## _cr16194

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### Transposition of BRRD and domestic legal framework
- Transposition strengthened the resolution regime in Germany.
- BRRD and German implementing legislation provide a broad set of resolution tools, framework for recovery and resolution planning, and EU coordination.
- BRRD aligned with FSB’s Key Attributes (KAs).
- Key laws:
  - BRRD Transposition Act of December 10, 2014; substantive recovery and resolution provisions in the Act on the Recovery and Resolution of Institutions and Financial Groups (“Sanierungs- und Abwicklungsgesetz”; SAG).
  - Amendments to the Banking Act (“Kreditwesengesetz”; KWG), last amended on November 2, 2015.
  - Law approving transfer of national resolution fund to the SRF, and Act on Deposit Protection Schemes (transposing the DGSD).
  - More recent law aligns framework to the SRM, clarifies status of claims in resolution, and introduces a new category of bail-in-able debt.

### Banking Union pillars and institutional developments
- First pillar: Single Supervisory Mechanism (SSM) — ECB responsible for prudential supervision, early intervention and recovery planning for euro area banks; SSM completed its first full year of operation.
- Second pillar: Single Resolution Mechanism (SRM) — SRB assumed direct responsibility in January 2016 for resolution planning and implementation for ECB-supervised and pan-European banks, and for managing the Single Resolution Fund (SRF).
- SRB assumed responsibility for resolution planning; ECB assumed long-standing supervisory responsibilities.

### Remaining institutional and operational challenges
- Decision-making and efficiency:
  - SSM Supervisory Board (SB) procedures could be simplified; allowance for decisions at SB level would enhance efficiency.
  - Complex decision-making for triggering resolution within SRM may affect timeliness; should be reviewed after experience is gained.
- Operationalization challenges:
  - Identified challenges: identifying parties to be bailed-in, ensuring access to FMIs, ensuring adequate liquidity in resolution, implementing structural changes such as asset separation; many solutions remain untested.
- Systemic arrangements:
  - No euro area wide deposit insurance scheme agreed.
  - No agreement on a common, permanent fiscal backstop for the SRF (e.g., access to the ESM).
  - Transitional period: Germany and other euro area Member States provide, as last resort, bridge financing to national SRF compartments that must be repaid by banks via ex post contributions.
  - ECOFIN ministers committed to agreeing on a common backstop at the latest by the end of the transitional mutualization period.

### Recovery and resolution planning progress in Germany
- Leadership and rollout:
  - Crisis Management Group (CMG) leadership for over five years for one FSB-designated G-SIB helped prepare for recovery planning requirements.
  - Recovery plan requirement being implemented in additional banks, including less significant institutions; small banks by 2017.
  - Resolution planning rolled out to a larger number of banks despite transfer of competence for largest banks to the ECB and SRB.
  - Resolution planning well advanced for the largest bank and being implemented in all SIs and will roll out to small banks.
- Cooperation:
  - Procedures established for cooperation and exchange of information between supervisory and resolution authorities.
- Cross-border:
  - Work progressing on resolution approaches for systemic banks with cross-border operations.

### Loss absorption, bail-in, and MREL
- Banks must build minimum requirement for own funds and eligible liabilities (MREL) that can be bailed-in.
- Building adequate buffers and restructuring funding/group structures may take years for some banks.
- Legal requirements:
  - At least 8 percent of total liabilities of the bank must be written down or converted into equity before the SRF could be used to contribute to loss absorption and recapitalization.
- Constraints and flexibility:
  - Exclusion of government stabilization tools may constrain authorities in systemic crises.
  - Restrictions on departing from pari passu outside of bail-in may constrain use of transfer powers.
- German authorities’ view:
  - Sufficient buffers largely in place so bail-in is a practical resolution tool, particularly as of January 1, 2017 when certain unsecured debt becomes statutorily subordinate to general senior unsecured liabilities and uncovered deposits.
- Recommendation:
  - Authorities should continue to monitor build-up of adequate bail-inable liabilities in large banks.

### Liquidity in resolution and Emergency Liquidity Assistance (ELA)
- Liquidity challenge:
  - Ensuring temporary liquidity in resolution is likely a greater challenge; banks in resolution will most likely face substantial funding needs until market access is restored.
- Preferred sources:
  - Such liquidity needs should preferably be covered by private sector funds.
- Public backstops and central bank facilities:
  - If market access is insufficient, availability of public backstop facilities and access to standard central bank facilities should be assessed during resolution planning.
- Legal constraints:
  - Legal framework explicitly precludes assuming access to ELA as part of resolution planning.
  - Despite ELA’s discretionary nature, the Bundesbank and resolution authorities should be able to assess potential post-resolution liquidity needs and available collateral.

### Cross-border coordination and third-country considerations
- BRRD provisions:
  - Non-EU countries may be invited to participate in resolution colleges as observers, without voting rights.
  - BRRD and German legislation do not require authorities to take into account effects of resolution measures in non-EU countries when making resolution decisions.
- Practical coordination:
  - Coordination with non-EU countries expected to occur largely through bilateral MoUs until European-level agreements reached.
  - German authorities have developed good coordination track record and entered into MoUs with most relevant authorities.
- Recommendation:
  - Authorities encouraged to pursue European-level legislative changes to allow considering effects in third countries when adopting resolution measures.

### Deposit protection, DGS and Institutional Protection Schemes (IPS)
- Three-pillar model maintained; funding and transparency enhancements undertaken.
- Two statutory DGS have voluntary schemes that allow financing restructuring by members and/or reimburse deposits in excess of legal minimum of € 100,000.
- Discretionary restructuring measures similar to those of the two IPS.
- DGS can be used only in limited situations to finance resolution measures.

