## _cr11273 ## Source details **Canonical URL:** [_cr11273](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf.json) --- ### Overview and institutional roles - Assessment focuses on Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) and Deutsche Bundesbank (Bundesbank). - Bundesministerium der Finanzen (BMF) retains responsibility for issuing regulations under the German Banking Act (Gesetz uber das Kreditwesen) (KWG) but has delegated rule-making powers to BaFin. - Individual banks’ external auditors and various banking associations share oversight responsibilities. ### General judgment on framework and context - Framework: Structurally sound; largely complies with the Basel Core Principles for Effective Banking Supervision (BCP). - Systemic importance: Germany has a large and complex banking system of domestic and international systemic importance. - IMF ranking: Germany is ranked No. 2 on IMF’s ranking of jurisdictions with systemically important financial sectors (IMF press release September 27, 2010). ### Progress since the 2003 FSAP and crisis-related reforms - Improvements implemented since 2003 and post-crisis include: - Increased emphasis on proactive supervision and more sophisticated identification of bank-specific and systemic risk factors. - Revisions to many regulations reflecting amendments to EU directives. - FMVAStärkG (August 2009) expanded early intervention powers; Restructuring Act (RStruktG) (December 16, 2010) amended Section 45 KWG to add restructuring/resolution tools. - Caveat: Several crisis-initiated improvements remain to be fully operationalized; many measures await legislative or EU/international agreement. ### Main areas for improvement (assessors’ determinations) - Major acquisition approvals - No statutory rule requiring prior BaFin approval before a German institution acquires a participating interest or establishes corporate ties with an entity not being a credit institution licensed in Germany; assessors recommend amending the KWG so acquisitions with material impact on risk profiles are subject to prior approval. - Use of intensified capital powers and stress testing - BaFin has made only limited use to date of formal powers to impose higher capital requirements commensurate with institutions’ risk profiles despite FMVAStärkG (August 2009). - Specific supervisory guidance for effective use of these powers has only very recently become available and has not been extensively tested. - Use of stress tests to closely scrutinize capital adequacy of individual institutions, taking into account forward-looking elements, needs further enhancement. - Risk management and supervisory inspection - Crisis experience exposed severe shortcomings in risk management at certain banks. - Authorities encouraged to deepen inspection work focusing on liquidity risk management, senior management risk oversight, stress testing capabilities, and IT infrastructure supporting risk management. - Supervisory data collection and international information sharing - Need for more timely and granular data series (for example, track liquidity in both euros and U.S. dollars). - Strengthen sharing of information with supervisory authorities in other countries—including those outside the EU. - Formalized supervisory “ladder” of remedial actions - Authorities should be ready to demand progressively stronger remedial action; a formalized ladder would promote consistency, resist special-interest pressure, and bolster public confidence. ### Assessment methodology and cooperation - Methodology: Core Principles (CP) Methodology published October 2006 by BCBS; ratings based on “essential” criteria. - Assessment was factual at mission completion (January 19–February 4, 2011); regulatory initiatives yet to be completed were noted. - The assessors had full cooperation from German authorities and received requested information. - Five rating categories used: compliant; largely compliant; materially noncompliant; noncompliant; nonapplicable. ### Institutional and supervisory structure, staffing, and resources - “Three Pillar” banking system: private banks, savings banks and Landesbanken, cooperative banks; relatively high public banking share. - Bundesbank: - Central bank; Executive Board comprises six members. - Employs some 10,000 people. - BaFin: - Established May 2002; employs around 1,900 staff in Bonn and Frankfurt am Main. - Managed by an Executive Board: President and four Chief Executive Directors. - Funded solely out of fees and contributions from supervised institutions. - Supervises approximately 2,000 banks, 710 financial service providers, approximately 620 insurance companies, and 28 pension funds and around 6,000 domestic investment funds and 73 asset management companies. - Staffing detail (banking supervision FTEs): - BA (Banking Supervision): 187 (1-05-02), 255 (31-12-04), 269 (31-12-06), 288 (31-12-08), 325 (31-12-10). - BaFin independence: - Design offers safeguards; President and Executive Directors appointed for life; BaFin not reliant on government funding. - Reporting obligations to BMF are burdensome; assessors recommend reassessing reporting requirements. - Legal protection for non–civil-servant BaFin staff is weaker; recommend clarifying protections. ### Legal framework and key regulations - KWG is fundamental law; reflects EU directives including CRD/Basel II. - Supplementary regulations include: - MaRisk (Mindestanforderungen an das Risikomanagement) under Section 25a KWG. - Solvabilitätsverordnung (SolvV) under Section 10 KWG. - Liquiditätsverordnung under Section 11(1) KWG. - FMVAStärkG (August 2009) and RStruktG (December 16, 2010) significantly enhanced BaFin’s early intervention and restructuring powers. ### Licensing, major acquisitions, and fit-and-proper - Licensing: - BaFin is licensing authority (Section 32 KWG); ongoing supervision follows grant. - Initial capital for deposit-taking institutions: at least EUR 5 million. - BaFin may limit licenses and impose initial higher capital requirements (practice: typical higher minimum of 12 percent during early years; assessors reference 12.5 percent in practice for some new institutions). - Transfer of significant ownership: - Qualified participating interest defined as at least 10 percent of capital or voting rights. - Acquirers must notify BaFin and Deutsche Bundesbank; BaFin has 60 working days (impeded to 80 or 90 in special cases) to assess and may prohibit acquisition under specified criteria. - Major acquisitions (CP5): assessed as materially non-compliant because KWG does not require prior approval for acquisitions of nonbanking entities that may materially affect an institution’s risk profile. ### Prudential regulation and capital adequacy (CP6) - Minimum overall capital ratio: 8 percent. - Eligible components defined in Section 10 KWG; CRD II transposition introduced framework for hybrid Tier 1 instruments and limits. - Historical weaknesses: - Prior to CRD II transposition, national provisions did not fully ensure emphasis on loss-absorbing Tier 1 characteristics; reliance on a “gentlemen’s agreement” expired in 2007. - BaFin historically had limited legal powers to impose higher capital requirements; FMVAStärkG (August 2009) expanded powers but limited use observed. - Supervisory powers and practice: - Section 7(1) SolvV: immediate notification required if institution falls below minimum capital requirements. - Section 45 and Section 46 KWG: BaFin may impose restrictions, orders to management, and, in severe cases, revoke license or order transfers under Section 48a KWG. - Assessors: limited historical use of these formal powers; assess BaFin’s capital adequacy regime as materially noncompliant due to weaknesses in operational application. - Recommendations: - Firmly embed use of BaFin’s new powers to impose higher capital charges in supervisory processes. - Enhance use of rigorous stress tests to scrutinize capital adequacy of individual institutions. - Closely monitor recapitalization efforts in anticipation of Basel III. ### Stress testing, ICAAP, and supervisory review (Pillar 2 / SREP) - MaRisk requires institutions to implement stress testing and ICAAP. - Bundesbank performs top-down stress tests; supervisors use results to challenge banks internally. - Assessors find stress testing needs stronger embedding in supervisory practice and call for more independent, forward-looking supervisory assessments of risk-bearing capacity. - At end-2010, BaFin and Bundesbank finalized an internal “range of practice paper for ICAAP” based on ICAAP assessments of 150 institutions. ### Risk management (MaRisk) and supervisory inspections - MaRisk (AT module and specialized parts) provides a holistic framework; applies proportionality by size/complexity. - Supervisory practice: - BaFin commissions special audits (well over 200 per year during 2007–10). - External auditors required to opine on adequacy of risk management in annual audits (PrüfbV). - Areas needing stronger supervisory focus: - liquidity risk management; - senior management risk oversight (including product approval); - stress testing capabilities (including reverse stress tests); - IT infrastructure and IT risk supervision. - Recommendations: - Increase scope and frequency of supervisory inspections in underexposed areas. - Beef up specialized IT inspection capacity and consider periodical reporting requirements for material operational risk incidents. ### Problem assets, provisioning, and accounting - External auditors must assess recoverability of loans and adequacy of provisions (Sections 23 and 26 PrüfbV). - No standardized statutory criteria for impaired asset classification; classification left to institutions’ discretion, which hampers cross-institution comparability. - Recommendations: - Develop specific minimum criteria as the basis for regulatory reporting while allowing stricter internal criteria. - Strengthen granularity of regulatory reporting (CP21). ### Large exposures, related parties, and decision-making - Large exposures: - Definition: exposures equal to or exceeding 10 percent of liable capital. - Individual limit: 25 percent of liable capital for banking book; reporting quarterly. - Assessors: framework compliant but retroactive approval exceptions undermine effectiveness; recommendation to review retroactive approval provisions. - Exposures to related parties: - Legal framework requires unanimous decision of senior managers and supervisory board; external auditors review. - Assessors: largely compliant but recommend restricting retroactive approvals and enhancing reporting frequency/aggregation to BaFin. ### Liquidity risk and foreign currency positions - Liquidity framework: MaRisk and LiqV provide requirements, including one-to-one relationship in the first maturity band. - Weaknesses: - Lack of routine surveillance mechanism for foreign currency liquidity and foreign currency stress testing. - Recommendations: - Enhance reporting requirements for foreign currency position risk and conduct separate stress testing for major currencies. - Increase supervisory inspections focused on liquidity management. ### Operational risk and IT risk - MaRisk addresses operational risk; business continuity and outsourcing requirements exist. - IT risk supervision underexposed in practice. - Recommendations: - Strengthen specialized IT inspection capacity and increase depth/frequency of targeted IT inspections. - Consider requirements for periodic reporting of material operational risk incidents to supervisors. ### Interest rate risk in the banking book - Supervisory stress test: +/- 200 bps sudden shift of the yield curve; reporting threshold: decline of economic value by more than 20 percent of own funds must be reported to BaFin and Bundesbank. - BaFin considering broader periodic reporting requirement for all institutions to assess sector-wide effects. ### Supervisory reporting, data granularity, and ad hoc crisis reporting - Standard reporting: weekly, monthly, quarterly, yearly returns; auditors’ reports; ad hoc reports for breaches (e.g., 10 percent large exposure). - Crisis-era additional reporting for systemically relevant institutions included: - detailed liquidity reports (liquidity positions twice a week for some institutions); - monthly reports on income, risk-weighted assets, own funds, solvency ratios; - monthly P&L from trading activities; - monthly capital and funding plan updates; - monthly updates on rating migration; quarterly MaRisk reports; structured products monthly. - Assessors: granularity sometimes insufficient; recommend replacing ad hoc streams with standardized comprehensive framework. Authorities were preparing major reporting reform expected to take effect during 2011. ### Accounting, disclosure, and external audit - Accounting frameworks: HGB and IFRS (for listed companies since 2005); PrüfbV sets auditor obligations. - BaFin has new power (end-December 2010) to demand change of the responsible auditor (not yet tested). - Concerns: divergent valuation practices and menu approach to valuation may hinder comparability across peers. - Recommendation: encourage further standardization of valuation practices. ### Corrective and remedial powers and the “ladder” of supervisory actions - BaFin’s remedial toolkit is comprehensive (Sections 45, 46, 46a, 36, 56 KWG) including restrictions on distributions, prohibitions on business, managerial removal, fines up to EUR 500,000, and resolution powers under RStruktG. - In practice BaFin often relies on informal pressure and moral suasion; assessors recommend a formalized ladder of actions to ensure timely, consistent, and sufficiently forceful interventions. ### Consolidated supervision and cross-border cooperation (CPs 24–25) - Consolidated supervision arrangements exist; BaFin and Bundesbank cooperate via MoU and guidelines. - Supervisory colleges established per CRD; as of the mission colleges established for 18 institutions and participation in 25 European colleges as host authority. - Cross-border cooperation is positive but requires further extension and deepening, including a formal framework for assessing non–EEA competent authorities’ regimes and possible powers to close foreign offices or impose conditions where host supervision is inadequate. ### AML/CFT (Principle 18) - 2009 FATF Mutual Evaluation found Germany’s AML/CFT framework was not fully in line with FATF recommendations at the time; authorities were addressing weaknesses. - BaFin’s enforcement track record prior to 2009 limited; assessors recommend reviewing enforcement strategy and capabilities to ensure violations are identified and sanctioned in a timely manner. - Legislative work underway (draft Act to Optimise the Prevention of Money Laundering) and enhancements in supervisory practice noted. ### Crisis response, public safety nets, and key crisis-related statistics - Crisis measures: - Gross amount made available to support financial sector exceeded 20 percent of GDP; less than half actually used. - Special Fund for Financial Market Stabilization (SoFFin) administered by FMSA; potential support capped at EUR 400 billion for guarantees and EUR 80 billion in capital support. - At peak outstanding guarantees reached EUR 174 billion; at mission time approximately EUR 110 billion had already been paid back. - Fiscal impact: - Debt-to-GDP ratio reached 80 percent in 2010 after including support to financial sector. ### Aggregate CP assessment counts and selected ratings - Aggregate counts: - Compliant: 18 - Largely compliant: 11 - Materially noncompliant: 2 - Noncompliant: 0 - Not applicable: 0 - Selected principle ratings and key issues: - CP1 Objectives/Independence: Compliant — recommend reducing reporting burden to BMF and improve legal protection for non–civil-servant staff. - CP5 Major Acquisitions: Materially non-compliant — lack of general prior approval for nonbank acquisitions. - CP6 Capital Adequacy: Materially noncompliant — operational use of expanded powers and stress testing needs enhancement. - CP7 Risk Management: Largely compliant — MaRisk provides sound foundation but supervisory practice needs strengthening in key areas. - CP14 Liquidity Risk: Largely compliant — enhance foreign currency reporting and supervisory testing. ### Recommended action plan — selected items by theme - Governance and independence - Reassess and potentially reduce BaFin’s reporting requirements to the BMF. - Amend legislation to strengthen protections for BaFin’s President and Executive Directors (prevent arbitrary transfers; require public disclosure of dismissal reasons). - Clarify legal protection for BaFin staff not designated as civil servants. - Major acquisitions and ownership changes - Amend the KWG to require prior approval for acquisitions likely to have material impact on an institution’s risk profile. - Capital adequacy and stress testing - Embed use of BaFin’s expanded powers to impose higher capital requirements in supervisory practice. - Enhance forward-looking, rigorous stress tests and integrate results into supervisory decisions. - Monitor and, if necessary, intervene on recapitalization efforts in preparation for Basel III. - Risk management and supervisory activity - Increase scope and frequency of on-site inspections focusing on liquidity, senior management oversight, stress testing, IT risk, and product approval processes. - Improve granularity and frequency of regulatory reporting via standardized framework. - Remedial actions and consistency - Develop and publish a formalized ladder of supervisory actions to ensure timely, proportionate, and consistent measures. - Cross-border cooperation - Extend and deepen cross-border cooperation; develop a formal framework for assessing non–EEA supervisory regimes; consider powers to close or condition foreign offices where supervision is inadequate. - AML/CFT - Review and strengthen BaFin’s enforcement strategy and capabilities to ensure timely identification and sanctioning of AML/CFT violations. *Source: _cr11273 - 2. Recommended Action Plan to Improve Effectiveness of Banking Supervision (PDF), https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf* ### 2. Recommended Action Plan to Improve Effectiveness of Banking Supervision .................33 ### 2. Recommended Action Plan to Improve Effectiveness of Banking Supervision .................33 ### Overview and institutional roles - The assessment focuses on the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht) (BaFin) and the Deutsche Bundesbank (Bundesbank). - The Federal Ministry of Finance (Bundesministerium der Finanzen) (BMF) retains responsibility for issuing regulations under the German Banking Act (Gesetz uber das Kreditwesen) (KWG) for questions of policy and politics, but has delegated rule-making powers to BaFin. - Individual banks’ external auditors have responsibilities for checking compliance with regulations. The various banking associations actively oversee their members. ### General judgment on framework and context - The German banking supervision framework is structurally sound, with a robust legislative and operational framework that largely complies with the Basel Core Principles for Effective Banking Supervision (BCP). - Germany has a large and complex banking system of domestic and international systemic importance. The assessment notes that, "Given that importance, and the impact that the financial crisis has had on the German banking sector, the standard to which the effectiveness of banking supervision in Germany is judged must be very exacting." - Germany is ranked No. 2 on IMF’s ranking of jurisdictions with systemically important financial sectors (IMF press release September 27, 2010. http://www.imf.org/external/np/sec/pr/2010/pr10357.htm). ### Progress since the 2003 FSAP and crisis-related reforms - The authorities implemented various improvements since the 2003 FSAP, acting on multiple recommendations and initiating improvements based on lessons from the global financial crisis. Notable developments include: - Increased emphasis on proactive supervision and more sophisticated identification of bank-specific and systemic risk factors. - Revisions to many regulations reflecting amendments to European Union (EU) directives. - However, further improvement is needed to fully operationalize crisis-initiated improvements; in many cases authorities have identified weaknesses and are in the process of addressing them, while other changes await legislative or EU/international agreement. ### Main areas for improvement (as determined by assessors) - BaFin lacks statutory rules requiring a German institution to obtain BaFin’s prior approval before acquiring a participating interest or establishing corporate ties with another entity not being a credit institution licensed in Germany. Although BaFin is notified in specific cases, supervisory authorities have no power to ex ante prohibit such acquisitions. Assessors deem a larger and more direct role for BaFin advisable. (Comparable comments were made in the 2003 FSAP.) - BaFin has made only limited use to date of its formal powers to impose higher capital requirements commensurate with individual institutions’ risk profiles. - BaFin’s legal powers were expanded and specified through the enactment of the Act for the Strengthening of the Financial Markets and Insurance Supervision (Gesetz sur Starkung der Finanzmarkt-und der Versicherungsaufsicht) (FMVAStärkG) in August 2009, but specific guidance for supervisors on effective use of the new powers has only very recently become available and has not yet been extensively tested in practice. - Use of stress tests to closely scrutinize capital adequacy of individual institutions, taking into account forward-looking elements, needs further enhancement. - Prior to the recent national transposition of the EU Capital Requirement Directive (CRD) II package, provisions defining components of capital did not fully ensure proper emphasis on the loss absorbing character of regulatory Tier 1 capital; German legislation lacked detailed provisions, including strict limits, for hybrid Tier 1 instruments. Vulnerability assessments and market analyses suggest some banks are still relatively weakly capitalized. - Strengthen banks’ risk management practices and day-to-day supervision thereof: - Crisis experience exposed severe shortcomings in banks’ risk management, including at certain German banks. Authorities are encouraged to deepen inspection work, focusing on liquidity risk management, senior management’s risk oversight, stress testing capabilities, and IT infrastructure supporting risk management. - Authorities should deepen analytical assessments of institutions’ risk bearing capacity and implement more rigorous and tailored stress tests to identify weaknesses and require strengthening of regulatory capital in both quantity and quality commensurate with risk profiles. - Improve timeliness and scope of supervisory data collection and international information sharing: - More timely information needs to be gathered; data series compiled should be reviewed to ensure relevant data are available. For example, supervisors should track liquidity in both euros and U.S. dollars. - Sharing information with supervisory authorities in other countries—including those outside the EU—could be further strengthened. - Establish a formalized supervisory “ladder” of remedial actions: - Authorities need to be ready to demand progressively stronger remedial action as an institution’s situation worsens. A more formalized ladder of actions—even if not solely quantitative—would help resist pressure from special interest groups, promote consistency across banks, and contribute to public confidence in authorities’ ability to preempt emerging strains. ### Background on prior assessment and changes since 2003 - The 2003 FSAP found supervision in Germany based on a well developed and comprehensive system; all but 2 criteria were assessed as “compliant” (16 criteria) or “largely compliant” (7 criteria); the 2 materially noncompliant criteria related to investment criteria and connected lending. The assessors recommended establishing criteria for pre-notification and post-event information for significant acquisitions and investments and implementing stronger rules on connected lending. - Significant changes since 2003 include: - Implementation of Basel II in the CRD and domestic legislation and publication of numerous international recommendations and guidelines. - Revision of the BCP and methodology in 2006. - Changes in the European regulatory landscape, including establishment of the Committee for European Banking Supervisors (CEBS) and, more recently, the European Systemic Risk Board. - The financial crisis spurred debate and actions to further strengthen financial regulation internationally and domestically. ### Assessment methodology and information sources - The Detailed Assessment of Observance Report was prepared as part of the FSAP Update mission to Germany (January 19–February 4, 2011). - The assessment team reviewed the legal framework, held extensive discussions with staff from BaFin, the Bundesbank and the BMF, as well as with the BdB, DSGV, BVR, and private sector participants. - The team examined current supervisory practice for on- and off-site supervision using the comprehensive self-assessment received in November 2010 as a starting point and reviewed anonymized supervisory materials provided during and after fieldwork. - Sources included: (i) the authorities’ self-assessment (November 2010); (ii) detailed interviews with BaFin and Bundesbank staff; (iii) laws, regulations, and documentation on the supervisory framework and financial sector structure and development; (iv) anonymized supervisory materials; (v) meetings with other authorities and independent bodies such as the BMF; and (vi) meetings with banking industry associations and individual institutions representing large private, public, and cooperative banks. *Source: _cr11273 - 2. Recommended Action Plan to Improve Effectiveness of Banking Supervision (PDF), https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf* ### 9. The assessors had the full cooperation from the German authorities and received ### _cr11273 - 9. The assessors had the full cooperation from the German authorities and received ### Assessment scope and methodology - The assessment was conducted in accordance with the Core Principles (CP) Methodology published in October 2006 by the Basel Committee on Banking Supervision (BCBS). - Compliance with both the “essential” and the “additional” criteria was assessed, but the ratings assigned were based on compliance with the “essential” criteria only. - The methodology requires that the assessment be based on: - (i) the legal and other documentary evidence; - (ii) the work of the supervisory authority; and - (iii) the implementation in the banking sector. - Full compliance requires all three prerequisites to be met. - The guidelines allow alternative means to fulfill compliance criteria if the overriding objectives of each CP are reached and may require more than minimum standards due to structural weaknesses. - The assessment is to be made on the factual situation at the date when the assessment is completed; where applicable, assessors noted regulatory initiatives yet to be completed or implemented. ### Cooperation and inputs - The assessors had the full cooperation from the German authorities and received all information necessary for the assessment. - The team thanks management and staff of various agencies and institutions for their openness and participation. - The authorities provided comments on a draft version of the assessment, which are reflected in the final assessment. ### Rating categories and interpretation - Five rating categories used: compliant; largely compliant; materially noncompliant; noncompliant; and nonapplicable. - Definitions: - Compliant: all essential criteria met