution.

There is no formal approval requirements under Section 2c of the KWG. However, the BaFin (or the ECB, in case of credit institutions directly supervised by the ECB) may prohibit the acquisition within a period of 60 day upon receipt of a complete notification of the intention to acquire a qualifying holding. This period may be extended to up to 90 days under certain circumstances. It should be noted that the period only starts running when the BaFin considers the notification to be complete. Therefore, the notification procedure often takes longer than 90 days, especially if BaFin has questions on the completeness of the corresponding notification filing.

If and once the BaFin resolves not to raise an objection against a notified acquisition, it usually informs the notifying party thereof.

The direct or indirect owner of a credit institution must be reliable, because the reasons for which BaFin (or the ECB, in case of credit institutions directly supervised by the ECB) may prohibit an intended acquisition of a qualifying holding in a credit institution include, inter alia, that the acquirer of (if the acquirer is a legal entity) its representatives are not reliable (point 1 of Section 2c(1b) of the KWG). A lack of reliability exists, inter alia, if the BaFin (or the ECB) reasonably believes that the financial resources used for financing the acquisition are derived from criminal activities. The same applies if money laundering or terrorist financing took place in connection with the acquisition (point 5 of Section 2c(1b) of the KWG).

In addition, BaFin (or the ECB) may prohibit the acquisition if the credit institution would become part of a holding structure that impairs compliance with regulatory requirements or imposes an impediment on BaFin’s (or the ECB’s) ability to effectively supervise the credit institution (point 2 of Section 2c(1b) of the KWG).

Furthermore, the acquisition of a qualifying holding can be prohibited if as a consequence of the acquisition, the credit institution would become part of a group of companies the parent of which is incorporated in a third country where it is not effectively supervised in its home member state (point 3 of Section 2c(1b) of the KWG).

Lack of financial resources of the acquirer to support the credit institution in case of a financial stress situation is a further reason for prohibiting the acquisition (point 6 of Section 2c(1b) of the KWG).

Subject to the restrictions set out in our response to question 20 above, there are no specific restrictions on foreign shareholdings in banks. However, is a bank, due to its specific business model, is considered as a provider of significant infrastructure, the acquisition of a shareholding is subject to clearance by the German Ministry of Economics and Climate Protection (Bundesministerium für Wirtschaft und Klimaschutz).

German banking regulation and EU banking regulation directly applicable in Germany include several special provisions that apply to domestic and/or globally systemically important banks.

Pursuant to Section 10f(2) of the KWG, BaFin and the Bundesbank determine, at least on a yearly basis, which entities incorporated in Germany qualify as globally important institutions (“G-SIIs“). The determination is made on the following factors:

1. size of the group;
2. interconnectedness of the group with the financial system;
3. substitutability of the services or of the financial infrastructure provided by the group;
4. complexity of the group; and
5. cross-border activity of the group, including cross border activity between Member States and between a Member State and a third country.

In addition, the BaFin and the Bundesbank determine, at least on a yearly basis, which entities incorporated in Germany qualify as “other systemically important institutions” (“O-SIIs“, Section 10g(2) of the KWG). This determination is made on the following factors:

1. size;
2. economic significance for the European Economic Area and Germany;
3. cross-border activities; and
4. interconnectedness with the financial system;

Thus, such “other systemically important institutions” may also include domestic systemically important banks.

In addition, BaFin may determine that entities other than G-SIIs and other systemically important institutions qualify as potentially systemically important institutions (Section 12 of the KWG).

There is not a separate special regime for G-SIIs, O-SIIs or potentially systemically important institutions. Rather, there is a multitude of provisions that contain stricter requirements for such entities, as compared to other credit institutions. This applies in particular with respect to capital requirements and resolution provisions.

The sanctions include criminal sanctions criminal courts, such as imprisonment or a monetary penalty or fine, administrative sanctions imposed by BaFin, the ECB and other supervisory authorities. In addition, if BaFin imposes an administrative sanction for certain offences, it publishes such sanctions, including the name of the credit institution.