### Court-approved reorganization measures
- German framework provides for court-approved reorganization measures (Credit Reorganization Act; “KredReorgG”) in addition to BRRD-style measures.
- These measures:
  - are public, time-consuming, involve creditor approval;
  - do not fit general BRRD framework and could be considered for removal.

### System-wide crisis management
- Arrangements for system-wide crisis management remain unclear.
- Institutional architecture designed for individual bank/group supervision and resolution.
- Recommendation:
  - Consider specifying roles of SRB and ECB relative to German authorities, notably MOF, in managing a systemic banking crisis involving simultaneous multiple bank failures.

### Key statistics and sector structure (from Introduction)
- Total number of institutions in Germany’s three-pillar banking system: almost 1,800 institutions.
- Approximate composition:
  - Approximately 300 private and specialized banks (€ 4.4 billion in total assets or 56 percent of the system).
  - Approximately 450 savings and publicly owned banks (€ 2.4 billion or 30 percent).
  - Approximately 1,000 cooperative banks (€ 1.1 billion or 14 percent).
- Twenty-two of the largest German banks/banking groups are under the direct supervision of the ECB.
- These banks, plus six other German banks with cross-border operations in the EU, fall under the authority of the SRB.
- The largest German bank, Deutsche Bank, has been designated as a G-SIB by the FSB.

### Main recommendations for crisis prevention and crisis management (extract)
- Crisis Preparedness:
  - Define a coordination mechanism including the SRB, ECB and MOF in a system-wide crisis — Priority: Immediate — Authority: German authorities/SRB/ECB
  - Develop contingency plans for a systemic wide crisis and test plans via a simulation exercise — Priority: Short term — Authority: German authorities/SRB
  - Streamline and simplify SSM decision-making procedures — Priority: Immediate — Authority: German authorities/SSM
  - Review efficiency of SRM decision making on SRB resolution decisions — Priority: Medium term — Authority: German authorities/SRB
- Resolution Planning:
  - Deepen planning to ensure temporary liquidity funding needed to support orderly resolution (private funds and public backstops) — Priority: Immediate — Authority: German authorities
  - Continue efforts to identify and remedy operational impediments to expeditious implementation of resolution tools and ensure ability to maintain control during implementation — Priority: Immediate — Authority: German authorities
- Resolution Funding:
  - Lead EU level discussion to establish a common permanent backstop for SRF — Priority: Medium term — Authority: German authorities/SRM

### SSM structure, supervisory practices, and BaFin/Bundesbank roles
- SSM composition:
  - ECB and national competent authorities (NCAs).
  - ECB can issue regulations, guidelines or general instructions to NCAs; cooperation described in SSM Supervisory Manual.
- Scope of direct supervision:
  - ECB supervises significant banks (SI), financial holding companies, mixed financial holding companies, and branches in participating Member States of banks from non-participating Member States.
  - NCAs supervise less significant institutions (LSIs).
- Joint Supervisory Teams (JSTs):
  - Established for each banking group or bank, comprising ECB and NCA staff, led by ECB coordinator and national sub-coordinators.
  - ECB developing IT platform for detailed bank and supervisory information accessible to NCAs and to resolution authorities via the SRB.
- Early intervention:
  - ECB can adopt early intervention measures and coordinate with NCAs; can require structural changes where EU law provides.
  - German legislation defines ECB and BaFin as competent supervisors with same powers under German law.
- BaFin and Bundesbank:
  - Provide national sub-coordinators and members to JSTs, jointly conduct SREP.
  - BaFin is a federal institution subject to MOF oversight; MOF may require reporting and approves BaFin regulations and certain administrative practices.
  - BaFin can require recovery plans and decide early intervention measures; assesses recovery plans in agreement with Bundesbank.

### SRM, SRB mandate, decision-making, and SRB–NRA interactions
- SRM composition:
  - SRB and national resolution authorities (NRAs); applies to banks and parent undertakings established in participating Member States, and to covered investment firms and financial institutions.
- SRB mandate:
  - Adopt decisions on SRF use, draw up resolution plans, assess resolvability, adopt resolution plans and decisions, address resolvability obstacles for entities in its remit.
  - SRB became operational on January 1, 2016; early start-up phase.
- SRB 2016 priorities included implementing harmonized MREL framework, cooperation with NRAs, manuals on resolution planning, BRRD-compliant resolution plans, define SRF funding, operationalize MoUs/cooperation with third countries, plan crisis exercise for 2017, and hire staff (approximately 110 during 2016).
- Decision-making steps for resolution (summary):
  - ECB determines SI is failing or likely to fail after consultation with SRB; SRB may make determination if ECB does not do so within 3 days of being informed by SRB of SRB’s intention.
  - SRB determines no reasonable prospect of alternative private sector solutions.
  - SRB adopts resolution scheme and immediately submits it to the Commission.
  - Resolution scheme may enter into force only if no objection by Council or Commission within 24 hours after submission.
  - Commission can propose Council objection within 12 hours; Council decision process and possible modification by SRB within 8 hours.
  - Where State aid or SRF used, Commission must approve State aid; prepared in advance and approved before SRB submission.
- SRB–NRA interactions:
  - NRAs must inform SRB of resolution decisions for LSIs and closely coordinate with SRB.
  - NRAs submit (updated) resolution plans for LSIs to SRB with reasoned solvability assessments.
  - SRB-established Internal Resolution Teams (IRTs) prepare resolution plans and submit to Resolution Colleges (RCs); RCs need establishment.
  - SRB can issue warnings to NRAs, and in specific cases directly exercise NRA resolution powers.
  - SRB decisions are subject to review by the European Court of Justice (review legality only).