without any significant deficiencies, including instances where the relevant CP has been achieved by other means. - Largely compliant: only minor shortcomings that do not raise serious concerns about achieving the CP objective and clear intent to achieve full compliance within a prescribed period. - Materially noncompliant: severe shortcomings despite formal rules and procedures; evidence that supervision has clearly not been effective; weak practical implementation; shortcomings sufficient to raise doubts about achieving compliance. - Noncompliant: not substantially implemented; several essential criteria not complied with; supervision manifestly ineffective. - Nonapplicable: reserved for criteria not relevant for the German situation (not used in this assessment). ### Comparability and judgment - Assessment of compliance with the BCPs requires judgments by the assessment team and is not an exact science. - Banking systems and domestic circumstances differ across countries; banking activities and best practices are rapidly evolving post-crisis. - By adhering to a common agreed methodology, the assessment provides an internationally consistent measure relative to the 2006 Revision of the BCPs. - Ratings assigned in this assessment are not necessarily directly comparable to those assigned under the pre-2006 BCP Methodology; the 2006 update raised the bar and lessons from the financial crisis may affect supervisory practice assessments. ### Institutional and macroprudential setting; market structure - Germany’s banking system is based on a “Three Pillar” system: private banks, savings banks and the associated Landesbanken, and cooperative banks, with a relatively high portion of public banking. - The banking sector accounts for the majority of total financial sector assets and is the backbone to German industry, which is more reliant on bank financing than in many other advanced economies. - Household credit is low compared to many other industrialized countries. - Private commercial banks hold less than 30 percent of system-wide assets and are relatively concentrated in the two largest, internationally active banks. - Cooperative and savings banks are domestically oriented; major banks have large exposures abroad via branches and subsidiaries, cross-border lending, and market operations. - Some German insurance and reinsurance companies are among the largest in the world. Securities markets are active and assets under management are large. ### Main supervisory authorities and arrangements - Main supervisory responsibilities are split between the Bundesbank (member of the European System of Central Banks (ESCB)) and BaFin. - Bundesbank: - Central bank of the Federal Republic of Germany. - Executive Board currently comprises six members, half nominated by the Federal Government and half by the Bundesrat, appointed by the President of the Federal Republic. - Employs some 10,000 people. - BaFin: - Established in May 2002, bringing together supervision of banks and financial services providers, insurance undertakings, and securities trading. - Employs around 1,900 staff in Bonn and Frankfurt am Main. - Managed by an Executive Board consisting of a President and four Chief Executive Directors. - Funded solely out of fees and contributions from supervised institutions and independent of the Federal budget. - Supervises approximately 2,000 banks, 710 financial service providers, approximately 620 insurance companies, and 28 pension funds as well as around 6,000 domestic investment funds and 73 asset management companies. - Cooperation between the Bundesbank and BaFin is formalized through a memorandum of understanding (MOU) and an accompanying Supervision Guideline: - Off-site analysis of banking business documents is done by the Bundesbank, which notifies BaFin of results. - Audits at supervised institutions are typically carried out by the Bundesbank, potentially with BaFin participation. ### Recent developments and crisis response - Germany was hit by financial crisis shocks beginning July 2007 from the subprime mortgage markets. - August 2007: two smaller banks required rescue at significant cost to the German taxpayer. - Early October 2008 (post-Lehman Brothers): liquidity rollover requirements at another institution posed a threat to financial stability. - Major private banks suffered market losses, difficult access to financing, and deteriorating loan quality as the recession deepened. - The crisis revealed serious and systemic risks across the Landesbanken sector; structural reform of the Landesbanken sector remains outstanding. - Authorities prevented widespread financial stress, provided stimulus, and overhauled the financial stability framework. - Support measures included guarantees, recapitalization, and asset purchases; the gross amount made available exceeded 20 percent of GDP, with less than half actually used. - Much support was channeled through the Special Fund for Financial Market Stabilization (Sonderfonds Finanzmarkt-stabilisierung) (SoFFin), administered by the Agency for the Stabilization of the Financial Markets (Bundesanstalt für Finanzmarktstabilisierung) (FMSA). - Total volume of potential support was capped at EUR 400 billion for guarantees and EUR 80 billion in capital support. - At its peak, outstanding guarantees reached EUR 174 billion; at the time of the mission, approximately EUR 110 billion had already been paid back. - The debt-to-GDP ratio reached 80 percent in 2010 after including support to the financial sector. - By the time of the mission, the health of the financial sector had stabilized via strong policy support; initial exceptional measures were followed by a more comprehensive approach. - Financial stresses abated, but pockets of vulnerability remain and restructuring of weaker institutions is yet to be completed. ### Preconditions for effective banking supervision - Sound and sustainable macroeconomic policies: - Monetary policy is conducted within the ESCB framework. - Budgetary policy is conducted within a fiscal framework based on predefined rules and within the requirements of the European Stability Pact. - Well-developed public infrastructure: - German legal framework for the banking sector is comprehensive and regularly updated. - German regulations on banking supervision provide a framework of minimum standards determined by Basel II (as implemented in Europe through the CRD). - The KWG has been regularly updated since its original adoption in 1961. - Auditing and accounting: - Auditing and accounting rules applicable to financial institutions generally comply with international standards. - The Accounting Standards Committee of Germany (Deutsche Rechnungslegungs Standards Committee) was appointed as private standard setter for financial reporting within the meaning of the German Commercial Code (Handelsgesetzbuch) (HGB). - The German Accounting Standards Board (Deutsche Standardisierungsrat) is the independent standardization body established by the Accounting Standards Committee of Germany. - German listed companies apply IFRS as required since 2005. - Audit profession oversight: - The German Public Auditors’ Act (Wirtschaftsprüferordnung) introduced disciplinary oversight investigations conducted randomly and without indication of misconduct, and mandatory rotation from audit engagements within a maximum period of seven years from appointment. - Legal and judicial framework: - Judicial system, including bankruptcy and enforcement of property rights, is well-developed. - Payment and settlement systems: - Oversight of payment systems is assigned to the Bundesbank. - TARGET 2 (RTGS of the ESCB) is fast and secure. - Bundesbank processes nonurgent domestic and cross-border euro payments through the SEPA system. - On July 17, 2008, the Bundesbank was instructed by the ECB Governing Council to develop TARGET2-Securities (T2S) with Banque de France, Banca d‘Italia and the Banco de España; T2S is expected to go live in September 2014 and will be run on the Single Shared Platform (SSP) used by TARGET2. ### Effective market discipline and disclosure - German legislative framework contains safeguards for disclosure and transparency; BaFin maintains fair and transparent market conditions as part of securities market supervision. - The Securities Trading Act (Wertpapierhandelsgesetz) (WpHG) requires listed companies to publish without delay new facts that could influence the price of a financial instrument and affect the issuer directly. - Reliability of financial disclosures is safeguarded through auditing and accounting rules. - Corporate governance: - Company law is governed by the German HGB and other laws. - The German Corporate Governance Code (Regierungskommission Deutschen Corporate Governance Kodex), adopted in February 2002, sets detailed corporate governance recommendations under a “comply or explain” regime; applies to listed companies and influences practice elsewhere. - Enforcement of financial reporting: - Two-stage enforcement: FREP (Financial Reporting Enforcement Panel, Deutsche Prüfstelle für Rechnungslegung) examines reporting of companies listed in the regulated market since July 2005; BaFin performs the second stage with sovereign authority. ### Public safety nets and deposit protection - Three Pillar system yields a complex structure of deposit insurance schemes with three categories: - Two Statutory Deposit Guarantee Schemes (one for private banks operated by the BdB; one for public banks operated by the VÖB). - These Statutory Schemes adhere to the current European Directive on minimum requirements for deposit insurance and cover (as per the end of December 2010) up to EUR 100.000 per customer per bank. - Functions and powers are assigned by law to a private-law entity fulfilling public-law functions as an “entrusted compensation scheme.” - Membership is mandatory for all deposit taking credit institutions with their registered office in Germany. - The Scheme is funded ex ante, although the Deposit Guarantee and Investor Compensation Act (Einlagensicherungs- und Anlegerentschadigungsgesetz) (EAEG) allows for additional/extraordinary contributions. - Two voluntary private-law schemes offering institutional protection for members associated with the BVR and the DSGV (associations for German cooperative banks and German savings banks, respectively). - Member institutions of these schemes are not assigned to the Statutory Deposit Guarantee Schemes and protect member credit institutions by safeguarding viability through arrangements and guarantees. - Contribution payments for these Schemes are paid ex ante. - Two voluntary Deposit Guarantee Schemes (one for private deposit taking credit institutions operated by the BdB and one for public deposit taking institutions operated by the VÖB). - These voluntary schemes supplement the legal compensation from the Statutory Schemes. *Source: IMF assessment chapter content provided in the supplied PDF excerpt.* ### 31. The German legal framework for banking supervision comprises legislation and ### The German legal framework for banking supervision comprises legislation and regulation at various levels ### Legal framework and key regulations - The most fundamental law is the KWG, which reflects relevant EU directives, including the CRD19 (and thus the Basel II framework). - The KWG consists of seven parts, dealing with, inter alia, the organization and modus operandi of BaFin, requirements applicable to supervised institutions (e.g., solvency, liquidity, large exposures, and reporting requirements) and provisions on supervision (e.g., licensing, information and audit rights, and formal measures). - Supplementary regulations and circulars issued on the basis of the KWG include: - Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement) (MaRisk), issued on the basis of Section 25a of the KWG, providing a holistic framework for management of all material risks. - Solvency Regulation (Solvabilitätsverordnung) (SolvV), issued on the basis of Section 10 of the KWG, containing detailed provisions on capital requirements for credit, market, and operational risks. - Liquidity Regulation (Liquiditätsverordnung), issued on the basis of Section 11(1) of the KWG, providing provisions on the liquidity of credit institutions. - August 2009: FMVAStärkG enacted, greatly enhancing the early intervention powers of BaFin. - Other major legislative developments: - Establishment of the German Federal Agency for Financial Market Stabilization and the Financial Market Stabilization Fund to support financially distressed institutions. - Restructuring Act (Restrukturierungsgesetz) (RStruktG) introduced mechanisms for orderly restructuring or resolution of troubled institutions; amendments to the KWG allow BaFin—under certain circumstances—to order an institution to sell all assets or systemically critical business segments to another institution or a government owned bridge bank and to temporarily order the transfer of assets. ### Supervisory approach and operational procedures - Day-to-day supervision relies on a system of on- and off-site supervision, founded on: - analysis of the auditor’s reports, - scrutiny of institutions' regular returns, - information acquired via ad hoc meetings and inspections. - Annual supervision scheduling: - Bundesbank proposes by October 31 each year the supervision schedule for the following year, based on (i) the individual risk profile; (b) the importance of the institution for the stability of the financial markets; and (c) the anticipated urgency of the need for individual cases to be dealt with. - The schedule is submitted to BaFin for review and jointly finalized by December 15 each year, with deviations possible by agreement between BaFin and the Bundesbank. ### Risk profiling and monitoring - BaFin and Bundesbank have established a preventive, risk-oriented supervisory process that creates “risk profiles” (updated at least once a year) for each institution: - Risks are mapped across four risk categories and three systemic stability (significance) categories. - Risk profiles are prepared by the Bundesbank and forwarded to BaFin for final decision making. - Two decisive features: - Helps supervisors deploy resources efficiently and identify institutions that represent a heightened risk to financial stability. - Reveals areas where weaknesses have come to light or cannot be judged due to lack of information. - For smaller institutions (e.g., cooperatives and savings banks): - Risk profile compiled based on statistical analysis using BAKIS (Bankaufsichtliches Informationssystem), recording ratios relating to market and credit risks, liquidity, earnings and asset and liability situation, compared with peer groups. - Institutions are assigned to one of five categories (A-E); category membership indicates the risk of certain pre-defined “critical event” such as loss of a large share of liable capital. - Statistically based process provides highly accurate forecasts for relatively homogeneous cooperatives and savings bank sectors. - For commercial banks (regional banks and branches of foreign banks): - Statistically based procedures useful but heterogeneity requires additional expert opinions. - For big banks: - Differences between institutions and small data pool preclude statistically valid procedures. ### Supervisory Review Process (SRP) and risk-bearing capacity - Under Basel II pillar 2 (SRP), supervisors assess quality of banks’ internal governance, risk management, and internal control processes, taking institutions’ specific circumstances into account. - German framework obliges licensed institutions to establish an internal process to identify all material risks and ensure they are sufficiently covered by “risk-bearing capacity” (capacity to identify, assess, mitigate, monitor, and communicate these risks). - SRP forms part of the risk profile prepared at least annually by the Bundesbank and provided to BaFin. - Institutions must consider all relevant risks and any risk concentration when determining risk-bearing capacity. - Institutions select methods and procedures to determine risk-bearing capacity, but these must reflect size of institution and the nature, scale, complexity and risk content of activities. ### Main findings — Objectives, independence, powers, transparency, and cooperation (CP 1) - Structural observation: - A relatively large proportion of German banks are (partly) owned by public bodies (regional government, municipalities), encompassing risk of explicit or implicit interference in supervisory authorities’ day-to-day activities, potentially leading to regulatory forbearance. - Constitutional oversight: - BaFin exercises public duties and is subject to oversight by the BMF as per the German Constitution; oversight focuses on legality and fitness for purpose of BaFin’s administrative actions ex post and does not provide for ex ante involvement in supervisory decisions or ex post powers to rescind BaFin decisions. - BMF relies on public-domain information and reports from BaFin on “internal organizational matters, significant events occurring in the exercise of financial services supervision and important topics in connection with activities at an international level.” - Assessors’ view on safeguards: - Design of German supervisory framework offers sufficient safeguards against government and/or political interference in day-to-day practices. - Noted elements: (i) independent character of BaFin is clearly anchored in legislative framework; (ii) BaFin is mandated to decide on individual cases without having to consult the BMF20 or other government bodies; and (111) BaFin is not reliant on government funding. - In practice, assessors found no indications of interference in supervisory processes or decision making; BaFin defers to the BMF on what is deemed to be “political.” - Assessors determined that BaFin has considerable de jure and de facto independence. - Reporting burden: - Reporting requirements from BaFin to the MBF currently laid down in the guidelines for control of BaFin by the BMF place a large burden on both authorities. - Recommendation: German authorities may wish to re-assess whether reporting requirements can be reduced without hampering BMF oversight of legality and fitness for purpose of BaFin’s administrative actions. - Protection of senior BaFin officials: - Room for improvement regarding protection of the position of the President and Executive Directors of BaFin. - No provisions in German legislation offering protection against arbitrary and/or obligatory transfers of BaFin’s President and Executive Directors (civil servants) to other functions within the Federal Public Service, nor provisions requiring public disclosure of reasons for dismissal of the President and/or Executive Directors. - Counterbalancing factors: civil servant status of most BaFin and Bundesbank staff reduces scope for regulatory capture; President and Executive Directors appointed for life. - Public ownership of a sizable part of banking sector may increase risk of political interference but provides insulation against capture by commercial interests. - Enforcement instruments: - KWG allows BaFin to employ a broad range of instruments to ensure compliance. - BaFin’s remedial and corrective powers are comprehensive but seem to rely largely on moral suasion and informal (albeit, if necessary, strong) pressure rather than formal regulatory interventions. - Assessors recognize potential effectiveness of moral suasion but note inherent limitations. - Legal protection for supervisory staff: - Supervisory staff designated as civil servants have sufficient legal safeguards, but improvements are necessary to ensure full legal protection. - Legal uncertainty exists for BaFin staff not classified as civil servants; their protection stems from the Collective Agreement for the Public Service rather than formal legislation. - Recommendation: review legal position of supervisory authorities and provide explicit protection for their official actions as an institution, except in cases of gross negligence or willful misconduct. ### Licensing and structure (CPs 2-5) - KWG clearly defines permissible activities of credit institutions, opting for a definition going beyond CRD definition. - KWG contains detailed provisions on granting banking licenses broadly compliant with the relevant CP. - Criteria considered include qualifications and trustworthiness of senior managers and supervisory board members. - Authority to assess qualifications and trustworthiness of supervisory board members was granted to BaFin in August 2009 through FMVAStärkG; BaFin issued a guidance note in February 2010 elaborating on these requirements. - No requirement in German legislation for a German institution to obtain BaFin’s prior approval before acquiring a participating interest or establishing corporate ties with another entity not being a credit institution licensed in Germany21. - Although in specific cases acquisitions are notified to BaFin, supervisory authorities have no power to ex ante prohibit such acquisitions. - Assessors recommend amending the KWG so that acquisitions that may have a material impact on an institution’s risk profile are subject to prior approval. - Note: comparable comments were made in the 2003 FSAP and accompanying CP assessment. ### Prudential regulation and requirements (CPs 6-18) - KWG and SolvV require all institutions to calculate and consistently maintain a minimum capital adequacy ratio. - Relevant provisions define components of capital in line with CRD requirements; German institutions are required to hold at least an overall capital ratio of 8 percent, but capital buffers typically exceed this regulatory minimum. - Prior to transposition of the CRD II package (completed as of December 31, 2010), German framework did not fully ensure proper emphasis on loss absorbing character of regulatory Tier 1 capital; neither KWG nor SolvV contained detailed provisions, including strict limits, for hybrid Tier 1 instruments. - Before transposition, Basel standards on such instruments were only reflected via a gentlemen’s agreement with internationally active credit institutions; this agreement expired in 2007 with transposition of Basel II in the SolvV. - Historically, BaFin lacked strong legal powers to impose higher capital requirements: - Section 10b of the KWG allowed higher capital requirements only for “institutions which, by the virtue of their asset or business profile, have a risk structure which compares unfavorably with that of most other institutions engaged in similar business.” - Section 45b allowed higher requirements if an institution did not have a proper business organization within the meaning of the KWG and failed to remedy deficiencies after a formal order within an appropriate period. - FMVAStärkG (August 2009) expanded and specified authorization to impose higher capital requirements. - Use of expanded powers and guidance: - Assessors strongly support the legal amendment but note BaFin has made limited use to date of powers to impose higher capital requirements commensurate with individual institutions’ risk profiles. - Specific guidance for supervisors on effective use of new powers has only very recently become available and has not yet been extensively tested in practice22. - Assessors note recent finalization of supervisory guidance on sound and consistent application of new powers and recent interventions vis-à-vis individual institutions23. - Recommendation: BaFin should continue developing guidance on relevant KWG provisions to avoid forbearance and ensure consistent application across institutions. - Stress testing: - Authorities are using stress tests to detect vulnerabilities of institutions and the financial system, but assessors view that use of stress tests to closely scrutinize capital adequacy of individual institutions, with forward-looking elements, needs enhancement. - MaRisk’s stringent stress testing requirements cannot fully replace comprehensive, consistent and independent assessments by authorities aimed at identifying vulnerabilities in capital positions of individual institutions. - Enhanced authority assessments would better incorporate potential materially adverse changes or developments affecting German institutions. - Importance of capitalization: - Ensuring a high level and quality of capitalization is central to prudential supervision. - Need for improvements underscored by: (i) events during the global crisis revealing some banks to be severely undercapitalized; (ii) vulnerability assessment undertaken as part of this FSAP; and (iii) analyses from market participants suggesting some banks are still relatively [text ends]. *Source: IMF Financial Sector Assessment Program — excerpt on German banking supervisory framework* ### Section 45 KWG as amended by the Restrukturierungsgesetz (RStruktG) of December 16, 2010. ### Section 45 KWG as amended by the Restrukturierungsgesetz (RStruktG) of December 16, 2010 ### Capital adequacy and Basel III - Findings: - The considerably stricter rules on capital adequacy to be imposed under Basel III may have a big impact on the capitalization of German banks for the following reasons: - (i) their profitability remains relatively weak; - (ii) leverage remains relatively high in comparison to international peers; - (iii) some banks rely relatively heavily on hybrid capital; and - (iv) sizeable capital support has to be phased out. - Recommendation: - Continued close monitoring of recapitalization efforts in anticipation of the new Basel III requirements remains imperative. ### Risk management framework (MaRisk) and supervisory practice - Findings: - The MaRisk provide a sound foundation for supervision of risk management practices, but the financial crisis revealed severe shortcomings in banks’ risk management globally. - The German supervisory approach has not always been successful in proactively identifying and remediating these issues in a timely manner. - Supervisory initiatives exist, but more work is needed to strengthen institutions’ risk management practices and day-to-day supervision. - Areas needing increased supervisory focus: - liquidity risk management; - senior management’s risk oversight; - stress testing capabilities; - IT infrastructure supporting the risk management process. - Recommendation: - German supervisory authorities are encouraged to proactively increase the scope and frequency of their own inspection work, focusing on the areas above. ### Stress testing and analytical assessments of risk-bearing capacity - Findings: - Analytical assessments regarding institutions’ risk-bearing capacity need enhancement by more firmly embedding stress testing in supervisory practices. - Stringent stress testing requirements on institutions via MaRisk cannot replace comprehensive, consistent and independent supervisory assessments. - Assessment: - The supervisory authorities demonstrate ability and willingness to seek improvements, but at the time of the mission the process was ongoing and sustainable effectiveness could not yet be determined. ### Credit risk supervision and reliance on external auditors - Findings: - Credit risks are adequately supervised through a combination of reliance on comprehensive annual activities by external auditors and inspections by supervisory authorities. - Inherent vulnerabilities of strong reliance on external auditors include: - (i) the time lag between the end of the accounting year and the delivery; - (ii) review of the audit reports; and - (iii) the need to rely more on interpretations of third parties than on own observations. - Diverging practices of audit firms on review of asset classifications and provisioning may hamper consistent comparisons across institutions. - The relatively swift recovery of the German economy has contributed to a relative decrease of the overall credit risk profile of German banks. ### Problem