Generally, the amounts of the fines which BaFin and the ECB may impose for administrative offences have increased during recent years. For certain offences, the maximum amount of the fine is the higher of EUR 15 Million and 15% of the total revenues of the relevant entity in the financial year preceding the offence.

The resolution regime for banks includes directly applicable European rules and domestic rules. Accordingly, European and German authorities are responsible for the application of the resolution regime.

European resolution regime

On the European level, Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund (the “SRM Regulation“) contains the legal framework for banking resolution. The European Single Resolution Board (“SRB“) is the competent authority for banking resolution. The SRB is in charge for resolution measures with respect to credit institutions that are directly supervised by the ECB, as well as certain cross-border banking groups (Art. 7(2) of the SRB Regulation). However, the SRB mainly acts through the national resolution authorities, which in Germany is the BaFin. This means that the SRB instructs the national resolution authorities to take actions related to banking resolution.

The resolution regime under the SRB Regulation includes, inter alia, the following measures

Resolution planning

Drawing up resolution plans in cooperation with the BaFin resolution authorities (Art. 8 of the SRB Regulation)

Assessing the resolvability of a credit institution (Art. 10 of the SRB Regulation), whereby an entity is deemed to be resolvable if it is feasible and credible for the SRB to either liquidate it under normal insolvency proceedings or to resolve it by applying to it resolution tools and exercising resolution powers while avoiding, to the maximum extent possible, any significant adverse consequences for financial systems, including circumstances of broader financial instability and with a view to ensuring the continuity of critical functions carried out by the entity (Art. 10(3) of the SRB Regulation). As a consequence of such assessment, the SRB may request a credit institution to remove impediments to the resolvability and, if necessary, instruct BaFin to take appropriate actions against the credit institution (Art. 10(10) and (11) of the SRB Regulation.

Determining the minimum requirement for own funds and eligible liabilities that are subject to write-down and conversion into equity (“bail-in“, Art. 12 to Art. 12k of the SRB Regulation).

Early intervention

The SRB may support the ECB (with respect to entities directly supervised by the ECB) and BaFin in taking early intervention measures.

Resolution

The SRB is in charge of determining whether the conditions for a resolution are met, i.e. that:

1. the entity is failing or is likely to fail,
2. there is no reasonable prospect that any alternative private sector measures or supervisory action (including early intervention measures or the write-down or conversion of relevant capital instruments and eligible liabilities) would prevent the failure of the entity within a reasonable timeframe, and
3. a resolution action is necessary in the public interest (Art. 18(1) of the SRM Regulation).

The SRB then instructs BaFin to implement the measures set out in the resolution scheme (Art. 18(9) of the SRB Regulation.

National resolution regime

For entities which do not fall into the direct competence of the SRB, BaFin is the primary resolution authority. However, even when BaFin is directly in charge of taking resolution actions, it closely cooperates with the SRB.

The resolution regime is mainly set out in the Restructuring and Resolution Act (Sanierungs- und Abwicklungsgesetz, “SAG“). The SAG provides for measures similar to those of the SRM-Regulation. Thus, BaFin is in charge of drawing-up resolutions plans (Section 40 of the SAG), determining eligible liability requirements (Section 49 of the SAG), assessing the resolvability (Section 57 of the SAG), determining whether the conditions for resolution are met (Section 62 of the SAG) and implementing the resolution scheme (Sections 69 et seqq. of the SAG), for example by transferring parts of the business to a bridge institution

In Germany, there are different deposit protection schemes for private banks, public saving banks and cooperative banks.

Private Banks

The statutory protection schemes for the private banks is the Entschädigungseinrichtung deutscher Banken GmbH (“EdB“). The EdB protects deposits in the amount of up to EUR 100,000 per customer (in some cases up to EUR 500,000).