### German resolution architecture (FMSA), MOF delegated powers, and incorporation plans
- FMSA role:
  - NRA responsible for entities not within SRB jurisdiction, including “high-priority” LSIs, other LSIs, banks, parent undertakings, subsidiaries domiciled in Germany, branches of foreign undertakings and stand-alone investment firms.
  - FMSA began assuming resolution functions in 2014.
  - FMSA is a Federal public-law agency subject to MOF oversight; MOF consent required for resolution measures with immediate financial effects or systemic implications.
  - German legislation limits liability of FMSA senior managers/staff to deliberate breaches.
  - FMSA required to prepare for incorporation into BaFin; law organizing incorporation to be completed by early 2018.
  - Authorities should ensure post-incorporation NRA retains necessary operational independence consistent with FSB KA 2.5.
- FMSA powers:
  - Draw up resolution plans and assess resolvability for banks outside SRB scope, identify and remedy material impediments, transfer shares/assets/liabilities or to bridge bank, cancel or write down shares or liabilities, replace management, require maturity amendments on bonds, amend contractual terms, impose temporary moratorium up to next business day after notification.
- MOF delegated powers and secondary acts:
  - MOF mandated to adopt secondary legal acts specifying recovery plan content, simplified obligations, IPS exemption criteria, criteria for negative effects on financial markets, requirements for internal group financing approval, and triggers for early intervention.
  - BaFin will prepare secondary legal acts in practice; MOF can delegate specification to BaFin in consultation/agreement with Bundesbank (delegations not yet taken place).

### Financial Stability Committee (FSC)
- Composition and mandate:
  - FSC comprises MOF, BaFin and Bundesbank as voting members and FMSA as non-voting member.
  - Secretary of State of the MOF chairs FSC.
  - Meets quarterly or more often; main focus on macro-prudential policy and strengthening cooperation in event of crisis.
  - Act establishing FSC does not envisage formal operational decision-making role for specific bank resolution decisions.
  - FSC developed an internal Handbook listing crisis prevention and management measures.
- Assessment and recommendations:
  - SSM Regulation established EU and domestic institutional framework covering recovery planning, crisis prevention, early intervention; operational slightly over a year.
  - Efficiency of SSM decision-making should be reviewed; SB proposals deemed accepted by Governing Council if no objection within ten working days — may not ensure timely decisions.
  - German (FMSA) and euro area (SRB) resolution authorities have clear powers but are still becoming fully operational.
  - No established arrangements for coordination between SRB, ECB and German authorities for a system-wide crisis; a coordination mechanism is needed.

### Recovery planning: powers, practices and cross-border cooperation
- Recovery plan obligations expanded to include all banks; requirements align with EBA standards.
- LSI recovery plans submitted to BaFin and Bundesbank; SI plans submitted to ECB.
- Supervisory authority can grant simplified obligations for recovery plans (BaFin for LSIs, ECB for SIs).
- Exemptions for IPS members possible except where systemic risk, ECB supervision, or assets exceed € 30 billion.
- Group recovery plans must include courses of action at group and subordinate levels, compatibility provisions, and intra-group support provisions.
- Powers to rectify deficiencies:
  - ECB can request revisions and require specific changes; can require business activity changes or governance/risk profile adjustments.
  - BaFin has similar powers for LSIs and recognized IPS members.
- Submission and phasing:
  - Submission phased-in over last three years; by early 2016 banks must prepare full scope plans (includes 22 ECB-supervised banks/groups and twelve supervised by BaFin/Bundesbank).
- Feedback and remediation:
  - Authorities provide feedback within 6 months.
  - If material deficiencies, banks have 2 months (extendable by 1 month) to revise and resubmit.
- Cross-border cooperation:
  - Practices generally well established; German authorities led a CMG for over five years coordinating a G-SIB recovery plan involving EU and non-EU authorities.
  - BaFin entered MoUs with relevant national supervisory authorities globally.
  - Information sharing with third countries limited to confidentiality-equivalent cases; reportedly done in practice.

### Early intervention: powers, scope, and cross-border cooperation
- Supervisory powers include early intervention in SAG and KWG; BaFin and ECB have same range of powers in principle.
- Powers include requiring implementation of recovery plan courses of action, requiring restoration plans, restricting business, requesting divestments, imposing liquidity requirements, removing management, and implementing recovery measures.
- Draft under discussion: when actual capital falls below required capital plus 1.5 percentage points, BaFin may require remedial measures.
- More severe measures: prohibit taking new deposits, prohibit or limit payments to affiliates/dividends, temporary ban on payments, closure for business with customers, appointment of temporary administrators or Special Representative, requirement to draw up creditor restructuring plans.
- Cross-border:
  - Consolidating/home supervisor must consult supervisory college before early intervention measures and notify EBA prior to acting.
  - Host supervisors must consult home supervisor and may act independently if no response within three days; if no joint decision within five days, BaFin (or ECB) can decide to enact measures.
  - Referral to EBA possible; if EBA does not decide within three days, BaFin (or ECB) can act.