assets, provisions, and regulatory reporting - Findings: - The supervisory framework regarding problem assets, provisions and reserves is comprehensive. - The German supervisory authorities have not issued standardized criteria for classifying assets; classification is left to institutions’ discretion. - Lack of standardized classification hinders sensible comparisons across institutions. - Recommendations: - Develop specific minimum criteria as the basis for regulatory reporting, while allowing institutions to employ stricter internal criteria. - Strengthen the granularity of the regulatory reporting framework (also see CP 21). ### Large exposures - Findings: - The framework with regard to large exposure is deemed compliant with the relevant CP. - Recommendation: - Review current provisions on decision-making with regard to large exposures because the possibility of retroactive approval undermines effectiveness by restricting opportunities to refuse or restrict loans. ### Exposures to related parties - Findings: - A “materially non compliant” deficiency identified in the 2003 FSAP related to exposures to related parties. - Progress has been made since 2003, but the supervisory framework does not yet fully comply with the relevant CP. - Remaining weaknesses: - (i) possibility of retroactive approval undermines effectiveness of decision-making provisions; and - (ii) lack of frequent regulatory reporting requirements, limiting BaFin’s ability to target inspections of lending practices for related parties. - Recommendation: - Take further measures to correct remaining weaknesses, including enhancing reporting frequency. ### Country and transfer risks - Findings: - Institutions are required to incorporate country and transfer risks in their risk management framework. - Provisioning against country and transfer risks is left to institutions’ discretion, subject to external auditors’ oversight. - Current reporting requirements in the German Country Risk Exposure Regulation (Landerrisikoverordnung) (LrV) exist. - Recommendation: - Strengthen granularity of regulatory reporting of country and transfer risks (also see CP 21). ### Liquidity risk and foreign currency position risk - Findings: - BaFin should enhance reporting requirements to supervisory authorities regarding foreign currency position risk, including results of separate stress testing for major currencies. - Recent events show that liquidity available in one market is not guaranteed in other markets; Germany’s export orientation makes this particularly relevant. - Recommendation: - BaFin should review procedures and make appropriate changes; supervisors should proactively increase inspection work on liquidity management. ### Operational risk and IT risk supervision - Findings: - IT risks remain underexposed in supervisory practice despite their significance. - Recommendations: - Beef up specialized IT inspection capacity. - Increase depth and frequency of targeted IT inspections. - Consider requirements for periodical reporting of material operational risk incidents to supervisory authorities. ### Interest rate risk in the banking book - Findings: - The German supervisory framework with regard to interest rate risk in the banking book complies with the relevant CP. - Recommendation / Enhancement: - Support envisaged change to require all institutions (instead of only the ‘outliers’) to periodically report to BaFin on the impact of a pre-defined (potential) parallel interest rate shift to better assess sector-wide effects. ### Anti-money laundering / Combatting the financing of terrorism (AML/CFT) - Findings: - The 2009 FATF Mutual Evaluation concluded that Germany’s AML/CFT framework was not fully in line with FATF recommendations at the time. - German authorities are in the process of addressing identified weaknesses. - Recommendation: - Review AML/CFT enforcement strategy and capabilities to ensure AML/CFT violations are identified and sanctioned in a timely manner given high misuse risk of Germany’s financial markets. ### Methods of ongoing banking supervision (CPs 19-21) and supervisory actions - Findings: - Supervisory approach provides a sound foundation for identifying and dealing with system-wide and individual problems. - Supervisory staff are reasonably experienced and make balanced judgments regarding remedial actions. - Balance and proportionality of supervisory actions are often reconciled informally at senior management level. - Recommendations: - Consider development of a formalized “ladder” of actions to ensure timely and appropriate supervisory actions commensurate with seriousness of issues (also see CP 23). - More strongly embed rigorous stress tests as forward-looking tools in supervisory practice. ### Regulatory reporting granularity and frequency - Findings: - Multiple instances identified where granularity of information obtained via formal regulatory reporting was insufficient. - BaFin has requested systemically relevant institutions to report more detailed information more frequently on the basis of Section 44 KWG. - Recommendation: - Replace ad hoc reporting streams with a standardized, comprehensive framework ensuring timely reporting of all material risks on a sufficiently granular basis. - Authorities were working on substantial amendments to the regulatory reporting framework, with parts expected to become effective during the course of 2011. ### Accounting and disclosure (CP22) - Findings: - Accounting and disclosure practices largely comply with the relevant CP. - Diverging valuation practices risk inhibiting consistency and distorting comparisons among peer groups. - New regulatory power granted to BaFin at the end of December 2010 to demand a change of the responsible auditor had not yet been tested in practice. - Recommendation: - Supervisory authorities may encourage further standardization of valuation practices. ### Corrective and remedial powers of supervisors (CP23) - Findings: - BaFin’s suite of remedial and corrective powers is comprehensive. - BaFin relies to a large extent on informal pressure and moral suasion through ongoing contacts with supervised institutions. - Informal instruments are effective but have inherent limitations. - Recommendation: - Authorities need to be ready to demand progressively stronger remedial action as an institution’s situation worsens. - A formalized “ladder” of actions would help resist special-interest pressure, promote consistent treatment, and contribute to public confidence. ### Consolidated supervision and cross-border cooperation (CPs 24-25) - Findings: - Arrangements are in place for effective consolidated supervision of conglomerates. - Authorities should remain vigilant to cross-institutional spill-overs and legal forms that hinder supervision and resolution. - Multiple supervisory colleges have been established per CRD requirements; supervisory relationships with EEA and non–EEA competent authorities are being strengthened. - Appropriate MoUs and written agreements reflecting EBA and BCBS guidance have been agreed with a significant number of authorities. - Recommendations: - Extend and deepen cross-border cooperation to prevent supervisory overlap and ensure effective, swift information sharing. - BaFin should develop and implement a formalized, detailed framework for assessing supervision regimes of non–EEA competent authorities to determine reliance levels. ### Summary tables referenced - The assessment includes: - Table 1: principle-by-principle summary of assessment results. - Table 2: summary of recommendations, some going beyond minimum standards. *Source: Section 45 KWG as amended by the Restrukturierungsgesetz (RStruktG) of December 16, 2010.* ### 2. Permissible Activities Compliant ### 2. Permissible Activities Compliant ### Core principle assessments and key findings - The definition for credit institutions used in German legislation goes above and beyond the definition used in the CRD, facilitating banking supervision. - 3. Licensing Criteria — Compliant: Appropriate provisions for the licensing of banks are in place. - 4. Transfer of Significant Ownership — Compliant: BaFin has the power to review and reject any proposals to transfer significant ownership or controlling interests directly or indirectly held in existing banks to other parties. - 5. Major Acquisitions — Materially non-compliant: German legislation does not provide for the authority to ex ante review and (dis)approve such participations. - 6. Capital Adequacy — Materially noncompliant: - BaFin’s legal powers to impose higher capital requirements on individual banks that are commensurate with their specific risk profiles of individual institutions have been expanded and specified in August 2009. - Operational guidelines for effective use of these new powers have only recently become available and have not yet been extensively tested in practice. - The use of stress tests as instruments to closely scrutinize the capital adequacy of individual institutions needs to be enhanced. - Prior to the (very recent) national transposition of the CRD II package, relevant provisions defining the components of capital did not fully ensure that proper emphasis was given to the loss absorbing character of regulatory Tier 1 capital, as German legislation lacked detailed provisions, including strict limits, for hybrid Tier 1 instruments. - The importance of strong supervision is underscored by the relatively weak capital position of a number of institutions and the prospective challenge of meeting Basel III standards. - 7. Risk Management Process — Largely compliant: - The MaRisk provide the German supervisory authorities with a sound foundation for the supervision of risk management practices. - More work remains to strengthen German institutions’ risk management practices and the day-to-day supervision of such practices, incorporating lessons drawn from the financial crisis. - Supervisory authorities are encouraged to proactively increase the scope and frequency of their own inspection work, focusing on areas underexposed in the past and/or where the financial crisis revealed significant shortcomings, inter alia liquidity risk management, senior management’s risk oversight, stress testing capabilities and the IT infrastructure supporting the risk management process. - Analytical assessments of institutions’ risk-bearing capacity need to be enhanced, particularly by more firmly embedding stress testing in supervisory practices. - 8. Credit Risk — Compliant: - Extensive work by institutions’ external auditors on assessing credit risks and credit risk management capabilities, together with inspections commissioned by BaFin and typically performed by the Bundesbank, offers a sound basis for supervision, though reliance on external auditors brings inherent vulnerabilities. - Diverging practices on the review of asset classifications and provisioning may hamper consistent comparisons across German institutions. - The relatively swift recovery of the German economy has contributed to a relative decrease of the overall credit risk profile of German banks. - 9. Problem Assets, Provisions and Reserves — Largely compliant: - Lack of standardized criteria for classifying assets as impaired hampers sensible comparisons across institutions. - No comprehensive framework ensures timely and comprehensive reporting of problem assets, provisions, and reserves on a frequent basis. - 10. Large Exposure Limits — Compliant: - The possibility to retroactively approve large exposures undermines the effectiveness of the supervisory framework, as it restricts possibilities to reject the relevant loan, or to attach conditions to it. - 11. Exposures to Related Parties — Largely compliant: - The framework lacks requirements on the aggregate reporting of loans to related parties. - Possibility to retroactively approve such loans undermines supervisory effectiveness, as it restricts possibilities to reject the relevant loan, or to attach conditions to it. - 12. Country and Transfer Risks — Compliant: Framework complies with this CP, though it relies heavily on general obligations placed on supervised institutions to establish appropriate processes for risk identification, assessment, treatment, monitoring, and communication. - 13. Market Risks — Compliant: Legislative framework lacks a specific requirement for exercisable contingency plans for market risk, but main elements are addressed through MaRisk requirements. - 14. Liquidity Risk — Largely compliant: - Framework should be improved by incorporating reporting requirements for currencies other than euros. - Supervisory inspections of liquidity risk management should be increased, using recent MaRisk enhancements as catalyst. - 15. Operational Risk — Largely compliant: - Framework largely meets requirements, but IT risk has remained underexposed in supervisory practice. - 16. Interest Rate Risk in the Banking Book — Compliant: - Current approach complies with the CP. - Envisaged change requiring all institutions (instead of only the ‘outliers’) to periodically report on the impact of a pre-defined parallel interest rate shift is a welcome enhancement. - 17. Internal Control and Audit — Compliant: Framework meets CP requirements. - 18. Abuse of Financial Services — Largely compliant: - Germany was in the process of implementing enhancements to the AML/CFT legislation addressing some FATF-raised deficiencies at the time of the FSAP mission. - Given the high risk of misuse of financial markets for money laundering and terrorist financing, authorities should review enforcement strategy and capabilities to ensure AML/CFT violations are identified and sanctioned in a timely manner. - 19. Supervisory Approach — Compliant: - Supervisory staff is reasonably experienced and makes balanced judgments regarding remedial actions. - Use of rigorous stress tests as forward-looking tools needs stronger embedding in supervisory practices. Also see CP 7. - 20. Supervisory Techniques — Compliant: - BaFin and the Bundesbank rely on external auditors to perform annual detailed checks and supplement these with supervisory inspections typically performed by Bundesbank staff at BaFin’s request. - Risk committees can identify broader threats and adjust supervisory initiatives. - 21. Supervisory Reporting — Largely compliant: - Multiple instances where granularity of formal reporting was insufficient. - Need to enhance reporting framework and implement a standardized, comprehensive approach ensuring timely reporting of material risks on a sufficiently granular basis. - German authorities were preparing a major reform of the reporting framework; parts of the new standardized framework were expected to become effective during the course of 2011. - 22. Accounting and Disclosure — Compliant: - Accounting and disclosure provisions comply with the CP. - Accounting rules allow a menu approach to valuing assets, which may inhibit consistency and distort peer comparisons. - 23. Corrective & Remedial Powers of Supervisors — Largely compliant: - BaFin’s remedial and corrective powers are comprehensive and were further expanded via the Restructuring Act that came into effect on January 1, 2011, providing mechanisms for orderly restructuring or resolution. - BaFin lacks a formalized “ladder” of actions to ensure timely and appropriate supervisory responses commensurate with issues’ nature and seriousness. - 24. Consolidated Supervision — Compliant: Generally complies with CP requirements. - 25. Home-Host Relationships — Largely compliant: - Germany has implemented relevant EU legislation and international standards from EBA and BCBS and agreed MoUs and written agreements for cross-border information sharing. - Supervisory cooperation is positive but can be further strengthened. - Aggregate assessment counts: - Compliant (18); largely compliant (11); materially noncompliant (2); noncompliant (0); and not applicable (0). ### Recommended action plan (selected by principle) - Objectives, Independence, Powers, Transparency and Cooperation (CP1) - Reevaluate the elaborate reporting requirements of BaFin vis-à-vis the BMF to alleviate reporting burden. - Amend legislation to ensure BaFin’s President and Executive Directors are protected against arbitrary and/or obligatory transfers within the Federal Public Service. - Amend legislation to ensure public disclosure of reasons for dismissal of BaFin’s President and Executive Directors. - Develop a consistent and well documented ladder of supervisory actions (also see CP 23). - Clarify liability protection for BaFin staff not designated as civil servants. - Review legal position of supervisory authorities and provide explicit protection for their official actions except in cases of gross negligence or willful misconduct. - Major Acquisitions (CP5) - Amend the KWG to facilitate prior approval of acquisitions that may have a material impact on an institution’s risk profile. - Capital adequacy (CP6) - Firmly embed the use of new powers to impose higher capital charges commensurate with institutions’ risk profiles in supervisory processes. - Enhance use of rigorous stress tests to scrutinize capital adequacy of individual institutions. - Continue to closely monitor institutions’ efforts to strengthen capital bases in anticipation of Basel III and intervene strongly if progress is lacking. - Risk management Process (CP7) - Further strengthen risk management practices by proactively increasing scope and frequency of supervisory inspections. - Enhance quantitative analyses of capital adequacy relative to individual institutions’ risk profiles, embedding rigorous stress tests. - Credit risk (CP8) - Investigate possibilities to improve consistency in practices on asset classification and provisioning reviews across audit firms. - Evaluate and improve supervisory capabilities and increase depth and frequency of credit risk inspections. - Problem assets, Provisions and Reserves (CP9) - Develop and publish standardized criteria for classifying assets as impaired to allow sensible comparisons across institutions. - Large Exposure Limits (CP10) - Restrict opportunities for retroactive approval of large exposures to preserve effectiveness of decision-making provisions. - Exposures to Related Parties (CP11) - Restrict opportunities for retroactive approval of exposures to related parties. - Liquidity Risk (CP14) - Enhance reporting requirements for foreign currency position risk. - Increase supervisory inspections focused on liquidity risk management. - Operational Risk (CP15) - Beef up specialized IT inspection capacity and increase depth and frequency of targeted IT inspections. - Develop requirements for periodical reporting of material operational risk incidents to supervisors. - Abuse of Financial Services (CP18) - Remediate weaknesses identified through the FATF Mutual Evaluation as quickly as reasonably possible. - Review BaFin’s enforcement strategy and capabilities regarding AML/CFT. - Supervisory Approach (CP19) - Consider providing more guidance through a menu approach with consistent parameters for required actions and remedial measures based on institutions’ placement in a risk matrix (also see CP 23). - More strongly embed rigorous stress tests as forward-looking supervisory tools (also see CP 7). - Supervisory Reporting (CP21) - Extend reporting requirements and develop a standardized, comprehensive framework ensuring timely, sufficiently granular reporting on all material risks. - Accounting and Disclosure (CP22) - Encourage standardization of valuation practices to allow more meaningful comparisons across institutions. - Supervisors’ Corrective and Remedial Powers (CP23) - Develop a consistent and well documented ladder of supervisory actions. - Consolidated Supervision (CP24) - Grant BaFin authority to close foreign offices of German institutions or impose conditions if host supervision is inadequate or access to information for consolidated supervision is denied. - Home-Host relationships (CP25) - (a) Continue to enhance cooperation and information sharing on a cross-border basis. - (b) Develop a formalized, detailed framework for assessing the supervision regime of non-EEA competent authorities to determine the level of reliance BaFin can place on such authorities. ### Authorities’ response (paragraphs 70–73) - 70. The German authorities express appreciation to the IMF and assessment teams for the assessment, strongly support the FSAP, and view it as promoting financial system soundness and improving supervisory practices. - 71. The German authorities appreciate the assessment and will use it to reflect on current practices and make changes where appropriate. - 72. Two areas with improvements already underway prior to the FSAP: - On CP 15, BaFin and the Bundesbank agree with the FSAP evaluation. The process to create within BaFin a separate unit for IT risk regulation and auditing with sufficient staff was started in 2010. It is assumed that during 2011 this unit will finally be established. - On CP 21 regarding reporting requirements, the German authorities are currently implementing new reporting requirements, which will improve, inter alia, the granularity of the information obtained. - 73. Overarching comments from the German authorities: - Issues that led to (partial) noncompliance ratings for CP 6, CP 7 and CP 14 will be dealt with in preparations for, and implementation of Basel III/ CRD IV. - The authorities understand that some unsatisfactory ratings reflected that recent regulatory and supervisory initiatives had not been sufficiently tested in reality; they view this as encouragement to continue improving practice. - The German authorities are not convinced that the assessors’ focus on execution of supervisory measures is warranted and prefer a focus on supervisory outcomes. *Source: _cr11273 - 2. Permissible Activities Compliant* ### 74. Furthermore, there are a small number of recommendations where the German ### _cr11273 - 74. Furthermore, there are a small number of recommendations where the German ### Authorities' views on specific Core Principles (CPs) - CP 5 regarding major acquisitions - The authorities believe the qualification as materially non-compliant is not justified. - Section 12 of the KWG in its current form is fully in line with the respective EU requirements. - Acquisition of participating interests outside the financial sector is a business decision in which the supervisor should not intervene. - Potential risks from institutions’ acquisition and investment policies are limited by quantitative limits and by managers’ responsibility and accountability for handling and monitoring institutions' risks, including acquisitions and investments. - Managers’ performance is subject to review by auditors and supervisory interventions should requirements be breached. - CP 6 and CP 7 regarding the use of stress tests - Deutsche Bundesbank carries out a broad variety of different bottom-up and top-down stress test exercises. - Stress tests cover solvency risk, macroprudential issues, liquidity risk, as well as systemic stability issues. - Communication of stress test results is done in the course of supervisory meetings; results supplement information from bank reports and on-site inspections. - Stress test results (aggregated and for individual banks) are regularly presented at the meetings of the Heads of Banking Supervision of Bundesbank and BaFin and at the risk committee meetings of Bundesbank and BaFin. - Results and methodological aspects of top-down stress tests are discussed with selected institutions in supervisory assessment meetings and in response to special requests by banks. - In 2010, there were several meetings with institutions to discuss methodologies and results of supervisory top-down stress tests and to challenge banks’ internal exercises with these results. - These meetings are in addition to regular supervisory talks that include discussions on banks’ internal stress tests. - (See also Deutsche Bundesbank Methodological Note, "Stress Tests at the Bundesbank—Overview," February 9, 2011). - CP 9 regarding problem assets, provisions and reserves - External auditors, in annual audits, report on “noteworthy loans” on a single-loan basis pursuant to Section 25 para 1 of the annual report regulation (“PrüfbV”). - Section 25 para. 2 of the PrüfbV: noteworthy loans include loans expected to be at risk to become “nonperforming” (or “impaired”) in major parts. - Explanatory notes to the PrüfbV (Section 25) set out indicators for loans that should be regarded as “nonperforming” for reporting purposes in the context of the annual audits: - The institution considers it unlikely that the borrower complies with his contractual payment obligations to the institution, its parent company or its subsidiaries in full (without making use of collateral); or - A material liability of the borrower to the institution, its parent company or its subsidiaries is past due for 90 days or more. - BaFin and the Bundesbank are of the opinion that information reported by annual auditors is comparable and does not hamper comparisons across institutions. - CP 10 regarding decision-making and retroactive approval - The IMF recommends restricting the possibility of retroactive approval. - German authorities: as a general rule the decision of the senior managers to unanimously grant a loan exceeding 10 percent of the institutions own funds has to be taken prior to the incurrence of a large exposure (Section 13 subsection 2, sentence 2 KWG). - Two exceptional cases allow post-incurrence unanimous decision: - in case of urgency of the transaction (sentence 3); or - if an already existing exposure becomes a large exposure due to reduction of own funds (sentence 6). - Authorities believe possibilities for retroactive approval are sufficiently restricted; disposing of exceptions would be disproportionate and—for the second exception—simply impractical. - CP 11 regarding exposures to related parties - IMF states "the German supervisory framework lacks requirements on the aggregate reporting of loans to related parties." - Authorities: the statement is correct, but falsely implies supervisors never obtain information on loans to related parties. - Section 25 (2) No. 1 of the PrüfbV: stricter (single-loan-based) reporting requirements apply where particular loans to related parties must be regarded as noteworthy because of their size or the way they are structured. - CP 18 regarding AML/CFT enforcement - BaFin has made efforts to strengthen its enforcement strategy and capabilities with regard to AML/CFT to ensure AML/CFT violations are identified and sanctioned effectively, reflecting FATF recommendations in its MER. - FATF has not criticized BaFin for failing to identify and sanction AML/CFT violations in a timely manner. - CP 22 regarding accounting and disclosure rules - German Accounting and disclosure rules are in line with European directives and European law, especially regarding the adoption of IFRS. - Discretion with regard to valuation of consolidated banking groups must be considered against the current IFRS rules. - Practical consequence: application of the IFRS-accounting framework results in different valuations until IAS 39 will be revised. - This is not a country specific criticism but a criticism of the underlying accounting framework; same applies to European countries applying national GAAP consistent with European accounting directives. ### Assessment framework and grades - Four-grade scale used for assessment: compliant, largely compliant, materially noncompliant, and noncompliant. - Definitions: - Compliant—A country will be considered compliant with a Principle when all essential criteria applicable for this country are met without any significant deficiencies. There may be instances where a country can demonstrate that the Principle has been achieved by other means. Conversely, due to specific conditions in individual countries, the