In addition, the private banks maintain a voluntary deposit protection scheme called Deposit Protection Fund of German Banks (Einlagensicherungsfonds deutscher Banken) which protects deposits in an amount which depends on the relevant credit institution’s own capital. The Deposit Protection Fund currently provides protection up to a ceiling (and subject to higher ceilings for deposits that were already protected on 31 December 2022) of

1. 5 million euros for natural persons and foundations with legal capacity; and
2. 50 million euros for certain non—profit organizations

In any event, deposits are protected up to a maximum of 15% of the bank’s own funds within the meaning of Art. 72 of the CRR, with Tier 2 capital only being taken into account up to an amount of 25% of Tier 1 capital within the meaning of Art. 25 of the CRR.

These ceilings will be reduced in 2025 and 2030, resulting in a ceiling of

1. 1 million euros for natural persons and foundations with legal capacity irrespective of the term of the deposit and
2. 10 million for certain non—profit organizations

In any event, deposits shall be protected up to a maximum of 8.75% of own funds.

Cooperative banks

Cooperative banks maintain a statutory protection scheme called BVR Institutssicherung GmbH (“BVR-ISG“), which protects deposits in the amount of up to EUR 100,000 per customer (in some cases up to EUR 500,000). In addition, the BVR-ISG also provides protection of deposits by protecting member banks from becoming insolvent. To this extent, the BVR-ISG can take several actions, including, inter alia, providing capital to a member bank and taking restructuring actions.

Public saving banks

The group of public saving banks (Sparkassen-Finanzgruppe) maintains a statutory protection scheme called Sicherungssystem der Sparkassen-Finanzgruppe. This scheme that provides the statutory deposit protection in the amount of up to EUR 100,000 per customer (in some cases up to EUR 500,000) and, in addition, provides for a system of institutional protection with the aim of preventing member banks from becoming insolvent.

The bail-in tool exists under German and European banking resolution rules (please refer to our answers to questions 4).

Under the SRM Regulation, that applies to the resolution of banks directly supervised by the ECB and certain cross-border banking groups, the bail-in tool may be applied by the SRB under Art. 27 of the SRB Regulation. Generally, all liabilities are subject to bail in, except for those enumerated in Art. 27(3) of the SRM-Regulation. These include, inter alia, deposits covered by deposit protection, liabilities arising from covered bonds and liabilities arising by virtue of a fiduciary relationship.

Under German law, Section 91(1) of the SAG provides that all liabilities are subject to bail-in except for those enumerated in Section 91(2) of the SAG. This enumeration is similar to the enumeration in Art. 27(3) of the SRB-Regulation.

Under both, the SRM-Regulation and the SAG, the bail-in tool can be applied only if the general resolution conditions (Art. 18(1) of the SRM-Regulation and Section 62 of the SAG) are met. These conditions include, inter alia, that the relevant entity has failed or is likely to fail. Such failure may be caused by a liquidity crisis, in particular if the institution is likely to become insolvent as a consequence of such liquidity crisis. However, a mere breach of the LCR would not meet the resolution conditions.

The TLAC requirement applies only to G-SIIs. According to Art. 92a of the CRR, EU G-SIIs the must at all times satisfy the following requirements for own funds and eligible liabilities:

(a) a risk-based ratio of 18%, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total risk exposure amount calculated in accordance with Article 92(3) and (4) of the CRR;

(b) a non-risk-based ratio of 6,75%, representing the own funds and eligible liabilities of the institution expressed as a percentage of the total exposure measure referred to in Article 429(4) of the CRR.

In addition, institutions that are material subsidiaries of non-EU G-SIIs and that are not resolution entities must at all times satisfy requirements for own funds and eligible liabilities equal to 90% of the requirements for own funds and eligible liabilities laid down in Article 92a.

Recent trends include the integration of economic, social and governance (“ESG“) aspects into banking regulation, as well as a trend towards more proportionality of banking regulation.

The biggest threat is over-regulation that began in the aftermath of the financial crisis and has resulted in many rules that are not proportionate to the purpose of the relevant rule and which sometimes are also not entirely consistent as well as difficult to apply and comply with in practice, requiring constant interpretation to be operated in practice.