### Resolution planning, resolvability, instruments, safeguards, and timing challenges
- Resolution planning:
  - SRB and FMSA draw up and adopt resolution plans for institutions/groups in remit, consulting ECB and relevant NCAs/NRAs.
  - Plans must not assume use of public funds at any point, including ELA from Bundesbank.
  - Plans to include options for resolution tools, business analysis, operational continuity, funding in resolution, MREL, information and communication, and resolvability assessment.
  - Simplified obligations allowed in specified situations; EBA guidelines on simplified obligations finalized.
- Resolution objectives and legal triggers:
  - Objectives: continuity of critical functions; avoid significant adverse effects on financial stability; protect public funds; protect client funds/assets.
  - Resolution measures only if: bank failing or likely to fail; no reasonable prospect of private sector/supervisory measures preventing failure within reasonable time; resolution necessary in public interest and proportionate; insolvency law insufficient.
- Safeguards and valuation:
  - Shareholders and creditors bear losses first and equal to insolvency outcome; NCWO principle explicit; independent ex ante and ex post valuations required; provisional assessment allowed if full assessment not possible in time.
- Instruments and contractual powers:
  - Instruments: sale of business/shares; bridge institution; asset separation/transfer; bail-in (in any case).
  - Powers to amend/cancel contractual obligations, temporarily suspend termination rights/payment/delivery obligations (up to 48 hours), and amend contracts.
  - Deutsche Bank and many subsidiaries have adhered to ISDA 2015 Universal Protocol on Resolution Stays.
  - German law requires inclusion in third country governed contracts of provisions recognizing resolution authorities’ bail-in and suspension powers.
- Bail-in scope, hierarchy, mandatory subordination, MREL:
  - Bail-in can recapitalize, convert/reduce claims transferred to bridge institutions, or complement other tools.
  - SRM and German frameworks allow exclusion of specific eligible liabilities where necessary and proportionate.
  - New German law clarifies hierarchy and introduces mandatory subordination of certain unsecured debt (bearer bonds, order bonds, similar tradeable rights, promissory note loans and registered bonds) applicable on January 1, 2017; these instruments will bear losses prior to other creditors, notably uncovered depositors.
  - MREL set institution-specifically; applies formally from 2016 with a transition period up to 48 months.
  - MREL calculated as amount of own funds and eligible liabilities expressed as percentage of total liabilities and own funds.
  - MREL determination based on business and funding model, deposit guarantee scheme contribution extent, and systemic consequences due to interconnectedness.
  - FMSA has ultimate discretion but must explain departures from prudential requirements when setting MREL.
- Operational and timing challenges:
  - Implementing resolution quickly challenged by positioning loss-absorbing capacity within groups, timely valuation, executing bail-in across multiple liability classes, ensuring FMIs access, implementing structural asset transfers, and ensuring adequate liquidity.
  - FMSA sponsoring working groups with authorities and industry to address these issues.
  - Temporary stay powers up to 48 hours may be insufficient; BaFin and ECB moratorium powers could complement stay but should be time-limited.

### MREL criteria, eligible liabilities, and cross-border recognition
- FMSA developing additional MREL criteria following EBA draft RTS on MREL and SRB guidelines; RTS specify resolvability, risk profile and systemic importance as relevant criteria.
- For G-SIBs RTS provides that MREL will be implemented consistent with FSB’s TLAC requirement.
- European Commission issued discussion paper on reducing overlap between MREL and TLAC in 2016; discussion ongoing.
- Authorities consider German banks generally have sufficient eligible liabilities, including debt issued under German law.
- Statutory subordination of certain unsecured debt instruments applicable from January 2017.
- Cross-border information exchange:
  - SRM and German legislation require balancing EU Member States’ interests when measures affect other Member States but lack explicit third-country effects consideration.
  - Strict preconditions for exchange of confidential information with third-country authorities (confidentiality equivalence; necessity for comparable resolution measures; appropriate data protection).
  - Cooperation agreements being put in place with third-country authorities.
- Recognition/refusal:
  - Third-country resolution measures not automatically recognized in Germany; refusal allowed where proceedings would adversely affect German stability, have significant fiscal implications, conflict with German law, or independent action necessary for a German Union branch.

### Resolution Colleges (RCs), CMGs and cooperation agreements
- RCs not yet established; to include NRAs, resolution authorities of other relevant EU Member States, Bundesbank, ECB if direct supervisor, BaFin, MOF, and relevant DGS supervisors; third-country authorities may be observers.
- CMGs will involve non-EU authorities where appropriate; SRB envisages co-existence of RCs and CMGs.
- RC functions include exchange of information for group resolution plan development, assessing group resolvability, addressing impediments to resolvability, deciding on group resolution schemes, specifying MREL at group level, and coordinating financing schemes.
- Public information indicates SRB, global CMG, and FMSA assume bail-in under a Single Point of Entry approach as preferred resolution strategy for a G-SIB.
- EBA responsible for framework cooperation agreements with third countries; draft FCA shared with selected authorities in US, Switzerland, Hong Kong and Japan; discussions ongoing.

### Deposit guarantee schemes (DGS), IPS, payout timing, and funding
- EinSiG entered into force on July 3, 2015; covers statutory DGS and recognized IPS.
- Compensation amount:
  - € 100,000 standard claim amount; can be increased up to € 500,000 in specified circumstances.
- Payout timing:
  - Up to May 31, 2016: payout within 20 working days following determination.
  - As from June 1, 2016: claims to be settled within seven working days (earlier than DGSD deadline, with DGSD deadline at latest by year 2024).
- Funding:
  - All schemes funded ex ante.
  - By July 3, 2024 DGS financial means must reach a target level of 0.8 percent of covered deposits of member institutions.
  - Ex post contributions may be required; ex post contributions for one year must not exceed 0.5 percent of all covered deposits of member institutions.
  - Each member’s share of ex post contributions corresponds to its share of total regular ex ante contributions.
  - If contributions insufficient, DGS/IPS required by law to take loans to cover costs.
- IPS preventive support:
  - Recognized IPS can implement measures to avert going concern risk (restructuring plans, recapitalization, guarantees, taking over liabilities), but banks/depositors have no legal claim to such measures.
  - Recognized IPS not allowed to take measures if, after consulting FMSA, BaFin determines resolution conditions met.
- Historical IPS support (selected figures):
  - BVR support: 2011: € 114 million; 2013: € 11 million; 2014: € 11 million.
  - DSGV support: 2012: guarantee of € 57 million (no availment yet); € 10 million funds, € 12 million participation rights and € 11 million silent participation. 2014: funds totaling € 35 million in one new support case.