essential criteria may not always be sufficient to achieve the objective of the Principle, and therefore other measures may also be needed in order for the aspect of banking supervision addressed by the Principle to be considered effective. - Largely compliant—A country will be considered largely compliant with a Principle whenever only minor shortcomings are observed, which do not raise any concerns about the authority’s ability and clear intent to achieve full compliance with the Principle within a prescribed period of time. The assessment “largely compliant” can be used when the system does not meet all essential criteria, but the overall effectiveness is sufficiently good, and no material risks are left unaddressed. - Materially noncompliant—A country will be considered materially non-compliant with a Principle whenever there are severe shortcomings—despite the existence of formal rules, regulations and procedures—and there is evidence that supervision has clearly not been effective, that practical implementation is weak, or that the shortcomings are sufficient to raise doubts about the authority’s ability to achieve compliance. It is acknowledged that the “gap” between “largely compliant” and “materially noncompliant” is wide, and that the choice may be difficult. On the other hand, the intention has been to force the assessors to make a clear statement. - Noncompliant—A country will be considered non-compliant with a Principle whenever there has been no substantive implementation of the Principle, several essential criteria are not complied with or supervision is manifestly ineffective. - A Principle will be considered not applicable when, in the view of the assessor, the Principle does not apply given the structural, legal and institutional features of a country. In the case of Germany, this category has not been used in the assessment. ### Principle 1. Objectives, autonomy, powers, and resources — Detailed assessment (summary) - Principle summary: An effective system of banking supervision will have clear responsibilities and objectives for each authority involved in the supervision of banks. Each such authority should possess operational independence, transparent processes, sound governance and adequate resources, and be accountable for the discharge of its duties. A suitable legal framework for banking supervision is also necessary, including provisions relating to authorization of banking establishments and their ongoing supervision; powers to address compliance with laws as well as safety and soundness concerns; and legal protection for supervisors. Arrangements for sharing information between supervisors and protecting the confidentiality of such information should be in place. - Description: See below. - Assessment: Compliant - Comments: See below. - Principle 1(1). Responsibilities and objectives - EC1: The KWG clearly states the tasks and responsibilities of BaFin, including the mandate: “BaFin shall counteract undesirable developments in the banking and financial services sector which may endanger the safety of the assets entrusted to institutions, impair the proper conduct of banking business or provision of financial services or lead to serious disadvantages for the economy as a whole. BaFin may, as part of its statutory mandate, issue orders to institutions and their senior managers that are appropriate and necessary to stop or prevent violations of regulatory provisions or to prevent or overcome undesirable developments at an institution which could endanger the safety of the assets entrusted to the institution or impair the proper conduct of its banking business or provision of financial services. (...)” - FinDAG notes BaFin takes over supervisory tasks formerly allocated to separate supervisory authorities for banking, insurance, and securities sectors. - German Parliament ordained continued involvement of the Bundesbank in banking supervision; Bundesbank’s mandate follows from the Act concerning the Deutsche Bundesbank and from the KWG, highlighting Bundesbank’s responsibilities for ongoing monitoring of German institutions. - The Bundesbank’s website explains its local presence and proximity to the market give “deep insights into the financial sector and knowledgeable staff qualified to deal with issues relating to the financial market and its stability.” - A MoU and a “Guideline on carrying out and ensuring the quality of the ongoing monitoring of credit and financial services institutions by the Bundesbank” spell out respective roles: Bundesbank assigned most operational tasks; decision-making powers (for supervisory measures) allocated to BaFin. - BaFin and the Bundesbank have not agreed a formalized mechanism for settlement of potential disputes; ongoing communication allows ample opportunities to discuss diverging opinions; final decision-making powers of BaFin are undisputed. - Consumer protection of individual rights is not part of BaFin's or Bundesbank's mandates; protection of individual consumers’ rights is mandated to the Federal Ministry of Food, Agriculture and Consumer Protection (Das Bundesministerium für Ernährung, Landwirtschaft und Verbraucherschutz, BMELV). - Previous plans to merge BaFin into Bundesbank had been abandoned due to constitutional constraints. - The so-called “ten point plan” proposed a more incremental reform agenda, including expansion of Bundesbank’s macro-prudential supervision mandate, overhaul of BaFin’s internal organization to better enable fast intervention, and further elaboration of functions and composition of BaFin’s Administrative Council. - EC2: Minimum prudential standards are in place, inter alia, through SolvV, LiqV, and MaRisk, reflecting the provisions of the CRD (and thus the Basel II framework), as well as CEBS/EBA and BCBS guidance. - EC3: German banking law and accompanying regulations are regularly updated and take into account new standards and guidelines developed by international standard Committees (e.g., BCBC, CEBS/EBA). The MaRisk are in the process of being updated; the consultation process for these amendments began in July 2010. The new so-called CRD II package has been implemented in Germany as per December 31,2010. - EC4: Information on the financial strength and performance of the German banking industry is published on an aggregated basis by the Bundesbank. - AC1: Supervision is performed on a risk-oriented basis, with more resources allocated to higher risk institutions. - At end-2010, 325 full time equivalents (FTE) were working in the BaFin’s Banking Supervision Directorate, supported by specialists operating out of the cross-sectoral departments. - At the time of the mission, BaFin was in the process of enlarging its organization and was seeking a significant increase of its specialist areas for example, lending business, capital adequacy, and risk management. - Decisions on staff allocation are driven by the risk profiles, prepared by the Bundesbank for each institution on at least an annual basis. - Assessment: Compliant - Comments: Mandates of both BaFin and the Bundesbank are clear and publicly disclosed. Arrangements for ongoing cooperation laid down in a MoU and accompanying guideline place responsibility for ongoing monitoring with the Bundesbank, while decision-making powers in the supervisory context have been entrusted to BaFin. No formalized dispute-settlement mechanism, but ongoing communication provides ample opportunities to discuss diverging opinions; final decision-making powers of BaFin are undisputed. Previous plans to merge BaFin into the Bundesbank had been abandoned due to constitutional constraints. *Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf* ### Section 2“[BaFin] is under the legal and technical supervision of the BMF.” This legal ### _cr11273 - Section 2“[BaFin] is under the legal and technical supervision of the BMF.” This legal ### Legal and technical supervision of BaFin by the BMF - The Principles governing the exercise of legal and technical supervision of BaFin by the BMF (Grundsatze fur die Ausabung der Rechts- und Fachaufsicht des BMF uber die BaFin) state the subject of supervision is “the legality and fitness for purpose of BaFin’s administrative actions.” - BMF supervision relies on: - information in the public domain; and - reports from BaFin on “internal organizational matters, significant events occurring in the exercise of financial services supervision and important topics in connection with activities at an international level.” - BaFin is required to report to the BMF on: - (i) supervisory measures intended and introduced “that are of material importance in the exercise of supervision;” - (ii) contacts with foreign supervisory authorities and on the conclusion of cooperation agreements with foreign supervisory authorities; - (iii) its advisory activities in connection with the development and support of supervisory systems outside Germany; and on - (iv) topics discussed in and results of meetings of relevant European supervisory bodies and other international groups in which BaFin is represented. - BaFin must notify the BMF without delay of: - possible threats to systemically important credit institutions, financial services institutions, investment funds or insurance undertakings under its supervision; - impeding disruptions on regulated stock exchanges and securities markets; - other financial difficulties looming in the financial services field; - audits by and requests for information from the Federal Court of Audit (Bundesrechnungshof). - Regulations issued by BaFin on the basis of the KWG are to be submitted to the BMF prior to publication; the BMF must be informed prior to publication about any BaFin announcement and/or notice with regard to “their regulatory content and their impact on the institutions and undertakings under supervision,” as well as on BaFin’s annual report, press briefings, interviews, and other publications. - Clarification: the guidelines do not provide the BMF with direct instruction rights vis-à-vis BaFin; there is no ex ante involvement in individual supervisory decisions nor ex post power to rescind BaFin decisions. In practice, no evidence of BMF influence on day-to-day BaFin supervisory decisions or of government/industry interference was found. ### Governance, appointments, and safeguards - Appointment and status: - The President and the Executive Directors of BaFin are, according to Section 9 of FinDAG, appointed for life by the President of the Federal Republic of Germany on proposal of the German Government. - Since the President and Executive Directors are civil servants, removal/dismissal is subject to the German Civil Service Act (Bundesbeamtengesetz, BBG). - Public disclosure of reasons for dismissal is not required. - There are no legal barriers to transferring BaFin’s President and Executive Board members to other branches of the Federal government; however, de facto obstacles exist because comparable functions in pay grade and office are scarce and a civil servant’s consent is necessary for transfers to functions below current pay grade and office. - Oversight and budget: - The BMF monitors BaFin’s management through its representatives on BaFin’s Administrative Council (21 members), including the Chairman and the Deputy Chairman. - The Administrative Council reviews and adopts BaFin’s annual budget. - BaFin’s Executive Board draws up the annual budget, prepares year-end accounts on revenues and expenditures; the Administrative Council grants discharge to the Executive Council, subject to approval of the BMF. - Bundesbank independence and appointments: - Bundesbank Act confirms Deutsche Bundesbank is independent of and not subject to instructions from the Federal Government. - Governing body members are appointed by the President of the Federal Republic of Germany; terms normally eight years (exceptionally shorter but not less than five years). - Bundesbank staff types: civil servants (Beamte), other salaried staff (Angestellte), and wage earners (Arbeiter). ### BaFin mission, objectives, and staffing - Mission statement (available on its website) clarifies BaFin’s regulatory approach is based on: - (i) a risk-based resource allocation; - (ii) proportionality; - (iii) fulfilling its European responsibilities; - (iv) maintaining an ongoing dialogue with the financial sector; - (v) objectivity and transparency; and - (vi) cost consciousness. - Staffing: - EC3—BaFin currently employs approx 1700 staff members, largely lawyers, economists, and mathematicians. - Supervised institutions confirm BaFin staff are deemed to have credibility and professionalism; same applies to Bundesbank staff. - Financing: - EC4—BaFin is entirely financed by levies and fees paid by supervised institutions. - Legal basis: Section 13 (1) FinDAG: “[BaFin] shall cover its costs, including the costs charged to [it] by the Bundesbank (...)” combined with Section 14 (1) allowing BaFin to charge fees up to EUR 500,000 for each official act performed. - Levies collected on pre-set parameters (e.g., balance sheet total); fees charged for inspections, approvals, and applications on the basis of actual hours spent. - Any remaining annual costs are allocated ex post on a pro rata basis to supervised institutions. - No evidence of undue sector influence on supervisory processes as a result of cost allocation/reimbursement. - Staffing evolution (table text preserved): - Staff as at 1-05-'02 31-12-'04 31-12-'06 31-12-'08 31-12-'10 - BA (Banking Supervision) 187 255 269 288 325 - Q 1 (Risk and financial markets analysis) 34 24 27 29 - Q 3 (Integrity of the financial system) 42 57 49 52 62 - Q RM (Cross-sectoral risk modeling) 26 29 34 35 - GW (Prevention of money laundering) 67 64 87 - Human resources issues: - Supervisory staff at BaFin and the Bundesbank is generally experienced; strong efforts have increased staffing and expertise. - Salaries are relatively low; difficult to retain staff, especially with highly technical skills and during booming financial sector periods. - Little inflow of mid-level staff and limited-term experts; BaFin is, in principle, allowed to offer such experts comparative salaries beyond regular civil servant grades and selectively uses this power. ### Independence assessments, protections, and recommendations - AC1: BaFin’s Executive Board members are nominated by the President of the Federal Republic of Germany at the proposal of the Federal Government. The Board members are civil servants and are appointed for life. - Assessment: Largely compliant - Comments: Design of German supervisory framework offers safeguards against government/political interference: independent character anchored in law; BaFin mandated to decide individual cases without consulting BMF; Executive Board members protected against arbitrary dismissal; BaFin not reliant on government funding; no indications of interference in practice. Civil servant status reduces scope for regulatory capture. - Observed burdens and recommended legislative changes: - Reporting requirements in the guidelines place a large burden on both BaFin and BMF; German authorities may wish to re-assess whether reporting requirements can be reduced without hampering BMF oversight of legality and fitness for purpose of BaFin’s administrative actions. - There are no provisions preventing arbitrary/obligatory transfers of BaFin’s President and Executive Directors to other Federal Public Service functions, nor mandatory public disclosure of reasons for dismissal. Recommendation: amend legislation to prevent arbitrary/obligatory transfers and mandate full disclosure of reasons for transfer or dismissal. (Comparable recommendation existed in the 2003 FSAP BCP assessment.) ### Legal framework, powers, and supervisory tools (Principle 1 components) - Principle 1(3) Legal framework — licensing and ongoing supervision: - EC1—KWG allocates role to grant banking licensing exclusively to BaFin; BaFin is obliged to consult the Bundesbank and the guarantee scheme appropriate for the applicant prior to granting a license. - EC2—KWG allows issuance of detailed regulations; BMF can delegate rule making to BaFin via BaFinBefugV; BaFin issued secondary regulations, e.g., Monthly Returns Regulation (MonAwV) and Regulation Governing the Auditing of the Annual Accounts of Credit Institutions and Financial Services Institutions (PrüfbV). - BaFin issues guidelines, guidance papers and circulars (non-binding) and consults Bundesbank and stakeholders before issuing publications. - EC3—Section 44 set seq of the KWG requires supervised institutions and related entities to provide BaFin and the Bundesbank, upon request, with information on all business activities. BaFin may perform inspections with or without special reason and may entrust inspections to the Bundesbank. BaFin typically notifies institutions a few weeks before planned inspections; letters elaborate scope and timing; objections to inspections have no suspensory effect. - Assessment: Compliant - Principle 1(4) Legal powers — measures available: - EC1—KWG allows wide instruments from temporary measures to dismissal of managers and revocation of licenses. RStruktG (Division 4a of the KWG) permits BaFin to order transfer of assets and liabilities to transferee or spin-off entities and to revoke the license upon completion; power linked to financial stability risks and requires BaFin to consult the Bundesbank. RStruktG provisions entered into force end of December 2010 and were not yet tested in practice at time of FSAP mission. - EC2—No legal or practical impediments for BaFin/Bundesbank to access bank boards, management, staff, and records. KWG provides comprehensive access rights and on-site inspection authority; inspections may be routine or event-driven. - EC3—BaFin can impose measures if an institution violates legal requirements or business is not conducted properly; FMVAStärkG (August 2009) authorizes measures if there is a substantial risk that an institution will not comply with funding and liquidity requirements in the near future. - Fines: KWG allows administrative fines largely for breaches of reporting/notification requirements or contravention of prior enforceable orders; fines can be imposed on individuals and institutions under the Administrative Offences Act (OWiG); penalty amounts under KWG are relatively low. - Assessment: Compliant - Comments and recommendation: BaFin relies substantially on ‘moral suasion’ and informal pressure. BaFin lacks a formalized “ladder” of actions; recommendation: develop a framework (ladder) to facilitate timely and appropriate supervisory actions, promote consistency, resist special interest pressure, and contribute to public confidence. (See CP 23.) - Principle 1(5) Legal protection for supervisors: - EC1—Neither the KWG nor FinDAG provides specific legal protection to BaFin and its staff against lawsuits for actions/omissions made in good faith. Most BaFin employees are designated as civil servants; liability under BGB requires willful or negligent breach of official duty. Article 34 of the Constitution allocates primary liability to the employing authority (the state) for public office exercise; recourse against individual public officials requires intentional wrongdoings or gross negligence. - Note: BaFin’s Annual Report 2009 refers to 1.191 staff member designated as civil servants as per the end of 2009 and 638 additional non civil servant employees. - EC2—Civil servants entitled to care and protection from their employers if actions brought; in practice, no cases where BaFin has made use of right of recourse. - Assessment: Largely compliant - Comments and recommendations: - Legal uncertainty remains for BaFin staff not classified as civil servants (approx one/third of total staff), whose legal protection derives from the Collective Agreement for the Public Service rather than formal legislation. German legislator may want to clarify by amending FinDAG. - Recommendation: review legal position of supervisory authorities and provide explicit protection for the institution for official actions, except in cases of gross negligence or willful misconduct, in line with practice in other jurisdictions. ### Cooperation and confidentiality (Principle 1(6)) - Domestic cooperation: - Cooperation between BaFin and the Bundesbank is governed by the KWG, a MoU, and a “Guideline on carrying out and ensuring the quality of the ongoing monitoring of credit and financial services institutions by the Bundesbank.” - International cooperation: - EC2/EC3—BaFin may exchange information with foreign authorities notwithstanding KWG confidentiality requirements, provided foreign authorities require the information for performance of their functions and are subject to confidentiality requirements at least equal to those in the KWG. - BaFin has entered into multiple MoUs aimed at information sharing and technical cooperation; BaFin’s Annual Report 2009 documents advisory/support efforts for foreign authorities (China, Ukraine, South Korea, Russia mentioned). - Confidentiality: - EC4—Section 9 of the KWG provides a broad confidentiality requirement covering “facts which have come to their notice in the course of their activities and which should be kept secret in the interest of the institution or a third party, even after they have left such employment or their activities have ended.” - Limited grounds for disclosure include criminal prosecution authorities or courts in criminal cases or authorities dealing with liquidation/insolvency proceedings. - BaFin can deny demands for confidential information beyond limitative provisions. - Assessment: Compliant - Comments: See detailed assessment of CP 25 for cross-border cooperation remarks. ### Permissible activities and licensing (Principle 2) - Definitions and licensing: - EC1, 2—The KWG clearly defines “credit institution” mirroring EU Directives. Section 1(1) sentence 1 KWG: credit institutions are enterprises conducting banking business commercially or on a scale requiring a commercially organized business undertaking. - “Banking business” includes acceptance of funds as deposits or other unconditionally repayable funds from the public, lending business, discount business, principal broking services, safe custody business, guarantee business, underwriting business, or e-money business. - Section 1(1a) KWG defines financial services that qualify as financial services institutions: investment and contract broking, investment advice, operation of multilateral trading facilities, placement business, portfolio management, own-account trading, non-EEA deposit broking, foreign currency dealing, factoring, finance lease and asset management. KWG gives definitive list of activities requiring a license. - Payment services transposed via ZAG (Payment Services Oversight Act); Section 1(2) ZAG lists activities requiring a license. E-money business rules to be transferred from KWG to ZAG when transposing E-Money Directive (2009/110/EC) into national legislation by April 30, 2011; e-money business will require authorization as payment service provider rather than credit institution. - Licensing requirement: Section 32 KWG and/or Section 5 of ZAG; exceptions exist but are not described in this excerpt. - Assessment: The approach complies with the CP; legal framework includes clear provisions relating to authorization and broad information gathering powers; BMF has delegated authority to draft detailed prudential regulation to BaFin with consultation processes. *Source: IMF external publication text (Section 2 of _cr11273).* ### Section 32 of the KWG are only permissible under specific conditions set forth in the ### _cr11273 - Section 32 of the KWG are only permissible under specific conditions set forth in the ### EC3 — Rules concerning the protection of the use of terminology - Rules concerning the protection of the use of terminology are laid down in Sections 39 et seq. of the KWG. - Under Section 39(1) of the KWG, except where the law provides otherwise, the use of the term “bank” or “banker” or an expression that includes the word “bank” or “banker” in a firm name or as an addition thereto or to describe the object of the business or for advertising purposes is restricted to: - (i) credit institutions that are in possession of a license under Section 32 KWG or branches of enterprises within the meaning of Section 53b(1) sentence 1 or Section 53b(7) of the KWG; or - (ii) other enterprises which, on entry into force of the KWG, were using such a term legally under the existing regulations. - Section 39(3) KWG grants BaFin the power to actively determine that enterprises may not use the terms specified in Section 39(1) of the KWG if the nature and scope of the activities do not justify their use. - Within BaFin, a separate unit has been entrusted with the task to detect unlawful banking activities and/or unlawful usage of the term “bank” or “banker” and with enforcing the aforementioned prohibitions. ### EC4 — Definition of deposit business - Deposit business, i.e., the acceptance of funds from others as deposits or of other repayable funds from the public, irrespective of whether or not interest is paid, is banking business according to Section 1(1) sentence 2 no. 1 of the KWG. *Source: _cr11273 - Section 32 of the KWG are only permissible under specific conditions set forth in the* ### Section 32(1) sentence 1 of the KWG, banking business and hence also deposit ### Section 32(1) sentence 1 of the KWG, banking business and hence also deposit ### Licensing requirement and BaFin supervision - Section 32(1) sentence 1 of the KWG: banking business and deposit business may only be conducted by a credit institution in possession of a written license from BaFin. - Upon receipt of a license, institutions are subject to supervision by BaFin. - BaFin’s intervention powers for unauthorized banking/financial services are governed by Sections 37 and 44c of the KWG (power to order unlawful institutions to cease operations and to conduct special inspections). - EC5—BaFin maintains on its websites a full database of licensed banks, branch offices, and branches of foreign institutions. - Assessment: Compliant. ### Licensing criteria (Principle 3) — description, requirements, and assessments - Licensing authority and process - EC1—BaFin is both banking supervisor and licensing authority (Section 32 KWG). New licenses (or extensions) are granted by the frontline supervisor responsible for the institution. - Further information on the license application process referenced in a Bundesbank notice (August 2002). - Scope and conditioning of authorizations - EC2—Section 32(2) KWG allows BaFin to limit banking licenses to specific types of business or impose conditions “consistent with the objective pursued by the KWG.” - BaFin typically uses this power to oblige new institutions to comply with a higher minimum capital requirement of 12 percent during the first three years after commencement of business activities (assessors’ understanding). - Ongoing consistency of criteria - EC3—KWG provides for revocation of licenses if facts emerge that would have warranted refusal originally; licensing criteria are consistent with ongoing supervision. - Mandatory and discretionary refusal grounds - EC4—Section 33(1) sentence 1 KWG: BaFin must refuse the license if, in short: - (i) sufficient initial capital is not available; - (ii) applicant or proposed senior managers are not trustworthy and/or qualified; - (iii) holder of a major participating interest in the institution is not trustworthy or fails to satisfy requirements for sound and prudent management; - (iv) institution will not have at least two proposed senior managers; - (v) institution has its head office outside Germany; - (vi) institution is not prepared or in a position to put in place organizational arrangements necessary for proper conduct of business; - (vii) applicant is a subsidiary of a foreign credit institution