### SRF and resolution funding
- SRF purpose and mechanics:
  - SRF target: at least 1 percent of covered deposits of all credit institutions within SRM participating member states (ca. € 55 billion over eight years).
  - Initially SRF consists of national compartments to fund resolution measures; mutualized over eight years.
  - National compartment amounts could be used by other SRM member states up to specified thresholds (40 percent in year 1, 60 percent in year 2 and + 6.6 percent during subsequent years).
- Germany’s arrangements:
  - Germany concluded a Loan Facility Agreement with SRB providing a backstop of around € 15 billion for the national compartment; backstop not automatic and requires MOF decision to activate.
  - SRF funded by regular ex ante and extraordinary ex post contributions; Commission Delegated Regulation with Council Implementing Regulation defines banks’ contribution formula (risk based with special provisions for small banks and IPS members).
  - For German banks the SRF will replace the domestic “Restrukturierungsfonds” for entities covered by SRM.
  - Transitional period: Germany and other Member States provide bridge financing to national compartments, repayable by banks via ex post contributions.
- SRF use conditionality and caps:
  - Shareholders and creditors must first absorb losses of at least 8 percent of total liabilities including own funds.
  - SRF amount must not exceed the lesser of 5 percent of the bank’s total liabilities or the means available to the SRF plus amounts that could be raised through ex post contributions in the following three years.
  - Commission approval under State Aid Framework required.
- Recommendation:
  - A credible common permanent backstop necessary; ECOFIN Ministers committed to agreeing on a common backstop fiscally neutral over the medium term by end of the transitional mutualization period.

### Annex I: SoFFin measures (selected figures as of December 31, 2015)
- Recapitalizations (in € billion):
  - Commerzbank AG: 5.1
  - Portigon (ex WestLB): 2
  - Hypo Real Estate Holding AG: 8.8
- Cumulated payments to Winding-up institutions (Assumption of risks):
  - FMS Wertmanagement: 9.3

*Source: EXECUTIVE SUMMARY and chapter excerpts, Technical Note on crisis preparedness and crisis management frameworks for German banks (FSAP), IMF (document _cr16194).*

### EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### _cr16194 - EXECUTIVE SUMMARY ___________________________________________________________________________ 5

### Transposition of BRRD and domestic legal framework
- The transposition of the Bank Recovery and Resolution Directive (BRRD) into German law has significantly strengthened the resolution regime in Germany.
- The BRRD and the implementing German legislation contain a broad set of resolution tools and establishes a framework for improved recovery and resolution planning as well as coordination across the EU.
- The BRRD is closely aligned with the FSB’s Key Attributes of Effective Resolution Regimes for Financial Institutions (KAs).
- The BRRD Transposition Act of December 10, 2014; substantive recovery and resolution provisions are contained in the Act on the Recovery and Resolution of Institutions and Financial Groups (“Sanierungs- und Abwicklungsgesetz”; SAG).
- Various provisions have been amended in the Banking Act (“Kreditwesengesetz”; KWG), last amended on November 2, 2015.
- A German law approving the mechanism for transferring much of the national resolution fund to the SRF, and the Act on Deposit Protection Schemes (transposing the DGSD), have also been adopted.
- A more recent law aligns the German framework to the SRM, clarifies the status of claims in resolution and introduces a new category of bail-in-able debt.

### Banking Union pillars and institutional developments
- Significant progress on the first two pillars of the Banking Union:
  - First pillar: Single Supervisory Mechanism (SSM) — prudential supervision, early intervention and recovery planning for banks in the euro area allocated to the European Central Bank (ECB); the SSM has completed its first full year of operation.
  - Second pillar: Single Resolution Mechanism (SRM) — newly operational; in January 2016 the Single Resolution Board (SRB) assumed direct responsibility for resolution planning and implementation (in conjunction with the European Commission) for banks directly supervised by the ECB and other pan-European banks, and for managing the Single Resolution Fund (SRF).
- The SRB has assumed responsibility for the relatively new task of resolution planning, unlike the ECB which assumed long-standing supervisory responsibilities.

### Remaining institutional and operational challenges
- Decision-making and efficiency:
  - Routine decision making by the SSM’s Supervisory Board (SB) could be simplified; allowing some decisions at the level of the Supervisory Board would enhance its efficiency.
  - The complex decision-making processes for triggering resolution within the SRM may affect timely and efficient resolution decisions; this should be reviewed after experience is gained.
- Operationalization challenges:
  - Numerous substantive challenges identified for implementing all aspects of a resolution decision in a timely manner (e.g., identifying specific parties to be bailed-in, ensuring access to FMIs, ensuring adequate liquidity in resolution, implementing structural changes such as asset separation); solutions remain untested.
- Systemic arrangements:
  - Euro area jurisdictions have not yet agreed on a euro area wide deposit insurance scheme.
  - There is currently no agreement on a common, permanent fiscal backstop funding arrangement for the SRF, such as access to the European Stability Mechanism (ESM).
  - For the transitional period, Germany and other euro area Member States will provide, as a last resort, bridge financing to their respective national compartments in the SRF that must be repaid by banks through ex post contributions.
  - ECOFIN ministers have committed to agreeing on a common backstop to the SRF, which is fiscally neutral over the medium term, at the latest by the end of the transitional period for mutualizing the SRF.

### Recovery and resolution planning progress in Germany
- German authorities are making significant progress on recovery and resolution planning:
  - Leadership for over five years of the Crisis Management Group (CMG) for one of the FSB-designated G-SIBs laid groundwork for early adoption of legal requirement that large domestic banks undertake recovery planning.
  - Recovery plan requirement being implemented in additional banks, including less significant institutions supervised by domestic authorities, and in small banks by 2017.
  - Resolution planning rolled out to a larger number of banks despite transfer of competence for the largest German banks to the ECB (recovery planning) and the SRB (resolution planning).
  - Resolution planning is well advanced for the largest bank and is being implemented in all SIs and will eventually be rolled-out to small banks.
  - Procedures established for cooperation and exchange of information between supervisory and resolution authorities.
- Work progressing on resolution approaches for systemic banks with cross-border operations.

### Loss absorption, bail-in, and MREL
- Banks need to build adequate loss absorbency buffers—the so-called minimum requirement for own funds and eligible liabilities (MREL)—that can be bailed-in.
- Building adequate buffers and restructuring bank funding and group structures to facilitate bail-in may take years in some banks.
- The BRRD, SRM Regulation and German legislation require that at least 8 percent of total liabilities of the bank have to be written down or converted into equity before the SRF could be used to contribute to loss absorption and recapitalization.
- The exclusion of government stabilization tools as a potential tool might constrain the authorities in the event of systemic crises.
- Flexibility to use other BRRD resolution tools (namely, the transfer powers) may be constrained by restrictions on departing from pari passu treatment of creditors, outside of bail-in.
- German authorities believe that sufficient buffers for the most part are already in place such that bail-in is already a practical resolution tool, particularly as of January 1, 2017, when certain unsecured debt will become statutorily subordinate to general senior unsecured liabilities and uncovered deposits.
- Authorities should continue to monitor the build-up of adequate bail-inable liabilities in large banks.

### Liquidity in resolution and Emergency Liquidity Assistance (ELA)
- Ensuring temporary liquidity of a bank in resolution is a likely greater challenge; banks in resolution will most likely face substantial funding needs until they restore access to adequate market sources.
- Such liquidity needs should preferably be covered by private sector funds.
- To the extent that market access to liquidity is insufficient, availability of public backstop facilities and access to standard central bank facilities should be assessed during resolution planning and preparation of resolution decisions.
- The legal framework explicitly precludes assuming access to emergency liquidity assistance (ELA) as part of resolution planning.
- With the caveat of the discretionary nature of ELA, the legal framework should not prevent the Bundesbank and the resolution authorities from assessing potential post-resolution liquidity needs, and available collateral.

### Cross-border coordination and third-country considerations
- Under the BRRD, non-EU countries may be invited to participate in resolution colleges as observers, but have no voting rights.
- The BRRD and German legislation do not require authorities to take into account the effects of resolution measures in non-EU countries when making resolution decisions.
- Coordination with non-EU countries is expected to largely occur through bilateral memoranda of understanding (MoU), unless and until a European-level agreement has been reached with that country.
- In practice, German authorities have developed good track record of coordination with countries outside the EU and have entered into MoUs with most relevant authorities for supervisory and resolution purposes.
- Authorities are encouraged to pursue legislative changes at the European level that would allow them to take the effects of resolution measures in third countries into account when adopting such measures.

### Deposit protection, DGS and Institutional Protection Schemes (IPS)
- The deposit guarantee scheme (DGS) in Germany continues to follow the three-pillar model of the German banking sector; steps have been taken to enhance funding and transparency.
- The two statutory DGS have voluntary schemes in place, which allow them to finance restructuring by their members and/or reimburse deposits in excess of the legal minimum of € 100,000.
- These discretionary restructuring measures are broadly similar to those at the disposal of the two Institutional Protection Schemes (IPS).
- DGS can only in limited situations be used to finance resolution measures.

### Court-approved reorganization measures
- The German resolution framework provides for court-approved reorganization measures in addition to BRRD-style resolution measures.
- These measures do not fit into the general BRRD framework, which has been fully implemented in Germany.
- They are public, will take time and involve creditor approval; they do not have added value and could be considered for removal from the resolution tool box.

### System-wide crisis management
- Arrangements for system-wide crisis management remain unclear.
- The institutional architecture for the Banking Union is designed with supervision and resolution of individual banks and banking groups in mind.
- Consideration should be given to specifying the role of the SRB and ECB towards the German authorities, mostly notably the Ministry of Finance (MOF), in managing a hypothetical systemic banking crisis that involves system-wide distress and potential simultaneous failure of multiple banks.

### Key statistics and sector structure (from Introduction)
- Total number of institutions in Germany’s three-pillar banking system: almost 1,800 institutions.
- Approximate composition:
  - Approximately 300 private and specialized banks (€ 4.4 billion in total assets or 56 percent of the system).
  - Approximately 450 savings and publicly owned banks (€ 2.4 billion or 30 percent).
  - Approximately 1,000 cooperative banks (€ 1.1 billion or 14 percent).
- Twenty-two of the largest German banks/banking groups are under the direct supervision of the ECB.
- These banks, in addition to six other German banks with cross-border operations in the EU, fall under the authority of the SRB.
- The largest German bank, Deutsche Bank, has been designated as a G-SIB by the FSB.

### Main recommendations for crisis prevention and crisis management (extract from Table 1)
- Crisis Preparedness
  - Define a coordination mechanism including the SRB, ECB and MOF in a system-wide crisis — Priority: Immediate — Authority: German authorities/SRB/ECB
  - Develop contingency plans for a systemic wide crisis and test plans via a simulation exercise — Priority: Short term — Authority: German authorities/SRB
  - Streamline and simplify SSM decision-making procedures — Priority: Immediate — Authority: German authorities/SSM
  - Review efficiency of SRM decision making on SRB resolution decisions — Priority: Medium term — Authority: German authorities/SRB
- Resolution Planning
  - Deepen planning to ensure temporary liquidity funding needed to support the orderly resolution of banks (i.e., private funds and public backstops) — Priority: Immediate — Authority: German authorities
  - Continue efforts to identify and remedy operational impediments to expeditious implementation of resolution tools and ensure ability to maintain control during this implementation period — Priority: Immediate — Authority: German authorities
- Resolution Funding
  - Lead EU level discussion to establish a common permanent backstop for SRF — Priority: Medium term — Authority: German authorities/SRM

*Source: EXECUTIVE SUMMARY, Technical Note on crisis preparedness and crisis management frameworks for German banks (FSAP), IMF.*

### 4.      The SSM consists of the ECB and the national competent authorities (NCAs) of the

### 4.      The SSM consists of the ECB and the national competent authorities (NCAs) of the

### Structure and legal framework of the SSM
- The ECB has adopted a Regulation establishing a framework for cooperation within the SSM between the ECB and NCAs.7
- To ensure consistent application of supervision in the euro area, the ECB can issue regulations, guidelines, or general instructions to the NCAs.
- Additional detailed descriptions on cooperation within the SSM in a crisis management context are set out in the SSM Supervisory Manual.