and the foreign supervisory authority has not given permission for the establishment of the subsidiary. - Section 33(3) KWG: BaFin may refuse if effective supervision would be impaired (e.g., cross-shareholding structures, non-EEA legal/administrative impediments, non-cooperating foreign supervisors), or if applicant fails to provide sufficient information. - KWG is a ‘closed’ legal framework—authorization may not be refused for reasons other than those specified in law. - Legal form and ownership transparency - EC5—KWG does not allow credit institutions requiring authorization to operate as a sole proprietorship. - EC6—KWG requires identification and trustworthiness testing of anyone holding a qualified participating interest (defined as at least 10 percent of capital or voting rights). - Prospective holders of a major participating interest must seek prior approval from BaFin before obtaining the interest; BaFin can prohibit intended participation. - Initial capital requirements - EC7—For deposit-taking institutions, initial capital should be at least EUR 5 million. - Senior management fit and proper tests - EC8—KWG defines ‘senior managers’; persons to be screened must submit CV and criminal record certificate (Führungszeugnis). BaFin consults the Federal Central Register and the Central Commercial Register for verification. - Professional qualification benchmark: “adequate theoretical and practical knowledge” and normally demonstrated by three years’ managerial experience at an institution of comparable size and type of business. - FMVAStärkG introduced new provisions on monitoring members of supervisory and administrative bodies requiring trustworthiness and qualification to understand transactions and assess risks; BaFin issued a Guidance Note (February 2010). - In 2009, BaFin took 10 formal actions against senior managers resulting in dismissal. Over 2008, three comparable actions were taken. - Business plan and organizational requirements - EC9, 10—Application must include a viable business plan and projected balance sheets and profit and loss accounts for the first three years (Anzeigenverordnung, AnzV). - Section 25a KWG lists required elements: internal control system, internal audit, sufficient staffing, IT contingency plan, continuous monitoring of financial situation, documentation, outsourcing rules with audit rights for BaFin, AML/CFT safeguards. - Risk management must consider type, scope, complexity and risk content of operations. - BaFin requires evidence of necessary initial capital but has no explicit statutory requirement to test financial strength of principal shareholders (it obtains financial information in practice). - Revocation and ongoing supervision of new institutions - EC12—BaFin may revoke authorization if facts would have warranted refusal originally (including false/incomplete information). - AC2—No special monitoring mechanism for newly licensed institutions; new institutions are monitored per regular cycles but in practice are subject to more stringent requirements, typically a higher minimum capital requirement (12.5 percent) — final determination case-by-case. - Assessment: Compliant (overall). Comment: full compliance with AC’s would require explicit mandate to review financial strength of (potential) principal shareholders (AC 1). ### Transfer of significant ownership (Principle 4) - Definitions and notification - EC1—Section 1(9) sentence 1 KWG: a qualified participating interest exists if at least 10 percent of capital or voting rights are held directly or indirectly, or if significant influence can be exercised. - Procedural rules and timelines - EC2—Section 2c KWG and the Holder Control Regulation (InhKontrollV) implement Directive 2007/44/EG and 3L3 Guidelines. - Any person intending to acquire a qualified participating interest must report intention without delay in writing to BaFin and Deutsche Bundesbank, stating size and all relevant information per InhKontrollV. - After complete information, BaFin has 60 working days to assess the acquisition. If further information is requested, the period is impeded until submission but may not exceed a total of 80 or, under certain circumstances (e.g., acquirer outside the EEA), 90 working days. - While BaFin reviews the acquisition, it may not be completed; failure may lead to transfer of voting rights to a trustee and/or instruction to sell the shares. - KWG allows an administrative fine of up to EUR 500,000. - Prohibition criteria - EC3—Section 2c(1b) KWG: BaFin may prohibit the acquisition if, in short: - (i) acquirer does not meet demands for sound and prudent management; - (ii) institution will not comply or continue to comply with prudential requirements; - (iii) effective supervision would be hampered; - (v) prospective managers are not trustworthy or lack professional skills; - (vi) acquirer has been committed for money laundering or terrorist financing; - (vi) financial soundness of proposed acquirer is insufficient. - Acquisition can be prohibited when information is incomplete or incorrect per InhKontrollV criteria. - Reporting thresholds and supervisory remedies - EC4—Institutions must report every acquisition/disposal of a qualified participating interest if it reaches, exceeds, or falls below thresholds of 20 percent, 30 percent, and 50 percent of voting rights or capital, and changes in subsidiary status, as soon as noticed. - Annual reporting obligation: name and address of any holder of a qualified participating interest in the reporting institution and subordinated enterprises. - EC5—BaFin can request the court to transfer voting rights obtained without prior approval to a trustee (Section 2c(2) KWG). - Assessment: Compliant. - Comment: German implementation constrained by EU harmonization (Directive 2007/44/EC). ### Major acquisitions and investments by banks (Principle 5) - Limits on participating interests in non-financial enterprises - EC1—Section 12(1) sentence 1 KWG: deposit-taking institution may not hold a qualified participating interest in a “non financial enterprise” if share would exceed 15 percent of the deposit-taking institution’s regulatory capital. - Aggregated qualifying participating interests in such enterprises may not exceed 60 percent of the deposit-taking institution’s liable capital. - Each excess requires permission from BaFin; BaFin may give consent only if the institution holds additional capital for the part exceeding the limit by liable capital. - Institutions must inform BaFin and Bundesbank about establishment, modification or discontinuation of participating interests or corporate ties that become subordinated enterprises in consolidation (applies to companies whose head office is located abroad). - Limitations in prior approval and supervisory criteria - EC2—KWG does not contain a general rule requiring prior BaFin approval before a German credit institution acquires a participating interest in or establishes ties with an entity that is not a credit institution licensed in Germany; no general criteria to judge such proposals. - EC3—KWG allows prohibition of acquisitions of German credit institutions when intransparent structures impair supervision, but does not provide prior approval for other acquisitions. - EC4—No specific provisions on financial and organizational resources in the context of envisaged acquisitions. - EC5—Aside from reporting mentioned under EC1, KWG does not require prior notification of acquisitions or investments; no differentiation by size or importance. - EC6—BaFin considers it has indirect means to mitigate risks from nonbanking activities but has no direct legal power to prohibit acquisition of participating interests in nonbanking enterprises. - Cross-border acquisitions - AC1—BaFin can be informed about envisaged acquisitions in another country but is not entitled to prohibit such acquisition; no formal approval process exists to assess foreign target supervision quality or consolidated supervision ability. - Assessment: Materially non compliant. - Comment and recommendation: Assessors recommend amending the KWG so acquisitions that may have a material impact on an institution’s risk profile are subject to prior approval; similar concerns noted in the 2003 FSAP. ### Capital adequacy (Principle 6) — framework, powers, and assessment - Regulatory framework and minimums - EC1, 2—Section 10 KWG and Solvabilitätsverordnung (SolvV) implement Directives 2006/48/EC and 2006/49/EC (CRD) / Basel II. Institutions must quantify credit/counterparty, operational, and market price risks and back them with own funds. - Institutions required to hold at least an overall capital ratio of 8 percent. Applies to consolidated, sub-consolidated and solo levels. - Eligible components of own funds listed in Section 10 KWG: “original own funds” (Tier 1), “additional own funds” (Tier 2), “ancillary own funds” (Tier 3). Tier 2 eligible only up to level of Tier 1. - Historical treatment: silent partnerships (Stille Gesellschaft) sometimes recognized as Tier 1 capital under KWG. - CRD II transposition introduced general framework for hybrid Tier 1 instruments including specific limits. - Monitoring and supervisory powers to raise capital requirements - Compliance monitored via quarterly returns to BaFin and Deutsche Bundesbank; annual auditors assess adequacy calculations. - BaFin historically had limited legal powers to impose higher capital requirements; FMVAStärkG (August 2009) expanded and specified powers allowing BaFin to impose higher capital requirements: - (i) for risks not fully covered by SolvV; - (ii) if institution’s risk-baring capacity not assured; - (iii) to build additional capital cushions for downturns; - (iv) to allow for special business situations. - Despite expanded powers, BaFin had to date only made limited use of its powers to impose higher capital requirements commensurate with individual institution risk profiles. - Capital adequacy calculation scope and deficiencies - EC4—Institutions determine capital ratio using Credit Risk Standardized Approach or IRB Approach; credit risk mitigation and netting recognized under SolvV. - Sections 9 to 14 SolvV list credit risk exposures: balance sheet exposures (Section 10), derivative exposures (Section 11), off-balance sheet exposures (Section 13), free delivery exposures (Section 14); market risk positions covered by Sections 295, 296, 298 SolvV. - Assessors observe prima facie cases where required capital ratios do not fully reflect individual bank risk profiles; quality concerns include heavy reliance on hybrid instruments. - Notification and remedial powers for breaches - EC6—Section 7(1) SolvV: BaFin and Bundesbank must be immediately notified if institution falls below minimum capital requirements. - Section 45 KWG: BaFin may prohibit withdrawals by proprietors/shareholders, distribution of profits, prohibit or limit lending, require risk-reducing measures if minimum capital ratio not restored. - Section 46 KWG: BaFin may issue instructions to management, prohibit deposit-taking or lending, prohibit proprietors or managers from activities or appoint supervising person; revocation of license or transfer order under Section 48a KWG in severe cases. - Assessors could not determine a consistent long track record of invoking Sections 45 and 46. - Internal models and IRB implementation - EC7—SolvV allows use of internal assessments (IRBA) subject to approval (Sections 56–70 SolvV; Section 58 SolvV approval by BaFin). - IRBA implementation plans must show achieving supervisory reference point within two and a half years after entry threshold and full implementation within five years. - BaFin and Bundesbank perform IRBA examinations; SolvV allows revocation of IRBA approvals if conditions no longer satisfied, with possible waivers if plausible plans are submitted. - BaFin has intervened by increasing risk factors in quantitative models (higher capital requirements), often triggered by outliers in backtesting. - International and forward-looking requirements - AC1, 2—KWG and regulations apply to all institutions domiciled in Germany; do not differentiate internationally active banks. - AC3—Supervisors have formal power to require forward-looking capital management and to set capital levels in anticipation of events. MaRisk obliges institutions to implement stress tests and reverse stress tests (2010 amendment published December 15, 2010). Section 123 SolvV requires stress testing to identify possible events or future changes. - FMVAStärkG allows BaFin to set higher minimum capital requirements to consider risks not covered by SolvV and to build buffers. - AC4—Actual own funds requirements apply to individual institutions and groups (Section 10(1) KWG). Under strict conditions, institutions may refrain from applying solo minimum capital requirements but must notify BaFin and Bundesbank and provide documentation. - AC5—FMVAStärkG strengthened powers to require higher capital; authorities also use moral suasion. Effective use of formal powers still to be ascertained. - Assessment: Materially noncompliant. - Key numeric and factual points: - Minimum overall capital ratio: 8 percent. - BaFin’s typical higher minimum capital requirement for new institutions during first three years: 12 percent (assessors’ understanding); practice often requires 12.5 percent for new institutions (case-by-case). - Deposit-taking institutions’ initial capital: at least EUR 5 million. - Historical “gentlemen’s agreement” and BCBS press release referenced (October 1998) influenced practices prior to SolvV transposition. - Assessors note limited use of BaFin’s new powers despite enactment of FMVAStärkG (August 2009). - Recommendations / supervisory priorities (implicit in assessment comments) - BaFin should continue developing guidance on KWG provisions to avoid forbearance and ensure consistent application of powers across institutions. - Enhance use of stress tests and incorporate results in supervisory decision-making for capital adequacy. - Closely monitor banks’ recapitalization efforts in light of Basel III challenges; intervene strongly if progress too slow. ### Risk management process (Principle 7) — framework and requirements (partial content) - Legal and regulatory framework - EC1—Section 25a KWG: institutions must have a proper business organization including appropriate and effective risk management to continuously safeguard resilience. - Section 25a elaborates on strategies, internal control mechanisms, internal control system, and internal audit function; internal control system includes arrangements for identifying, assessing, treating, monitoring and communicating risks. - MaRisk and proportionality - MaRisk codifies Section 25a requirements; originally published 2005 and revised 2007, 2009, and 2010. - MaRisk provides a qualitative framework addressing material risks with a modular structure: AT module (general principles) and specialized parts (internal control system, internal audit, management of interest rate risk, liquidity risk, operational risk). - MaRisk apply mutatis mutandis to groups, financial holding companies and require group risk aggregation across entities, business units and material activities. - MaRisk apply the principle of proportionality, allowing tailored implementation according to size, nature, scale, complexity and risk content. - Audit and external review - External auditors assess all elements of risk management as part of annual audits. The PrüfbV requires auditors to “assess the adequacy of the risk management structure pursuant to” (text ends in supplied content). *Italic: IMF Financial Sector Assessment Program material: _cr11273 - Section 32(1) sentence 1 of the KWG, banking business and hence also deposit* ### Section 25a KWG as well as the further requirements regarding a proper business ### Section 25a KWG as well as the further requirements regarding a proper business organization ### Supervisory framework and MaRisk requirements - Section 25a KWG: institutions must establish and maintain adequate organization, taking due regard of the complexity and scope of the risks incurred; particular attention to counterparty credit risk, market price risk including interest rate risk in the banking book, and liquidity and operational risks. - BaFin may designate focus areas for annual audits and has used this power to require external auditors to focus on valuation practices for structured products and the effectiveness of supervisory boards. - MaRisk require executive boards (Geschäftsleitung) to define sustainable business and consistent risk strategies; responsibility cannot be delegated and executive boards must ensure implementation. - MaRisk require annual review of strategies and quarterly written risk reports by senior management to the supervisory body; reports must be comprehensible, meaningful, present and evaluate the risk situation, deal separately with special risks, and describe planned measures. - Institutions must establish an internal process to ensure risk-bearing capacity, with processes for identifying, assessing, treating, monitoring, and communicating risks (including stress testing and risk reporting). - MaRisk specify elements for internal guidelines: structural/operational arrangements; processes for risk identification/assessment/treatment/monitoring/communication; internal audit; compliance; outsourcing procedures; compensation principles. ### Audit, inspection and supervisory practices - Section 25a KWG provisions may be subject to on-site inspections commissioned by BaFin and typically performed by the Bundesbank (‘special audits’ pursuant to Section 44 KWG). - During 2007-10, BaFin commissioned well over 200 special audits per year. - Larger part of special audits focused on MaRisk’s basic principles for risk management (AT module) and risk management practices for credit, market, and counterparty risks; liquidity, operational, interest rate risks, and internal audit requirements were relatively underexposed. - External auditors must opine on adequacy of risk management structures as part of the annual audit cycle (PrüfbV obligations). - If risk management is inappropriate/effective, BaFin can issue orders; if not remedied, Section 45b allows BaFin to impose additional capital charges; order risk reduction measures; restrict opening of branches; restrict business activities including acceptance of deposits and lending. ### Risk profiling, ICAAP and supervisory review (Pillar 2 / SREP) - Supervisors compile institution-specific risk profiles at least annually; individual ratings (‘A’ best to ‘D’ worst) are aggregated into an overall risk matrix and shared with BaFin for finalization and supervisory decisions. - Guideline for preparation of risk profiles issued June 2008; a further guideline focused on quantitative assessment of capital adequacy has been used de facto for ICAAP assessments since June 2010 (still labeled draft). - German institutions are required to establish an Internal Capital Adequacy Assessment Process (ICAAP) to identify material risks and ensure risks are covered by risk-bearing capacity; methods must reflect size, nature, scale, complexity and risk content of activities. - At end of 2010, BaFin and the Bundesbank finalized an internal “range of practice paper for ICAAP”, based on supervisors’ assessments in 2010 of the ICAAPs of 150 institutions; the internal paper contains aggregated conclusions on risk-bearing capacity. ### Internal models, validation and supervisory model reviews - German institutions may use internal risk models for minimum capital requirements for credit, market and operational risk, provided models are accepted by BaFin; detailed provisions laid down in the SolvV. - SolvV includes requirements for independent validations; institutions must demonstrate to BaFin that internal validation processes enable assessment of model performance consistently and meaningfully. - Supervisory practice includes examining use and performance of models; assessors identified instances where supervisors increased risk factors in quantitative models based on significant backtesting outliers. ### Risk reporting, IT and data aggregation - MaRisk require internal risk reporting capabilities to senior management at regular intervals, at least quarterly; substantial limit breaches must be included with explanations and remedial actions. - Important risk information must be communicated immediately to senior management, responsible staff and internal audit where appropriate; institutions must have procedures to enable such reporting. - Supervisors assess reporting capabilities in on-site inspections focusing on report quality and bottom-up aggregation, including data quality. - Supervisors recognize increasing IT complexity, legacy systems and inadequate IT infrastructures revealed during the financial crisis; an IT working group delivered a new concept for assessing institutions’ IT systems in December 2010. - Assessors note IT area has been relatively underexposed in German supervisory practice. ### Product approval and segregation of duties - MaRisk require specific rules for development of new products: a concrete business plan based on risk analysis prior to commencing activities; decision on new products/markets must involve a unit independent of front office. - Test phases required for trading activities with limited scale before continuous trading; approval by responsible executive board members and supervisory board notification requirements apply. - Observance of product approval requirements is included in annual audit cycle and special audits; supervisors are not yet conducting dedicated inspections of product approval process effectiveness — assessed as an area for enhancement. - Segregation rules (BTO 2.1 MaRisk): monitoring/communicating risk control functions must be segregated up to executive board level from front-office origination and trading units; risk reports should be written by risk control reporting directly to executive board. ### Stress testing and forward-looking assessment - MaRisk require institutions to perform stress tests for all identified main risk drivers, account for risk concentrations and off-balance sheet risks, incorporate strategic direction and economic environment; stress testing provisions enhanced in December 15, 2010 MaRisk amendments to require reverse stress tests and to stress diversification assumptions. - Bundesbank performs its own top-down stress tests across institutions; results shared with BaFin and discussed with supervised institutions. - Assessors consider supervisory practices on forward-looking assessments should be enhanced and stress testing more firmly embedded in supervisory analytics. ### Observations on supervisory strengths and gaps (Assessment Largely compliant) - MaRisk provides a comprehensive foundation for supervising risk management; external auditor annual opinions and BaFin special audits supply supervisory understanding of deficiencies. - Financial crisis revealed global shortcomings: risk aggregation, enterprise-wide risk views, weak articulation of risk appetite by senior management, inadequate stress testing and incorporation of results, ineffective liquidity management, valuation practice weaknesses, and deficient IT infrastructures. - German supervisory approach has not always proactively identified, monitored and mitigated such issues in a timely manner, partly due to reliance on third parties and time lags from annual audit cycles. - Encouraged initiatives: designation of focus areas for annual audits; updated guidance for risk profiles; enhanced liquidity management and stress testing requirements. - Recommendations: increase supervisory inspection work focusing on underexposed areas (liquidity risk management, senior management risk oversight including product approval, stress testing capabilities, IT infrastructure) to respond more timely to deficiencies; enhance analytical assessments of capital adequacy by embedding stress testing in supervisory practices and conducting independent forward-looking assessments. ### Credit risk management (Principle 8) — framework and supervisory practice - MaRisk AT 4.2 item 1: executive board must define sustainable business strategy and risk strategy; risk strategy must contain objectives with respect to material business activities and take risk concentrations into account; may be divided into sub-strategies (e.g., credit risk). - Structural/operational arrangements for lending in BTO 1 MaRisk; processes for identifying/assessing/treating/monitoring/communicating credit risk in BTR 1 MaRisk. - External auditors pursuant to Section 23(2) PrüfbV must assess material structural features and risks of lending business, including large exposures and related party lending; material observations included in annual audit report. - BaFin periodically commissions special audits of lending practices; supervisory inspections typically comprise multiple weeks on-site and more than half of 200+ inspections commissioned annually relate to MaRisk provisions, including lending requirements. - Assessment: credit risk management framework in MaRisk is comprehensive and extensive; reliance on external audit work and time lags are inherent vulnerabilities, mitigated to a large extent by supervisory inspections. ### Decision-making, large exposures and limits (AC1-AC3) - Section 13(2) KWG: loans to single borrowers or counterparties that exceed 10 percent of the institution’s own funds (large exposures) must be granted on basis of unanimous decision of all executive board members prior to granting; provision for urgent loans approved retroactively weakens effectiveness. - Institutions must define clear decision-making hierarchy ensuring material/risky exposures decided by senior management; consistency and effectiveness reviewed in inspections and external audits. - Trading transactions are categorized as credit transactions (Section 19(1) KWG and AT 2.3 item 1 MaRisk); same structural/operational and process requirements apply to counterparty credit risk exposures; transactions subject to counterparty limits and issuer limits. - All extending of credit is a “granting decision” (AT 2.3 item 2 MaRisk): voting rules and monitoring apply and exposures are counted toward borrower-related limits immediately (BTR 1 item 5 MaRisk). ### Reporting, supervisory access and data thresholds - MonAwV and supervisory reporting: institutions file quarterly regulatory reports with Bundesbank intended to give ongoing insight into business performance; monthly returns lack detailed loan classifications and provisioning but such information is provided via annual audit reports and large exposure reports. - Large exposure reporting threshold: loans of EUR 1.5 million or more reported to Bundesbank’s credit register; disclosure to institutions is obligatory for loans exceeding EUR 750,000 (or 10 percent of own funds, whichever threshold reached first) under Section 18 KWG. - Supervisory authorities can demand further information at all times under Section 44(1) KWG, including internal risk reports and internal audit reports. ### Problem assets, provisioning and reserves (Principle 9) - BTO 1.4 MaRisk: institutions must set up meaningful risk classification procedures for initial, regular or ad hoc assessment of credit risks; criteria must be defined for risk class assignment. - Institutions must set criteria forming basis for valuation allowances, write-downs and loan loss provisions (including country risk provisioning), taking account of accounting standards (e.g., internal valuation procedures); calculations of necessary risk provisions must be kept up to date; substantial provisioning triggers immediate senior management notification. - HGB (Section 252 et seq): loans must in principle be valued annually on individual basis (group valuation allowed for homogeneous loans); provisions required when full repayment appears doubtful (minimum for unsecured part); total default requires immediate write-off. - PrüfbV requires external auditors to review classification and provisioning policies and assess likely recoverability and appropriateness/sufficiency of provisioning, incorporating realizable collateral value where relevant. - MaRisk BTO 1.2.4 and 1.2.5: institutions must have processes for intensified loan management and treatment of problem loans; criteria for transfer to restructuring/winding-up units must be set; policies subject to special audits commissioned by BaFin and annual audit work. - If classification/provisioning processes are inappropriate, BaFin can issue orders under Section 25a (1) sentence 8 KWG; if not remedied, BaFin can impose capital charges, order risk reducing measures and impose restrictions on deposit and credit business; BaFin cannot demand an increase of provisioning levels but can increase overall financial strength or seek risk deductions commensurate with provisioning shortfalls. - Supervisory access to detailed information: legal ability to obtain relevant information throughout the year by requesting internal risk reports and commissioning special audits. ### Assessment conclusions and recommendations (summary) - Overall assessment of MaRisk and supervisory framework: Largely compliant for risk management supervision; Compliant for credit risk management. - Key supervisory gaps and recommended enhancements: - Increase frequency and depth of supervisory on-site inspections, focusing on liquidity risk management, senior management’s risk oversight (including product approval), stress testing capabilities, and IT infrastructure supporting risk management. - Strengthen forward-looking supervisory assessments of capital adequacy by embedding independent stress testing and consistent analytical review into supervisory practices. - Investigate ways to improve consistency across audit firms in review of asset classifications and provisioning to enable better comparisons across institutions. - Evaluate and continue to improve depth and frequency of supervisory credit-risk related inspections and the granularity and frequency of regulatory reporting (see CP21 implications). *Source: Section 25a KWG as well as the further requirements regarding a proper business organization (extracted content).