### Scope of ECB direct supervision and NCA responsibilities
- The ECB is tasked with the direct supervision of:
  - significant banks (SI),8
  - financial holding companies,
  - mixed financial holding companies,
  - branches in participating Member States of banks established in non-participating Member States.
- The ECB conducts supervision on a consolidated basis over banks’ parents established in a participating Member State and participates in supervision on a consolidated basis with respect to parent undertakings not established in a participating Member State.
- The ECB participates in supplementary supervision of financial conglomerates in relation to banks included in the conglomerates, and is involved in supervision of cross-border banks and groups, either as a home supervisor or a host supervisor in Supervisory Colleges.
- NCAs perform supervision on a consolidated basis of banks, financial holding companies or mixed financial holding companies that are less significant (LSIs) on a consolidated basis.9
- Note: The degree of the ECB’s oversight of NCAs, the reporting by NCAs, as well as supervisory standards and policies varies according the ECB’s ranking of LSIs (high, medium or low priority).

### Joint Supervisory Teams (JSTs) and information systems
- The ECB’s day-to-day supervision of each significant bank or banking group, including recovery planning and early intervention, is carried out by Joint Supervisory Teams (JSTs).
- JSTs:
  - are established for each banking group or bank,
  - comprise staff both from the ECB and NCAs,
  - are led by an ECB coordinator along with national sub-coordinators.
- The ECB is developing an IT platform that will contain detailed bank and supervisory information available to the NCAs and to the resolution authorities, albeit only via the SRB.

### Early intervention powers and coordination
- The ECB can adopt early intervention measures stipulated in Union law where a bank does not meet, or is likely to breach, applicable prudential requirements.
- In exercising these powers the ECB coordinates with the NCAs concerned.
- Where EU law explicitly provides for this, the ECB can require structural changes by banks to prevent financial stress or failure.
- German legislation defines the ECB—in addition to the Federal Financial Supervisory Authority (“Bundesanstalt für Finanzdienstleistungsaufsicht” or BaFin)—as the competent supervisor, meaning it has the same powers as BaFin under German legislation.
- The early intervention powers are analyzed in more detail in paragraph 49 et seq.

### ECB cooperation with resolution authorities
- The ECB cooperates with resolution authorities including in the preparation of resolution plans.
- The ECB communicates to resolution authorities any material changes to a bank’s legal or organizational structure, its business or financial position.
- The ECB and BaFin must inform the SRB and the Federal Agency for Financial Market Stabilization (“Bundesanstalt für Finanzmarktstabilisierung” or FMSA) of any early intervention measure they require a bank to take.
- The SRB informs the Commission and can start preparing for the resolution of the bank concerned if indicated.

### German domestic supervisory architecture (BaFin, Bundesbank)
- In Germany BaFin is the NCA exercising direct supervision over less significant banks in cooperation with the Bundesbank.
- BaFin and the Bundesbank:
  - provide national sub-coordinators and other members to JSTs for significant German banks,
  - cooperate closely on all supervisory matters,
  - jointly conduct the Supervisory Review and Evaluation Process (SREP).
- BaFin and the Bundesbank have agreed a Supervision Guideline specifying cooperation practices for less significant banks.
- BaFin is a federal institution with legal personality, governed by public law, subject to legal and technical oversight by the Federal Ministry of Finance (MOF).
  - The MOF may at any time require BaFin to report and submit documents, subject to confidentiality provisions.
  - BaFin’s regulations, circulars on individual regulatory issues and changes to its administrative practices are approved by the MOF.
  - MOF also clears political statements in BaFin’s annual reports and press releases.
- BaFin can require banks and investment firms to prepare recovery plans and can decide early intervention measures.
  - BaFin assesses recovery plans in agreement with the Bundesbank.
  - Agreement of the Bundesbank is needed for granting simplified obligations and exemptions from the requirement to prepare recovery plans.

### SRM, SRB mandate and operational start
- The Single Resolution Mechanism (SRM) consists of the SRB and national resolution authorities (NRAs). It applies to:
  - Banks established in participating Member States;
  - Parent undertakings, including financial holding companies and mixed financial holding companies that are established in participating Member States and are subject to consolidated supervision;
  - Investment firms and financial institutions established in participating Member States and that are covered by consolidated supervision.
- The SRB is a Union agency with legal personality; mandated to:
  - adopt decisions on the use of the SRF,
  - draw up resolution plans,
  - assess resolvability,
  - adopt all resolution plans and decisions, and
  - address obstacles to resolution with respect to entities not part of a group and for groups considered significant or subject to the ECB’s direct supervision, and other groups operating cross-border within the EU.
- The SRB is accountable to the Council and the European Parliament and must act independently and in the general interest.
- The SRB formally became operational on January 1, 2016 and is in an early start-up phase.
- Key SRB 2016 priorities:
  - implement a harmonized framework for the Minimum Requirement for Own Funds and Eligible Liabilities (MREL),
  - develop a framework for cooperation with the NRAs,
  - develop manuals on resolution planning and policy orientations for the use of resolution tools,
  - develop BRRD-compliant resolution plans for institutions under its remit,
  - define funding and financing requirements for the SRF,
  - operationalize MoUs and Cooperation Agreements with third countries.
- The SRB planned a crisis management exercise for 2017 and was hiring staff (approximately 110 during 2016, nearly doubling its staff complement from January 2016 when it commenced operations).