* ### Section 23 and 26 of the PrüfbV, the recoverability of the loans and the adequateness ### Section 23 and 26 of the PrüfbV, the recoverability of the loans and the adequateness of provisions ### External audit, valuation powers, and provisions - Section 23 and 26 of the PrüfbV require external auditors to assess the recoverability of loans and the adequacy of provisions. - BaFin is authorized under Section 10 (3b) of the KWG to adjust the institution’s own funds if doubt arises on the accurate valuation of certain assets (even if approved by the external auditor). - Assessors were provided supervisory materials illustrating the use of BaFin’s supervisory power in practice. - In the annual audits, auditors must describe “noteworthy loans” (including loans for which sizable risk provisions are necessary or were necessary in the concluded financial year), classified by risk category, and assess the viability of the collateral as far as relevant for the valuation of positions. If possible, the prospective realizable (net-) value of collateral has to be indicated as well (Section 26(2) PrüfbV). ### MaRisk requirements on security valuation and monitoring - BTO 1.2.1 items 2 and 3 MaRisk: value and legal validity of security must be assessed prior to granting the loan. - Existing security values may be used if there are no indications of changes in value. - If security value substantially depends on a third party (e.g., guarantees), the counterparty risk of the third party must be reviewed. - Value and legal validity of security must be reassessed at suitable intervals if a threshold set by the institution, and depending on the type of security, is exceeded. - MaRisk requires ad hoc reviews of exposures, including the underlying security, whenever the institution obtains knowledge indicating a substantial negative change in the risk assessment of the exposure or the security. ### Classification of impaired assets and comparability issues - There are no special provisions in the KWG or in the HGB establishing standardized criteria for assets to be classified as impaired; classification is left to institutions’ discretion. - Annual reports from external auditors are to provide insight into risk classification of an institution’s entire exposure volume (Section 23(4) PrüfbV), but lack of standardized criteria hampers sensible comparisons across institutions. ### Internal risk reporting on credit risk (MaRisk / BTR 1) - MaRisk general rule: risk reports with description and assessment must be submitted to the institution’s executive board in a comprehensive and meaningful form; senior management must submit “an appropriate written report on the institution’s risk situation to the supervisory body” quarterly. - Risk reporting of credit risk (at least quarterly) must address: - (i) The performance of the lending portfolio, e.g., by sector, country, risk class and size, or security category, taking special account of risk concentrations. - (ii) The extent of limits granted and external lines; large exposures and other noteworthy exposures (e.g., material problem loans) must be listed and commented on. - (iii) Where appropriate, a separate analysis of country risks. - (iv) The development of the institution’s risk provisioning. - Internal risk reporting is typically included in special audits commissioned by BaFin on the basis of Section 44(2) of the KWG. ### Valuation and provisioning practices (HGB / PrüfbV) - According to the HGB, valuation and provisioning generally must be conducted on an individual item basis (exceptions allowed for standardized retail loans, e.g., homogenous consumer loans). - External auditors are required to opine in their annual reports on notable loans on an individual basis (structured by risk classification). - Exposures regarded as “notable” include: - (i) Loans to members of the board (executive and supervisory boards, including connected persons). - (ii) Loans for which provisions are or will be necessary in a significant amount. - (iii) NPLs (if material related to the total volume of loans). - (iv) Loans with exceptional collateral. - Section 23(3) PrüfbV: auditor must describe the selection procedure for loans to be audited; this encompasses large exposures defined by Section 13 of the KWG and other exposures reviewed individually. ### Assessment, compliance, and recommendations on classification and reporting - Assessment: Largely compliant. - Comments: - The supervisory framework covering problem assets, provisions and reserves is comprehensive. - Authorities have not issued standardized criteria for classifying assets as impaired; this hampers cross-institution comparisons. - Authorities are encouraged to develop specific (minimum) criteria as basis for regulatory reporting, while allowing institutions to employ stricter internal criteria. - Material differences between (minimum) regulatory criteria and institutions’ internal criteria should be reconciled in annual external auditor reports. - There is no comprehensive framework to ensure timely and comprehensive reporting of problem assets, provisions and reserves throughout the year; this observation affects CP 21. ### Principle 10 — Large exposure limits: definitions, limits, and supervisory arrangements - Definition and scope: - KWG Sections 13 and 13b, and GroMiKV, define large exposures and related decision-making, limit definition, breaches, and supervisory reporting. - For nontrading book institutions, Section 13 (1) sentence 1 KWG: large exposures are exposures to an individual borrower or single borrower unit which amount to or exceed at least 10 percent of the liable capital. - For trading-book institutions, Section 13a distinguishes large exposures from banking and from overall business: - Section 13a (1) sentence 3 KWG: large exposures from overall businesses are exposures to an individual borrower or a single borrower unit which amount to or exceed 10 percent of the own funds. - Large exposures from banking businesses are exposures to an individual borrower or a single borrower unit excluding the individual total position from trading book business which amount to or exceed 10 percent of the liable capital. - Section 13b KWG: rules on large exposure limits apply to both a solo and a consolidated basis. - Individual and aggregate limits: - Individual large exposure limit: single large exposure limited to 25 percent of the liable capital for the banking book and 25 percent of the own funds for the overall business of trading-book institutions. - Aggregate large exposure limit: former requirement that institution may not incur large exposures which in total exceed eight times its liable capital for the banking book and eight times its own funds for the overall business of trading book institutions has been removed. - Assessors understand supervisory practice showed the aggregate large exposure limit was, in reality, never breached. - Breaches and supervisory actions: - If individual large exposure limit exceeded, responsible manager must be notified immediately and supervisory authority must be notified of the breach. - Amount by which lending exceeds the large exposure limit must be backed by liable capital or own funds. - BaFin may exempt an institution from the requirement to provide capital backing; consent usually subject to a time limit and revocable; BaFin regularly attaches other conditions, especially reporting obligations tied to solvency ratio thresholds. - Section 56(2) no. 6 KWG: breaches of large exposure limits not approved may, in case of negligence or deliberate intent, constitute a breach of administrative regulations and entail administrative fines. - Reporting requirements: - Institutions must report to the Bundesbank their large exposures for the preceding quarter each January, April, July, and October. - Reports must include: amount of notifiable large exposures on the reference date; amount that counts for the individual large exposure limit (accounting for exemptions in Sections 9 to 11 GroMiKV); and the risk-weighted amount of notifiable large exposures. - Superior institutions of groups must produce quarterly reports by the last calendar date of the following month for consolidated reporting. - Exposure definition and exclusions: - Definition of exposure for large exposures follows Section 19(1) KWG and includes on-balance-sheet assets, derivatives, and other off-balance-sheet transactions. - Section 20(1) to (5) KWG lays down rules on exceptional cases of exposures not to be considered as utilization of large exposure limits. - Audit and supervisory verification: - Senior management must inform itself about the state of all large exposures at dates for submission of quarterly large exposures reports. - Annual account auditors must verify and assess institutions’ compliance with large exposure rules (Section 23(1) PrüfbV). - Section 36(2) PrüfbV: auditors must report on precautionary measures to comply with large exposure requirements on a consolidated basis (Section 13b KWG), including disclosure compliance. - BaFin examines compliance with large exposures rules in special audits pursuant to Section 44 KWG. - Risk concentration management (MaRisk): - AT 4.3 and AT 4.3.2 MaRisk: institutions must establish processes to identify, assess, treat, monitor, and communicate risks including risk concentrations, dependent on nature, scale, complexity and risk content. - Specific counterparty risk requirements in BTR 1 MaRisk: no lending without borrower-related limit; trades only within counterparty and issuer limits; limits must be closely monitored and breaches recorded and escalated if necessary. - AT 2.2 MaRisk and AT 4.1 item 1 MaRisk: material risks and risk concentrations must be covered by risk taking potential at all times; qualitative and, if possible, quantitative techniques should be used; treatment and monitoring by appropriate procedures (limits, “traffic light systems”, other precautions). - Decision-making for large exposures generally requires a unanimous decision from senior management prior to legally incurring the exposure; urgent cases allow retroactive decisions, but if retroactive decision not taken within one month, institution must notify BaFin and Bundesbank. - BTR 1 item 7 MaRisk: quarterly risk report for management board must include main structural features of lending business, performance by sector/country/risk class/size, extent of limits granted, external lines, large exposures and other noteworthy exposures. - Internal auditors must assess management of risk concentrations as part of annual audit cycle (Section 23(5) PrüfbV). - BaFin special audits typically examine systems for monitoring sectoral and regional loan concentrations. - Supervisory monitoring of country and transfer risks: - Current supervisory legislation only partly provides for supervisory monitoring of risk concentration such as country and transfer risks. - Reports filed with the Bundesbank’s Central Credit Register on loans of EUR 1.5 million or more to individual borrowers or a single borrower unit must incorporate sectoral and geographical information. - Information from the Credit Register is periodically analyzed by the Bundesbank to identify potential risks to overall financial stability or risks to individual firms’ financial solidity. - Where country and transfer risks on an individual non-EEA country exceed a total of EUR 10 million, institutions must notify BaFin and the Bundesbank on a quarterly basis of their country risk exposures, broken down by individual countries. ### Assessment of large exposures - AC1: Definition of large exposures in Sections 13 et seq. KWG is in accordance with AC1. - Assessment: Compliant. - Comment: Authorities are recommended to review provisions on retroactive decisions, as retroactive approval undermines effectiveness of otherwise stringent provisions by restricting opportunities to refuse the loan or impose restrictions. ### Principle 11 — Exposures to related parties - Legal definition and scope: - Sections 15 and 17 KWG govern loans to related parties (Organkredite). - KWG definition of related parties encompasses senior managers, members of a governing body, proxy holders (Prokuristen), spouses, civil partners, and minors of designated related parties. - Approval, terms, and supervisory oversight: - Section 15 KWG: loans to related parties may be granted only by virtue of a unanimous decision by all of the institution’s members. - Loans to related parties—other than as part of staff programmes—may only be made on market terms and only with the explicit approval of the Supervisory Board. - Section 15 allows BaFin to order that loans not granted on market terms be fully backed with liable capital. - Practice and shortcomings: - In practice, board members with conflicts of interest are excluded from approval processes though no legal requirement mandates this exclusion. - KWG exemptions aimed at proportionality and practicality do not materially invalidate the principal rule. - Possibility under the KWG of having urgent loans approved retroactively undermines effectiveness of the supervisory framework on loans to related parties, as retroactive approval limits the possibilities to reject loans or attach specific conditions. *Source: _cr11273 - Section 23 and 26 of the PrüfbV, the recoverability of the loans and the adequateness of provisions have to be assessed by the external auditors.* ### Section 15(4) of the KWG sets out more detailed decision-making provisions. It ### _cr11273 - Section 15(4) of the KWG sets out more detailed decision-making provisions. It ### Loans to related parties (Section 15 KWG and MaRisk) - Section 15(4) of the KWG requires decisions of senior managers and the Supervisory Board to be taken prior to the loan being granted, explicitly including provisions on the interest payable on, and repayment of, the loan, and must be clearly documented. - MaRisk principle: separation between front office (initiating the loan) and back office (voting on and subsequent managing of the loan). - For related parties, decisions must be unanimous by senior managers and the supervisory board, enabling independent assessment and separation of duties to prevent ongoing conflicts of interest from influencing ongoing management/monitoring. - Assessors note BaFin in practice imposes exclusion of senior managers or supervisory board members benefiting from the loan from the approval process (assessors’ understanding; footnote 52). ### Supervisory powers and limits (EC5–EC7) - Section 15(2) of the KWG allows BaFin to impose limits for granting loans to related parties (as comprehensively defined in the KWG); loans breaching limits must be reduced to the limits upon a further order of BaFin or, in the meantime, be backed with liable capital. - Assessors note BaFin has no practical experience imposing such limits and considers imposition a deep encroachment into institutions’ fundamental lending freedom. - KWG does not contain specific risk management requirements for loans to related parties but requires a proper business organization covering identification, assessment, management, monitoring and reporting of all material risks. - Section 23(1) PrüfbV: external auditors must report on observance of the institution’s internal rules governing loans to related parties and Section 15 KWG. - No current rules require reporting of aggregated exposures to related parties to BaFin; such reporting existed prior to 1998 but was abolished. - External auditors under PrüfbV must comment in their annual audit report on “noteworthy loans”, including “loans to managers which are exceptionally significant in view of their magnitude or particular features.” ### Assessors’ evaluation on related-party lending - Assessment: Largely compliant. - Key comments and recommended corrective measures identified by assessors: - The possibility of retroactive approval undermines effectiveness of decision-making provisions by restricting opportunities to refuse the loan or put restrictions on it. - Lack of reporting requirements to BaFin prevents BaFin from making informed decisions on targeted inspections of lending practices to related parties. - German authorities should take further measures to correct these remaining weaknesses. ### Country and transfer risks (Principle 12) - Legal and supervisory framework: - Section 25a(1) sentence 3 KWG requires institutions to establish a proper business organization with appropriate and effective risk management covering all relevant risks. - MaRisk requires processes for identifying, assessing, treating, monitoring, and communicating all relevant risks, encompassing country and transfer risks. - BTR 1 item 6 MaRisk: institutions must identify risk concentrations using qualitative and, to the extent possible, quantitative procedures and manage/monitor via limits, traffic lights systems or other precautionary measures. - Section 24 PrüfbV: external auditors must assess total extent of country risk-related exposures and methods used to manage and monitor them. - Provisions and reporting: - MaRisk requires institutions to set criteria for loan loss provisions (including country risk), taking into account accounting standards; provisioning calculations are subject to external audit review (Section 26 and 31 PrüfbV). - BaFin’s Country Risk Exposure Regulation (Landerrisikoverordnung, LrV) requires reporting of lending to borrowers outside the EEA if aggregated exposure to a specific country at quarter-end exceeds EUR 10 million; transactions of at least EUR 1 million must be detailed (including collateral and provisions). - Credit Register of the Bundesbank: covers borrowers whose credit volume amounts to EUR 1.5 million or more (pursuant to Section 14 KWG). - KWG allows supervisory authorities to request information on all business activities; authorities used this during the crisis to request exposures to Greece. - Assessment: Compliant. - Comment: Approach relies on overarching obligations and fits within CP framework that recognizes different international practices for oversight of country and transfer risks. ### Market risk (Principle 13) - Legal and supervisory framework: - Section 25(a) KWG requires institutions to maintain an appropriate and effective risk management system commensurate with size and scope. - BTR2 MaRisk sets specific market risk requirements: threshold systems to limit market risks, appropriate valuation of positions, risk reporting, internal control, management oversight; subject to internal/external review and Bundesbank on-site examinations where applicable. - Key operational requirements: - Use of limits with mandatory reporting of limit exceptions daily to senior management; risk reports including limit deficiencies to senior management at reasonable intervals. - Trading book positions valued daily; consolidated overall risk positions at least once a day with P&L, limit exceptions, and positions reported promptly to senior management. - Valuation and oversight scaled to size/nature of trading book; require proper pricing methods and alternative valuation methods during market stress or when market prices are unavailable/distorted. - Stress tests required at regular intervals, broad enough to include off-balance sheet risk and concentrations, robust to account for plausible and exceptional events. - No specific requirement for contingency plans covering material market risk shocks, though MaRisk requires contingency plans for time-critical activities and special requirements for liquidity squeezes. - Institutions required to initiate risk reports to senior management at least quarterly. - Structural controls: - Separation between trading unit, risk control unit, and settlement/back office; marks used in pricing developed outside trading unit and subject to oversight. - Assessment: Compliant. - Comment: Legislative framework lacks explicit contingency plan requirement for market risk, but MaRisk addresses main elements. ### Liquidity risk (Principle 14) - Legal and supervisory framework: - Section 25(a) KWG: institutions must have suitable arrangements for managing, monitoring, and controlling risk. - MaRisk: principle-based requirements covering liquidity risk, including off-balance sheet and special-purpose vehicles. - LiqV: specific quantitative requirement of a one-to-one relationship between liquid assets and callable liabilities in the first maturity band, including relevant off-balance sheet items and considering liquidity facilities or lending commitments. - Systemically relevant institutions encouraged to use internal liquidity models subject to Bundesbank authorization after in-depth examination. - CEBS guidelines on liquidity buffers and BCBS liquidity risk measurement incorporated in December 2010. - Governance and oversight: - Executive board responsibility for ensuring policies, practices, procedures, and processes to limit and control liquidity risk; annual accounts auditor and Section 44 KWG Bundesbank audits confirm existence of suitable risk management. - MaRisk requires senior management involvement; implementation monitored by external audit and Bundesbank examinations. - Reporting, stress testing and contingency planning: - Institutions must take a holistic view of risks and use stress testing; larger institutions use sophisticated models. - No routine surveillance mechanism for foreign currency liquidity and position risk; BaFin conducts selected oversight and can request information under Section 44 KWG. - Institutions required to develop detailed contingency plans for unusual liquidity demands and reporting channels up to supervisors; auditors review such plans during annual accounts review. - No explicit requirement for separate foreign currency stress tests; proportionality applies where material funding risk in external currencies exists. - Assessment: Largely compliant. - Comments and recommendations: - BaFin should consider strengthening and tightening reporting requirements for currencies other than euros. - Supervisors should proactively increase inspection work on liquidity management and thoroughly test observance of enhanced MaRisk liquidity requirements, taking decisive action for deficiencies. ### Operational risk (Principle 15) - Legal and supervisory framework: - Section 25a(1) KWG: institutions must establish appropriate and effective risk management structure aligned with risk bearing capacity, with proper controls and management reporting. - MaRisk treats operational risk as a material risk subject to minimum requirements; requires review of controls when material changes occur. - Governance and responsibilities: - Senior management is responsible for defining business strategy with reasonable and adequate risk controls; responsibility cannot be delegated. - Supervisory board must be informed and have opportunity to discuss or change the framework. - MaRisk prescribes senior management responsibility for implementation; annual oversight exercised by external auditors. - Business continuity and IT: - MaRisk requires business continuity planning for major disruptions; plans must be regularly reviewed. If activities are outsourced, institutions must assess service provider contingency plans. - Supervisory authorities do not independently review contingency plans on a routine basis. - MaRisk requires symmetry between scope/quality of data and technology platforms and institutional needs; IT systems must protect data integrity, availability, and authenticity and be based on established standards; suitability reviewed periodically by qualified institutional staff. - Reporting: - Senior management must file a quarterly report regarding the institution’s risk situation with plans to address concerns; important issues must be immediately forwarded to regulatory authorities with accompanying information and documents. - No explicit assessment paragraph present in this excerpt beyond requirements and responsibilities. *Source: _cr11273 - Section 15(4) of the KWG sets out more detailed decision-making provisions. It (IMF country report excerpt).* ### Section 26(1) of the KWG requires institutions to file their annual accounts and ### Section 26(1) of the KWG requires institutions to file their annual accounts and ### Operational risk, legal risk, and outsourcing (EC7–EC8) - EC7: Under MaRisk guidelines legal risk is included as a material risk subject to the disciplines outlined above. - EC8: MaRisk requirements for material outsourcing contracts must include: - (i) specifications and description of the services to be performed; - (ii) audit rights for internal and external auditors ensuring BaFin’s information and examination rights; - (iii) proper procedures to ensure compliance with data protection requirements; - (iv) right to give notice of termination; - (v) procedures designed to ensure continuing compliance with bank supervisory requirement; and - (vi) commitments from the service provider to inform the bank of any incident likely to threaten continued performance. - The institution is responsible for identifying which outsourced activity is material relative to the bank’s particular risk profile. - MaRisk does not provide for a form of pre-clearance by the supervisor of envisaged outsourcing arrangements. - Recommendation: Authorities may want to implement requirements aimed at periodical reporting of material operational risk incidents to the supervisory authorities to ensure supervisors are kept abreast of relevant developments affecting operational risks at banks. ### Group-level risk management (AC1) - Section 25(1)a of the KWG: same elements of risk management on an individual institution basis must apply to the group and be implemented at the group level. - MaRisk specifies group risk management scope: cover all material risks regardless of whether risks are housed in a non-consolidated entity. - MaRisk procedures: judge material risk requirements through an overview of the institution’s risk conducted at regular intervals and on an event driven basis; consider additional risk from operationally intense business. - Assessment: Compliant. ### Supervisory assessment and IT risk (Comments) - Assessors view area of IT risk as underexposed in German supervisory practice. - Recommendation: supervisory authorities are strongly recommended to strengthen specialized IT inspection capacity and increase depth and frequency of targeted IT inspections, focusing on: - IT security and the prevention of cyber crime; - IT controls and contingency procedures; - tests. - Authorities may want to elaborate their minimum requirements on operational risk management, taking into account the BCBS’ Consultative Document on Sound Practices for the Management and Supervision of Operational Risk (Published on December 10, 2010). ### Interest rate risk in the banking book (Principle 16: EC1–AC4) - EC1: Interest rate risk is a material risk under Section 25a(1) of the KWG and MaRisk; banks must have adequate control systems, monitoring and measuring procedures, and oversight; board and senior management responsibilities cannot be delegated. - EC2: Interest rate risk is included within monitoring and control of market price risk in the banking book; review must incorporate possibility of a major market disruption; external auditors review implementation as part of annual accounts or Section 44 audits conducted by the Bundesbank. - EC3: AT 4.3.2 of the MaRisk requires appropriate stress testing at regular intervals; supervisory authorities require a stress test consisting of a +/- 200 bps sudden shift of the yield curve. - Reporting requirement: Institutions must report the outcome of the stress test to BaFin and the Bundesbank if it shows a decline of the economic value of the institution by more than 20 percent of own funds. - AC1: MaRisk allows discretion whether interest rate risk results are run through P&L or present value; BaFin asked institutions to calculate impact of a sudden and unexpected interest rate shock on a regular basis. - A relatively small number (130) of institutions reported a decline of the magnitude set out by BaFin. - BaFin was in the process of imposing high capital charges on some (12) of these institutions. - AC2: MaRisk requires internal capital measurement systems where relevant to include interest rate risk in the banking book. - AC3: Stress tests should reflect exceptional but plausible scenarios consistent with strategy and environment; senior management must report risk factors and stress testing results at appropriate intervals; suggested mitigation methods included in risk report. - AC4: MaRisk requires clear structural separation between trading unit, risk control function, and settlement and control function up to senior management; separation may be waived if trading activity is immaterial. - Assessment: Compliant. - Comment: BaFin is considering adapting approach to require all institutions (instead of only those breaching 20 percent threshold) to report impact of predefined parallel interest rate shift on income to better assess sector-wide effects. ### Internal control and audit (Principle 17: EC1–EC8) - EC1: Complete legal framework covering responsibilities of board and senior management; BaFin and Bundesbank conduct regular testing for compliance. - EC2: Section 25a of the KWG and MaRisk set executive board responsibility for establishing and maintaining an adequate control environment. - EC3: Legal backing places full responsibility for oversight with board and senior management; ongoing testing of board competency by BaFin and Bundesbank. - EC4: BaFin has powers to remove or force dismissal of executive board members for cause; 2009 Annual Report lists 10 measures against managers (versus 3 in 2008). - EC5: MaRisk requires qualitative and quantitative staffing and remuneration to ensure appropriate skill sets. - EC6: Internal audit reports to executive board but must be independent; auditors must concentrate on auditing tasks; investment banking services require adequate separation of duties and formal compliance structure. - EC7: Section 25a and MaRisk require adequate functioning internal audit unit with broad responsibilities to examine risk management, strategy, internal controls, and regulatory adherence. - EC8: Institutions must align staffing needs to business and risk management; internal audit appears independent, adequately staffed, competent, and operating under comprehensive audit plans updated yearly or more frequently. - Reporting: Serious deficiencies must be reported immediately including offenses related to mismanagement or misconduct by executive board members. - Assessment: Compliant. - Comments: German supervisory framework with regard to internal control and audit complies with this CP. ### Abuse of financial services / AML/CFT (Principle 18: EC1–EC12) - EC1: AML/CFT legal framework includes: - Anti Money Laundering Act (Geldwäschegesetz, GwG) for customer due diligence (CDD) and internal safeguards; - KWG adds banking-specific rules; - Regulation (EC) No. 1781/2006 on payer information for transfers; - PrüfbV defines auditors’ obligations for AML/CFT audits. - Resource constraints: specialized BaFin staff typically perform investigations but in practice only a limited amount of inspections are performed each year. - EC2: Section 25a(1) KWG requires proper business organization and risk management; Section 25c(1) KWG obliges banks to develop and update internal principles and safeguards to prevent ML, TF and other criminal activities leading to asset exposure. - Licensing: All banking businesses subject to licensing with background checks; regulatory measures exist to prevent criminals gaining access post-license. - External evaluation: Mutual Evaluation Report (2009) found statutory provisions for transaction monitoring generally weak; STR reporting well established but fails to meet FATF standard in several key areas. - EC3: MaRisk embeds requirements for proper business organization; quarterly MaRisk reports are the channel to inform BaFin about suspicious activities material to safety, soundness, and reputation. - Reporting channels: Institutions report STRs to law enforcement authorities of the German Lander and to the German Financial Intelligence Unit (FIU). - EC4: GwG requires CDD measures including: - (i) adequately identify the contracting party; - (ii) risk-based measures for PEPs; - (iii) identify beneficial owner; - seek and obtain information on purpose and intended nature of the business relationship; - inability to fulfill CDD prohibits establishing or continuing business relationships or transactions. - Mutual Evaluation conclusions: preventive measures generally adequate but problematic in areas such as broad CDD exemptions for low-risk customers and treatment of all EEA member states as a single-risk category. - Legislative developments: Law for the Implementation of the Second EU E-money Directive enacted on March 9, 2011; main outstanding issue (treatment of EU/EEA as single risk category) to be solved at EU level. - EC5: Section 25f(1) KWG: enhanced due diligence for correspondent institutions based in third countries. - EC6: External auditors: - produce annual AML/CFT audit reports for supervised institutions and provide these to BaFin; - can carry out specific on-site AML/CFT inspections at BaFin's behest; - Section 29(2) KWG requires auditors to examine compliance with GwG, KWG, and EC Regulation 1781/2006; - Section 21 PrüfbV addresses a broad range of AML/CFT requirements. - EC7: BaFin is designated competent AML/CFT supervisory authority with sanction powers; GwG provides administrative fines (Zwangsgeld). - Between 2001 and Mutual Evaluation in 2009: BaFin imposed one administrative fine for an AML/CFT failure (under predecessor legislation), revoked five money service remitters’ licenses for AML/CFT reasons, but otherwise limited sanctions (written warnings); no dismissals or fines under sector-specific regulatory laws during that period. - EC8: GwG requires institutions to designate an ML compliance officer subordinate to management with necessary means and procedures; no explicit legal provisions oblige institutions to ensure high standards when hiring employees; regular checks of employee reliability during employment required only in exceptional, justified cases. - EC9: Credit institutions must draw up organizational instructions to ensure written reports on all internal cases of suspicion are submitted to the compliance officer and documented; internal audit must examine compliance with GwG duties and submit reports at least once a year to the management board. - EC10: STR information may be used only for specified criminal proceedings, taxation proceedings, supervisory tasks under Section 16(2) of the GwG, and threat prevention (Section 11(6) GwG); names of persons who make STRs receive special protection; BaFin requires STRs filed only through the ML compliance officer without disclosing the officer’s name or staff names. - EC11: BaFin obliged to inform competent law enforcement agency, with a copy to the FIU, where it believes an offence under Section 261 Criminal Code or terrorist financing has been or will be committed or attempted (Section 14(1) GwG). - EC12: KWG regulates BaFin cooperation with foreign authorities for supervision; Section 8 KWG for EEA counterparts; Section 9(1) KWG for AML/CFT cooperation regardless of EU/EEA status; BaFin frequently cooperates with supervisors and FIUs in other countries and has concluded MoUs since 1999 that include a paragraph on financial crimes (ML) when the foreign authority has AML/CFT responsibility. - AC1: BaFin as supervisory authority has no specific expertise for addressing criminal activities but cooperates closely with the FIU which shares expertise. - Assessment: Largely compliant. - Comments and recommendations: - 2009 FATF Mutual Evaluation concluded Germany’s AML/CFT framework then was not fully in line with FATF recommendations; identified weaknesses in CDD, record-keeping, and sanctioning/enforcement. - BaFin is strongly recommended to review its enforcement strategy and capabilities with regard to AML/CFT given its very limited track record in sanctioning before 2009. - German authorities were in process of addressing weaknesses; BMF developed a draft Act to Optimise the Prevention of Money Laundering (Gesetz zur Optimierung der Geldwäscheprävention) to strengthen FIU role, extend due diligence duties for non-financial institutions, and strengthen Länder supervisory remits (draft Act under discussion). ### Supervisory approach (Principle 19: EC1–EC6) - EC1: BaFin and the Bundesbank jointly undertake risk assessment, profiling, and evaluation guided by a June 2008 guideline; a further guideline has de facto formed the basis of ICAAP assessments since June 2010. - Bundesbank prepares bank-by-bank “risk profile” based on annual audit, ongoing monitoring issues, and on-site inspection results; provided to BaFin which has final decision on adequacy. - Supervisory review and evaluation process conducted in four layers per CEBS guidelines: scope and classification; individual risk assessment; ICAAP review and evaluation; supervisory measures. - Institutions are placed into a risk matrix of four risk/quality categories and three levels of systemic relevance to determine supervisory oversight. - EC2: Monitoring and assessment of system risks is task of dedicated structures: BaFin Directorate Q1 (financial stability, risk analysis, financial instruments, risks from real economy) and Bundesbank Financial Stability Department (established 2009) for bottom-up contagion analysis; risk committee established in 2009 to integrate micro and macro oversight. - EC3: See EC1. - EC4: External auditor regulation is clear on responsibility to check compliance with prudential standards; Bundesbank may perform inspections or BaFin may require Section 44 KWG reviews. - EC5: Institutions legally obligated to report substantive changes or material issues affecting health or stability. - EC6: Institutions file annual and monthly prudential information forming early alert system based on peer comparisons; quarterly returns reviewed for unusual activity and forwarded to line supervisor. - Additional points: - BVR and DSGV have internal risk-rating frameworks linked to protection schemes; periodic discussion with supervisors provides incentives. - Challenges noted: introduction of Basel III and Basel liquidity rules; Landesbank sector transition. - Assessment: Compliant. - Comments: - Guideline for preparation of risk profiles issued June 2008; updated guideline for quantitative capital adequacy assessment de facto in use since June 2010. - Supervisors intend focus in 2011 on resilience of business models, profitability concerns, and increased investment banking risk-taking. - Recommendation: BaFin may consider developing a formalized “ladder” of actions to ensure timely and proportionate supervisory responses; need to embed rigorous stress tests more strongly in supervisory practice. ### Supervisory techniques (Principle 20: EC1–EC8; AC1) - EC1: Yearly supervisory strategy and individual supervision plans incorporate on-site and off-site factors and inputs from risk committee and macro factors; Bundesbank authorized to carry out on-site visits under Section 7(1) KWG; proportionality requirement applies. - EC2: Bundesbank outlines annual schedule for on-site inspections at end of October, accounting for risk profiles and urgency; schedule finalised after discussions with BaFin and may be amended. - EC3: Supervisory work verifies MaRisk implementation and accuracy of prudential returns; BaFin can require special inspections under Section 44 KWG; strict follow-up required for supervisory measures including remediation timing. - EC4: Monitoring conducted through documents, reports, annual accounts, audit reports, routine and special supervisory exercises; results feed supervisory strategy and inspection scope. - EC5: Bundesbank regional offices meet at least annually with senior management to discuss auditor reports and risk profiles; BaFin may join prudential discussions; for large/complex institutions dialogue is more frequent and multi-level. - EC6: Section 33 KWG: BaFin assesses professional qualifications and trustworthiness during licensing and on an ongoing basis; Section 44 audits may be required if doubts arise; Sections 35 and 36 KWG allow removal of management for cause; February 2010 BaFin guidance on fit and proper criteria for supervisory board members to implement FMVAStärkG (enacted August 2009). - EC7: BaFin emphasizes adequate internal auditing policies and MaRisk compliance; external auditors required to report deficiencies immediately to supervisory board chairman and BaFin. - EC8: Bundesbank conducts annual prudential discussions including risk profile and improvement expectations; BaFin may join. - AC1: Section 44(4) KWG: BaFin can send representatives to supervisory board meetings and sub-committees; Bundesbank has no legal right but can be deployed by BaFin. - German banking supervisors participated in about 700 meetings of supervisory and control bodies and their sub-committees between 2005 and 2010. - Assessment: Compliant. - Comments: - Reliance on external auditors for annual checks can produce time lags, but regional Bundesbank offices and BaFin are competently staffed for early identification of threats. - Risk committees in BaFin and Bundesbank identify broader threats and adjust supervisory initiatives. ### Supervisory reporting (Principle 21: EC1) - EC1: Section 26(1) of the KWG requires institutions to submit the annual accounts along with a certification from the auditor, and the annual management report. *Italic: IMF staff summary of supervisory framework excerpts contained in the supplied content.* ### Section 26(3) of the KWG these requirements are also operative at the consolidated ### _cr11273 - Section 26(3) of the KWG these requirements are also operative at the consolidated ### Supervisory reporting and returns (EC1–EC11) - Auditors must submit specified data relating to detailed information on asset quality and loan loss provisioning. - A monthly return is filed with the Bundesbank containing information on the balance sheet and the P&L. - Reporting on the adequacy of own funds is submitted quarterly but any capital shortfall would be required to be reported immediately. - Separate monthly reports are filed with respect to adequacy of funds to meet payment and settlement obligations. - Ad hoc reports are required when an institution meets or exceed the 10 percent limit on loans to a single borrower and loans that exceed EUR 1.5 million. - The described reports are filed with the Bundesbank and are available electronically to staff of BaFin on an as needed basis or passed to BaFin if anomalies exist and are flagged by the Bundesbank. - Financial reports submitted to the Bundesbank follow rules set out in the HGB and a regulation governing the financial statements of credit and financial services institutions drafted by BaFin and approved by the Ministry of Justice; some parent institutions must report under IFRS while others may elect to do so. - If IFRS consolidated statements are used for prudential purposes they should follow the regulation regarding the procedure for calculation own funds as it contains prudential filters that incorporate CEBS and BCBS recommendations. - The annual accounts are filed in accordance with the Principles of Proper Accounting (Grundsätze ordnungsgemäßer Buchführung) codified in the HGB (including “historical cost principle,” “item-by-item valuation principle,” “realization principle,” “imparity principle,” and “prudence principle”). - Standard reporting package: weekly, monthly, quarterly, and yearly reports filed with the Bundesbank, aligned with the nature, size, and unique risk profiles of individual banks. - Additional reporting imposed in response to the financial crisis for credit institutions with systemic risks includes: - (i) detailed liquidity reports accompanied by liquidity calls; - (ii) monthly reports on development of income, risk-weighted assets (credit, market, and operational risks), own funds and solvency ratio (tier 1-capital ratio and total capital ratio) both on a solo and consolidated basis and compared with figures for the respective period of last year; - (iii) monthly reports on profit and loss from trading activities; - (iv) monthly updates on institutions’ capital and funding plans; - (v) monthly reports on rating migration within the credit portfolio; - (vi) quarterly MaRisk reports, submitted by senior management to the institution’s supervisory board members; - (vii) quarterly reports on planned and concluded internal audits (once a year the major findings of all concluded internal audits of the FY); - (viii) all minutes of supervisory board meetings and, in advance, important papers prepared for these meetings. - Additional reporting requirements established for institutions heavily exposed to structured finance products (for example, RMBS, CMBS, CDS, and CDO). - Additional supervisory reports are compiled, evaluated, and assessed by regional offices of the Bundesbank and responsible supervisors at BaFin; the Bundesbank may propose BaFin take supervisory measures but final decision rests with BaFin. - Reporting requirements are standardized as to reporting periods, but comparability may be limited due to different valuation techniques; supervisory agencies can ask for additional standardized information and manual manipulation of data sometimes occurs to harmonize figures. - BaFin has power under the KWG to request information from companies, governing board members, employees, and associated enterprises; may request a special audit under Section 44 of the KWG to be carried out by an external party of the Bundesbank; information gathering and inspection powers encompass external service providers, holding companies and enterprises included in consolidated supervision. - Section 44 of the KWG et seq provides BaFin sufficient and adequate powers to gain access to all bank records. - BaFin has adequate authority to enforce compliance with respect to content and timeliness in reporting of supervisory returns; KWG options for reporting deficiencies range from fines to measures against senior managers and revocation of banking license; BaFin may require correction of inaccurate information. - Integrity and reliability of information filed in prudential returns is checked as part of the annual audit per the PrüfbV; auditors use determination of materiality and random sampling; deviations must be noted in the auditor’s report; regional Bundesbank offices scrutinize returns and may refer questionable returns to BaFin for special audit. - Where audits are not carried out by BaFin or Bundesbank staff, outside auditors or outside audit companies are used; auditors must meet high professional standards and the use of special audits is authorized under Section 44 of the KWG; Section 30 of the KWG allows BaFin to instruct the auditor of the annual accounts to focus on certain issues. - Section 29(3) of the KWG requires the auditor to inform supervisory authorities if an audit will be qualified or an audit certificate withheld and to notify authorities immediately if they become aware of facts that might (i) jeopardize the institution’s existence or materially impair its development; (ii) constitute a major infringement of provisions relating to approval criteria or the pursuit of business under the KWG; or (iii) indicate that senior managers have seriously infringed the law/articles of association/articles of incorporation or partnership agreement. - Assessment: Largely compliant. - Comments: Assessors found granularity of formal regulatory reporting sometimes insufficient; BaFin has mitigated this by requiring systemically relevant institutions to report more detailed information more frequently (liquidity positions twice a week; trading P&L monthly; funding plan updates monthly; capital plan updates monthly; MaRisk report quarterly; credit and market risks information quarterly; planned and concluded audits quarterly; structured products monthly). Assessors recommend BaFin replace this ad hoc reporting stream with a standardized, comprehensive framework to ensure timely reporting of sufficiently granular data on all material risks. German authorities are preparing a major reform of the reporting framework increasing granularity and frequency; parts expected to become effective during the course of 2011. ### Accounting and disclosure (Principle 22; EC1–EC11; AC1–AC5) - Section 25(a) of the KWG requires institutions to have an adequate framework of financial control; board members are responsible for proper business organization including financial controls; BaFin may issue orders requiring remedial action and may sanction responsible individuals. - Under Section 242 of the HGB, board members are responsible for content, adequacy, and accuracy of annual accounting reports. - Section 26 of the KWG requires institutions to draw up annual accounts for the previous year in the first three months of the current financial year, submit approved annual accounts and accompanying management report to BaFin and the Bundesbank; accounts must be audited and certified by a competent external auditor and the audit certificate (or a note accounting for withholding) must be submitted to BaFin and the Bundesbank. - Disclosure requirements are set out in the HGB; failure to comply with timely filing or other requirements is a breach and may result in a fine by BaFin. - Valuation rules: institutions may choose among historical cost, item-by-item valuation, realization principle, imparity principle, or prudence principle; EU directives require trading assets at fair value and only distributable profits net of provisioning may be disclosed. - Routine audit requirements: Section 29 of the KWG and regulations governing annual audits; Section 30 of the KWG allows BaFin to determine focal points of audits. BaFin has ordered audits to focus on structured products, securitization exposures, valuation procedures, and functioning of supervisory boards. - The PrüfbV requires external auditors to assess approach to managing large exposures and loans to related parties (Sections 13, 13a and 15 of the KWG), country related exposures, noteworthy loans, underlying value of loans and suitability of risk provisions, quality and realizability of collateral, net asset position including off-balance sheet items and hidden reserves/losses. PrüfbV contains no specific reference to asset valuations, trading positions or securitizations but these are implicitly included in auditors’ assessment of risk management adequacy. - In line with Section 28(1) of the KWG institutions must immediately notify BaFin and the Bundesbank of the auditor selected to conduct annual reviews; BaFin has a window of 30 days to reject the auditor and require appointment of another if sufficient grounds exist. As of December 31, 2010, BaFin can require changes in the auditor in charge if he or she did not adequately fulfill the role expected within one of the prior two years (new power not yet tested in practice at time of mission). - Accounting principles and rules are not within bank supervisors’ purview; HGB contains detailed requirements and a Regulation Governing the Financial Statements of Credit Institutions and Financial Services Institutions drafted by BaFin and approved by the Federal Ministry of Justice provides additional requirements. Parent institutions may be required by EC regulations to draw up annual accounts in accordance with IFRS; if consolidated accounts are IFRS-based, procedures surrounding annual accounts are applied within appropriate sections of the HGB. - Disclosure rules are the prerogative of stock exchanges and the HGB; Section 26(a) of the KWG aligns with EC directives requiring qualitative and quantitative disclosure of own funds, capital adequacy, and risk management procedures. BaFin can issue guidance to correct deficiencies in disclosure practices. - SolvV disclosure requirements (in addition to HGB) require institutions to disclose, for example: - (i) high level strategy and processes for each risk category; - (ii) structure and organization of risk management; - (iii) scope and nature of risk reporting; - (iv) hedging policies; - (v) structure of own funds; - (vi) certain quantitative and qualitative information on derivative and netting positions; credit, market, interest rate, operational, securitizations, and credit risks; and mitigation techniques. - Bundesbank monitors compliance with disclosure standards required under Section 5 of the SolvV and reports non-compliance to BaFin for corrective measures; the auditor of the annual accounts must verify compliance with Section 5 requirements. - BaFin’s annual report satisfies this criterion. - AC notes: - Meetings with the banking committee of the German Institute of Certified Public Accountants are held annually along with members of regional associations for savings and cooperative banks. - Section 29 of the KWG requires auditors to report on situations with potentially serious detrimental effects; auditors are held harmless for inaccuracies in reports filed in good faith. - An external auditor may be excluded from an audit of a publicly traded company if responsible for the annual audit for seven consecutive years. - Section 26(a) 1 of the banking act requires every institution to have a formal disclosure policy. - Supervisory authorities have no legal access to external auditors’ work products, though discussions may entail limited disclosure of work product information. - Assessment: Compliant. - Comments: Supervisory authorities meet annually with the Institut der Wirtschaftsprüfer in Deutschland e.V and representatives acting as statutory auditors for savings and cooperative banks. BaFin’s new authority (as of end of December 2010) to demand replacement of the auditor in charge under certain circumstances had not been tested. Accounting rules permit a menu approach to asset valuation which may inhibit consistency and distort peer comparisons; BaFin and the Bundesbank may consider encouraging further standardization of accounting and valuation practices due to their bearing on regulatory capital and reserving requirements. ### Corrective and remedial powers of supervisors (Principle 23; EC1–EC5) - Ongoing supervisory process includes regular meetings with management board and its chairman to keep management apprised of relevant sector issues and institution condition; administrative orders must be in writing and remedial follow-up is intense. - Reporting obligations: an institution that incurs a loss of more than 25 percent of own funds, a fall in capital or liquidity below required minima, an acquisition of a qualified participating interest, intention to merge, or intention to terminate business must report these occurrences to BaFin and the Bundesbank to allow consideration of orderly resolution alternatives. A firm overextended or insolvent must immediately report to BaFin, who alone may file an insolvency petition. - BaFin’s supervisory toolkit includes measures ranging from administrative actions to orders and removal of managers for intentional or willful violations; BaFin may revoke a license. - BaFin may impose fines up to euro 500,000 for intentional breaches of the banking act; some violations may be criminal offences under Section 54 of the act. - Measures are subject to principle of proportionality; each case considered on its merits. - Observed enforcement practice: 2009 Annual Report of BaFin noted 141 cases of serious incidents, but only one fine was issued and only 10 formal actions were taken against managing directors, indicating limited use of formal powers and a preference for milder measures consistent with constitutional requirements. - Additional legal developments strengthening intervention and resolution: - FMVAStärkG (effective August 1, 2009) strengthened BaFin’s early intervention powers. - Establishment of the German Federal Agency for Financial Market Stabilization and Financial Market Stabilization Fund to support institutions experiencing financial difficulties stemming from the financial crisis. - RStruktG introduced mechanisms for orderly restructuring or resolution of troubled institutions; KWG was amended to allow BaFin—under certain circumstances—to order an institution to sell all assets or systemically critical business segments to another institution or a government owned bridge bank and to temporarily order transfer of assets. - Assessment: BaFin has a broad range of powers to address various scenarios though actual use of formal powers has been limited in practice. *Source: IMF staff compilation from the referenced PDF chapter/section.* ### Section 45 of the KWG, BaFin may restrict or suspend withdrawals by the proprietors ### Section 45 of the KWG, BaFin may restrict or suspend withdrawals by the proprietors ### Remedial and corrective powers (Sections 45, 46, 46a, 36, 56) - Section 45 of the KWG: BaFin may restrict or suspend withdrawals by the proprietors or partners, the distribution of profits, the amortization of reserves for showing a profit, or the granting of loans if an institution does not meet the requirements concerning own funds or liquidity or if there are facts, which warrant the assumption that the institution will fall below the minimum requirements in the foreseeable future. - Prior to August 2009 BaFin was de facto not able to impose higher requirements concerning own funds or liquidity to take account of risks not provided for in the SolvV or extraordinary risks; the 2009 amendment of the KWG via the FMVAStärkG has greatly enhanced this power. - EC6 / Section 36 of the KWG: BaFin can request the dismissal of managers and members of the supervisory board or prohibit them from carrying out activities. - Section 56 of the KWG: Option of imposing fines of up to a maximum of EUR 500,000 on the institution itself or on its managers responsible for intentional or reckless breaches of the provisions of the KWG listed, or of orders issued by BaFin. - AC2 / Section 46 of the KWG: BaFin may take temporary measures to counteract dangers for the security of assets entrusted to the institution. Measures include issuing concrete instructions to managers; prohibiting or restricting the acceptance of deposits and the granting of loans; prohibiting proprietors and managers from carrying out their activities, or limiting such activities; appointing supervisors; and prohibiting or restricting payments to affiliated companies if these payments adversely affect the financial situation of the institution. - In cases where there is a danger of insolvency, Section 46a(1) sentence 1 no. 1-3 of the KWG: possible temporary measures include a ban on sales and payments, closure of the institution for business with customers and a prohibition on accepting payments not intended for the discharge of debts to the institution. - Procedural constraint example: Section 2c(1b) sentence 1 of the KWG — BaFin may prohibit the acquisition of a qualified participating interest only during a maximum period of 90 working days after submission of the full report if the conditions listed have been met. ### Administrative law and intervention standards (AC1) - Banking supervisory measures that react to deficiencies generally represent incriminating administrative acts; the intervention standards in the KWG grant BaFin a margin of discretion. - Authorities can decide whether and when to implement administrative procedures after a due assessment of circumstances; limits on intervention periods may arise from general legal principles or the principle of proportionality. - BaFin is noted to rely substantially on informal (albeit, if necessary, strong) pressure and moral suasion through ongoing contacts with supervised institutions. ### Assessment and supervisory practice - Assessment: Largely compliant. - Comments: - BaFin’s suite of remedial and corrective powers is comprehensive. - Reliance on informal pressure has inherent limitations; authorities should be ready to demand progressively stronger remedial action as an institution’s situation becomes more precarious. - Recommendation: It would be useful to have a more formalized “ladder” of actions to resist pressure from special interest groups, promote consistency in treatment of different banks, and contribute to public confidence. Such a ladder need not rely on simple quantitative criteria but would help ensure timely and appropriate supervisory actions. --- ### Consolidated supervision (Principle 2.4) - EC1 — Reporting and structural transparency: - The KWG covers reporting and submission requirements allowing BaFin and the Bundesbank to judge structure at the group level. - Ad hoc notifications required when participating interests reach 20 percent, 30 percent, and 50 percent of voting rights or capital; when an institution ceases to be or becomes a subsidiary; existence/changes/termination of close associations; acquisition/changes/termination of a qualified participating interest; intention to merge; establishment/relocation/closure of a branch in a non-EEA state or commencement/termination of cross-border services without a branch. - Annual notifications capture close associations, participating interests in other enterprises, and number of domestic branches. - Section 24(3a) of the KWG: financial holding companies must annually submit an aggregated report of subordinated institutions, financial enterprises and ancillary services undertakings. BaFin must transmit a list of such holdings to competent authorities in other EEA states and to the EC. - Institutions face consolidated-level regulatory reporting on solvency, large exposure, adequacy of risk management, and outsourcing. For systemically relevant institutions reporting is expanded (albeit while a standardized, comprehensive framework ensuring timely, sufficiently granular reporting is lacking) to earnings and other areas. - EC2 — Supervisory powers on subordinate and cross-border entities: - BaFin can request information and conduct audits on subordinate enterprises domestically and cross-border as well as on financial holding companies and governing body members. These powers are limited to monitoring accuracy of regulatory reporting or verification necessary for supervision on a consolidated basis. - BaFin cooperates with competent authorities within the EEA including exchange of information necessary to carry out effective supervision. - EC3 — Risk management requirements: - KWG requires a viable and effective risk management framework on both a solo and consolidated basis and must take into account all material risks; covers whole organization including entities not subject to supervisory consolidation. - EC4 — Scope of supervisory consolidation: - Section 10a of the KWG sets out scope; differentiation between groups of institutions and financial holding groups depending on structure. Adequate own funds requirement directed at both individual banks and banking groups, monitored via quarterly returns. Large exposures standards and limits apply to individual institutions and to exposures with a group or financial holding group. - EC5 — Cooperation arrangements: - BaFin and the Bundesbank cooperate to meet objectives of Section 7 of the KWG; details in Prudential Supervisory Guidelines. - Section 8 of the KWG sets out cooperation with authorities across the EEA consistent with the CRD. BaFin has numerous MoUs guiding cooperation with overseas supervisory authorities. Supervisory colleges are in place for major German banking groups. - EC6 — Powers to limit group activities: - The range of activities depends on licenses the individual group entities hold. BaFin has no explicit powers to limit the group’s activities or locations in which they operate as long as entities do not violate supervisory or prudential rules. - BaFin will flag concerns if a business unit abroad encumbers consolidated supervision or the institution cannot demonstrate proper business organization and has authority to give specific instructions appropriate and necessary for ensuring a proper business organization, which in principle could entail temporary termination of activities or businesses that are not properly managed. - EC7 — Supervisory review of risk management: - Requirement for appropriate risk management controls on both solo and consolidated bases, including cross-border activities. German authorities regularly review adequacy and effectiveness through on-site and off-site methods; BaFin has tools for corrective action. - EC8 — Group-wide controls and audit evidence: - Risk management requirements include enterprise-wide management and financial controls that include units abroad. Institution’s risk positions in overseas entities are included in monthly returns. MaRisk requires management to ensure group risk communication throughout the organization. Auditor must specifically state that foreign branches are included in the risk management structure of the organization. BaFin has supervisory tools to address non-compliance. - EC9 — Limits on ordering closure of foreign offices: - BaFin lacks authority to order closure of a foreign office unless there is a serious breach of the institution’s risk management and control environment. BaFin can require upgrades to risk management; failure could lead to closure of the office as the most expeditious way forward. - If a deposit taking institution or securities firm domiciled in another EEA member state opens an office in Germany and is not observing Section 53b(3) KWG obligations and the institution or home supervisor fails to correct the deficiency, BaFin may take appropriate measures up to and including prohibition of new business within Germany. - BaFin is not permitted to require closure of overseas offices or impose limitations on activities solely on the grounds of inadequate supervision by host supervisors. - EC10 — Enterprise responsibility: - The enterprise is responsible for ensuring group has adequate own funds sufficient to meet regulatory requirements and account for risks in the institution as a whole. - AC1 — Participating interests and fit-and-proper: - Participating interests in banks by nonbanks permitted under conditions in Section 2(c) of the KWG. - Section 44 of the KWG: holder of a qualified participating interest subject to same obligation to provide information and documents as the institution itself. - BaFin can prohibit acquisition if buyer is not trustworthy; institution cannot meet supervisory requirements; structure detracts from effective supervision; or the institution would be a subsidiary of a country where supervision is not effective. - If acquisition takes place despite BaFin’s objection, BaFin can prohibit the holder from exercising voting rights or transfer voting rights to a trustee. - Regardless of ownership, all institutions must have at least two fully qualified managers. - AC2 — Cross-EEA regime consistency: - Bank supervisory rules across the EEA largely based on the CRD. Quality control via the EC and peer reviews by CEBS. BaFin assesses equivalence of host supervisors where necessary. - AC3 — On-site assessment planning and international activity: - On-site assessments are planned yearly and are risk-based for internationally active banks; scope includes relevant overseas operations. Supervisors of German big internationally active banks spend approx 30 percent of their time abroad, often in the United Kingdom, the United States, and Asia. - Assessment: Compliant. - Comments: - Consolidated supervision in Germany generally complies with this CP, with a notable exception: BaFin lacks the ability to require institutions to close an office in a jurisdiction that lacks adequate supervision or where secrecy provisions unduly hamper effective transmission of information to the home supervisor. - Large German banks operate globally with branches/subsidiaries in jurisdictions where information flows are weak and depositor information may be rigidly protected. Existing supervisory arrangements often permit only broad information flow and may hinder timely insights into depositor relationships and safeguards needed where money laundering may be an issue. - Authorities may want to amend legislation so BaFin can require closure of foreign offices or impose conditions on their activities if host oversight is inadequate or access to necessary information is blocked. - Authorities must remain vigilant to cross-institutional spill-overs and the possibility that conglomerates adopt legal forms that hinder effective supervision and resolution. --- ### Home-host relationships (Principle 2.5) - EC1 — Information sharing obligations: - Section 8(3) of the KWG: German supervisory authorities must share “all relevant and essential information required for the performance of supervision” with competent authorities in the EEA when supervising cross-border institutions. “All information which may affect the assessment of an institution’s financial situation in the EEA state in question shall be deemed to be essential information in this respect.” - Essential information includes: (i) information on the group structure, including all major institutions; (ii) procedures for the collection of information and the verification of that information; (iii) adverse developments in institutions or in other group entities which could seriously affect these institutions; and (iv) major sanctions or exceptional supervisory measures. - Mandatory establishment of supervisory colleges anchored in KWG amendment entering into force as of January 1, 2011 (new Section 8e of the KWG). New Section 9(1) sentence 4 no 9 allows information exchange with competent authorities and third countries in context of colleges established under Section 8e. - At the time of the mission, German supervisory authorities had established colleges for 18 institutions according to CRD requirements and participated as host authorities in 25 European colleges chaired by other supervisory authorities. - CEBS/EBA guidelines relating to effective functioning of colleges are carefully observed. - EC2 — Coordination and MoUs: - BaFin, in cooperation with the Bundesbank, coordinates and distributes relevant information to competent authorities where it is responsible as home supervisor for cross-border institutions. - German supervisory authorities have signed MoUs to facilitate cooperation (including information sharing) with approximately 40 countries, including most of the EEA authorities. - For ‘formal’ colleges, written agreements (CEBS/EBA template) about functioning of the college are in place. Written agreements and MoUs are in practice communicated to supervised institutions though there is no legal provision requiring this. Relevant MoUs are published on BaFin’s website. - EC3 — Scope of information to share as home supervisor: - Section 8(3) KWG specifies sharing (i) group structure and supervisory framework, (ii) significant developments in institutions or group entities which could seriously affect these institutions, and (iii) extraordinary or severe supervisory measures taken under KWG. - From 2011 the requirement to agree a joint risk assessment and capital adequacy decision with other EEA supervisors annually applies; one systemically relevant German banking group field-tested the “joint risk assessment and decision” (JRAD) process in 2010. JRAD guidelines were published in December 2010 and, from 2011 onward, all colleges for which German authorities are home supervisors will conduct the JRAD process according to current guidelines. - EC4 — Host supervisor information to home supervisor: - Relationship determined by CRD requirements and the new annual JRAD requirement from 2011. - In 2009 BaFin was host supervisor for 167 cross-border institutions. The competencies of BaFin as host supervisor are stipulated in Sections 53, 53a and 53b of the KWG. - Implementation and technology: - Issue under discussion: assessment of equivalence of third countries’ confidentiality provisions; German authorities awaiting CEBS/EBA decisions based on methodology published on June 15, 2010. - CEBS/EBA investigating secure, web based portals for supervisory colleges to enhance information sharing on a ‘real time’ basis; German authorities pursuing strengthening of their own IT capacities and may start testing new secure web platforms for three colleges in the first half of 2011. *Source: _cr11273 - Section 45 of the KWG, BaFin may restrict or suspend withdrawals by the proprietors* ### Section 53b(4) of the KWG establishes a cooperative procedure between BaFin and ### Section 53b(4) of the KWG establishes a cooperative procedure between BaFin and ### Cooperative procedure and remedial powers (Section 53b(4)) - BaFin shall “request the institution to rectify the shortcomings within a specified period” in the case of material problems or deficiencies, particularly regarding liquidity. - If the institution fails to comply with this request, BaFin notifies the home supervisor. - If the home supervisor fails to take any measures or if its measures prove insufficient, BaFin can take the necessary measures, and can ultimately prohibit the conduct of new business in Germany. ### Scope of supervisory competencies for branches and subsidiaries - In 2009, 80 branches of EEA banking groups were registered in Germany. - For branches and subsidiaries of EEA headquartered banks, supervisory competencies of BaFin are stipulated in Section 53b of the KWG, which refers to numerous other provisions of the KWG. - For subsidiaries of foreign banks, applicable legal provisions include Sections 53, 53a and 53b of the KWG. - In accordance with Section 53b of the KWG (implementing article 40 (1) of Directive 2006/48/EC), the principle of home state supervision applies to branches of institutions based in EEA member states, while BaFin and the Bundesbank retain several competencies, inter alia, regarding: - liquidity, - reporting requirements, - rights of access to data, - suitable arrangements for managing, monitoring and controlling risks. - In the case of subsidiaries (as distinct from branches), BaFin can exercise nearly the same regulatory powers as for German branches and subsidiaries. ### Home-host cooperation, supervisory colleges, and information exchange - Ongoing bilateral information exchange occurs between BaFin (host supervisor) and the home supervisor. - Section 8e of the KWG formalizes cooperation between host and home supervisors in supervisory colleges. - According to the new Section 8e(3) of the KWG, BaFin has to inform all members of a college on an ongoing basis about the relevant measures of its supervisory activities. - Communication in colleges is developed according to a written agreement, including provisions about the communication strategy between host and home supervisor; the strategy takes into account the scope and nature of cross-border operations of the bank or banking group. - If BaFin takes unusual or significant supervisory actions, it generally consults with competent authority(ies) in the EEA even if no legal requirement exists. - In an emergency potentially jeopardizing financial stability in any EEA member state where a supervised institution is domiciled, BaFin is required under Section 8(7) of the KWG to promptly inform the Bundesbank and the BMF. - Section 8(8) of the KWG: BaFin informs other competent authorities about supervisory actions it intends to take relating to an incident about which it was informed by the other authority. ### Audit rights, data access, and shell banks - Section 53b(6) of the KWG expressly grants foreign supervisory authorities in the EEA member states an audit opportunity after prior notification of BaFin. - Section 44a(2) of the KWG allows BaFin to permit banking supervisory authorities from other EEA-states—and if reciprocity is granted also non-EEA states—to check the accuracy of data transmitted by a German enterprise to certain enterprises abroad, if transmission of data is necessary to comply with the prudential provisions applicable to the enterprise domiciled abroad. - BaFin does not permit the establishment of shell banks within Germany; while no statutory prohibition exists, licensing and supervisory processes preclude shell operations by requiring appropriate organizational and management structures. The FATF assessment found no evidence suggesting BaFin’s licensing regime failed to prevent creation of shell banks. ### Licensing and refusal powers (EC6) - Section 33(1) sentence 1 no. 8 of the KWG: a license shall be refused if the applicant is a subsidiary of a foreign credit institution and the competent supervisory authority for this credit institution has not given its consent to the establishment of the subsidiary. - Section 33b of the KWG stipulates cases where the competent home state authority within the EEA is to be consulted before granting a license. - BaFin can refuse granting a banking license in accordance with Section 33(3) of the KWG if: - effective supervision of the institution is impaired due to the legal or administrative regulations of a third state, or - no effective supervision is exercised in the state in which the institution’s head office is domiciled, or - the foreign supervisory authority is not prepared to cooperate satisfactorily. ### Assessment, practices, and remaining gaps - Assessment: Largely compliant. - Comments and observed practices: - German authorities have implemented relevant EU legislation and relevant international standards from EBA and BCBS, increased home-host relationships, signed a sizeable amount of MoUs, and conducted a rising number of joint inspections/assessments. - Important next steps for Germany include: - extend and deepen cross-border cooperation with relevant competent authorities for the various colleges established; - establish efficient and secure channels for information sharing ensuring swift information “delivery” to all relevant authorities; - further increase joint work with other home- and/or host supervisors; - prepare and agree joint recovery and resolution plans for the German global systemically important financial institutions. - Market participants are generally positive about cross-border cooperation but note room for improvement in preventing supervisory overlap and ensuring relevant information is shared effectively and swiftly, limiting ad hoc requests from individual supervisory agencies. - Assessors recommend Germany create a formalized, detailed framework for assessing the supervisory regime of competent authorities from non EEA member states to determine the degree of reliance that can be placed on such authorities. ### Appendix 1 — Recommended Action Plan of the BCP Assessment (selected items) - Materially noncompliant and no action underway: - CP 5 Investment criteria: The authorities should set criteria for both pre-notification and information-after-the-event for significant acquisitions and investments conducted by credit institutions. The “test” conducted by BaFin should only imply that the acquiring institution has the necessary resources, skills, and organizational capacity to handle the acquisition without undue risk. - CP 10 Connected lending: Implement stronger rules on connected lending, tighten endorsement procedures at managing and supervisory boards, dedicate a separate unit for management/monitoring/reporting of loans to connected parties, and provide more detailed and frequent reporting to the supervisory authority. - Largely compliant, and measures underway: - CP 11 Country risk: Introduce more frequent and more detailed reporting of country and transfer risks (planned to be introduced in the prudential reporting statements of September 2003). - CP 16 On-site and Off-site supervision: Strengthen resources and skills of BaFin and the Bundesbank; BaFin and the Bundesbank have recently hired some 400 additional staff and 600 more staff is earmarked for hiring. - CP 18 Offsite supervision: Develop a structured automated system for systemic evaluation of banks’ performance (no current timetable). - Largely compliant, but no measures underway: - CP 1(2) Independence: Clarify in law the scope of the right of the Ministry of Finance to issue instructions to BaFin; amend law so reasons for dismissal of the President of BaFin must be publicly disclosed. - CP 13 Other risks: Issue guidance papers to establish risk management practices for liquidity, overall interest rate, and operational risks; strengthen supervisory boards’ role and responsibilities. - CP 20 Consolidated supervision: Include nonfinancial entities, including a holding company, in group-wide supervision. - CP 22 Remedial action: Set explicit standards to mitigate supervisory forbearance, e.g., requirements to act within a specified time limit if capital adequacy ratio falls below statutory minimum. - CP 24 Home country supervision: Amend legislation so BaFin may refuse licensing branches when home country supervisory cooperation cannot be guaranteed; ensure access to necessary information even if classified as confidential in the home country. *Source: _cr11273 - Section 53b(4) of the KWG establishes a cooperative procedure between BaFin and* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2011/_cr11273.pdf_