### SRB decision-making procedures (Box 1 summary)
- Decision-making steps for resolution at the European level:
  - The ECB, after consultation with the SRB, determines that a SI is failing or likely to fail, and informs the Commission and the SRB. The SRB may make that determination if the ECB, within 3 days of having been informed by the SRB of its intention to make that determination, does not do so.
  - The SRB, in close cooperation with the ECB, determines that there is no reasonable prospect of alternative private sector solutions, or supervisory actions taken that would prevent failure within a reasonable period of time. The ECB may also inform the SRB that this condition is met.
  - The SRB adopts a resolution scheme when it assesses that resolution action is necessary in the public interest, and immediately after adoption submits it to the Commission.
  - The resolution scheme may enter into force only if no objection has been expressed by the Council, or by the Commission, within 24 hours after submission.
  - Within 12 hours after submission, the Commission can propose to the Council to object to the resolution scheme on the ground that it does not fulfill the public interest criterion; if the Council objects on this ground, the entity is orderly wound up in accordance with national insolvency law and the Council provides reasons.
  - Within 12 hours after submission, the Commission can also propose that the Council approves or objects to a material modification of the amount of the SRF provided for in the resolution scheme; the Council provides reasons for its decision.
  - Within 8 hours, the SRB modifies the resolution scheme in accordance with reasons expressed by the Commission or the Council.
  - Where State aid or the SRF are used to finance resolution measures, the Commission must approve this aid; this State aid decision will be prepared in advance and approved before the resolution scheme is approved by the SRB and submitted to the Commission for final approval.1

### SRB—NRA interactions and oversight
- The SRB is responsible for the effective and consistent functioning of the SRM.
- NRAs must inform the SRB of their resolution decisions with respect to LSIs and closely coordinate with the SRB when they take such measures.
- NRAs are required to submit (updated) resolution plans for less significant banks to the SRB, accompanied by a reasoned assessment of resolvability.
- SRB-established Internal Resolution Teams (IRTs) consisting of SRB and NRA staff will prepare resolution plans and submit them to Resolution Colleges (RCs) involving NRA staff from other EU Member States outside the euro area. The RCs still need to be established.
- The SRB can:
  - issue a warning to a NRA if a draft decision is not in line with the SRM or SRB general instructions,
  - in specific cases decide to directly exercise the NRA’s resolution powers and order a bank under resolution to i) transfer specified rights, assets or liabilities to another person, ii) require the conversion of any debt instruments which contain a contractual term for conversion and iii) adopt any other necessary action to comply with the decision in question with respect to banks within the scope of NRA’s mandates.
- SRB decisions are subject to review by the European Court of Justice.10
  - The Court will only review the legality of the decision and not the substance.
  - The Court may declare SRB decisions void, with implications for national resolution actions; authorities are encouraged to explore potential implications and mitigation measures.

### SRB—ECB MoU and CMG coordination
- The SRB and ECB have concluded a MoU enabling necessary cooperation, including:
  - representation of each authority as an observer in each other’s meetings,11
  - cooperation and exchange of information in early intervention, recovery and resolution planning and in resolution actions.
- When a CMG12 is established for a bank, the SRB and ECB will cooperate with respect to distribution of tasks; SRB chairs CMGs, but the ECB chairs CMG topics related to recovery planning.
- The SRB is concluding a cooperation agreement with the Commission to streamline decision making on resolution decisions; the Commission has established a permanent task force for crisis management issues.

### German resolution architecture (FMSA) and relationship with SRB and BaFin
- FMSA, the German NRA, is responsible for entities and groups other than those within SRB jurisdiction, including:
  - “high-priority” LSIs and other LSIs,
  - banks, parent undertakings of a group, financial holding groups, mixed financial holding groups,
  - subsidiaries domiciled in Germany, branches of undertakings domiciled abroad and stand-alone investment firms.
- The proportionality principle influences how FMSA exercises its powers. FMSA began assuming its resolution functions in 2014.
- FMSA is a Federal public-law agency, subject to legal and technical oversight by the MOF.
  - MOF may at any time require FMSA to report on information available to it or its actions, with confidentiality safeguards.
  - MOF’s consent is required for resolution measures with immediate financial effects, or that have systemic implications.
  - German legislation limits liability of FMSA’s senior managers and staff to consequences of deliberate breaches of their obligations.
- German legislation requires FMSA to prepare for its incorporation into BaFin; work has commenced on a law organizing this incorporation to be completed by early 2018.13
  - Authorities should ensure that after incorporation the NRA maintains necessary operational independence consistent with statutory obligations (in line with the FSB’s KA 2.5).
- FMSA responsibilities and powers include:
  - drawing up resolution plans and assessing resolvability for banks not within SRB scope,
  - identifying and remedying material impediments to resolvability,
  - powers to transfer shares in, or assets, rights or liabilities, of a failing bank to another institution or a bridge bank,
  - power to cancel or write down shares, or write down or convert liabilities of a failing bank,
  - power to replace the management,
  - power to require a bank to amend the maturity of bonds issued by it,
  - power to amend contractual terms agreed by the bank under resolution,
  - power to impose a temporary moratorium (i.e., up to the next business day following a notification) on termination rights, rights on the realization of collateral and contractual payment or delivery obligations.
- The SRB has an oversight role over FMSA’s resolution decisions.
- FMSA and BaFin have concluded a Cooperation Agreement to consult and inform one another with respect to early intervention, recovery planning, resolvability assessments, resolution planning and resolution measures.
- FMSA is tasked with implementing resolution decisions adopted by the SRB and will submit a final report to the SRB on execution of a resolution scheme. German law requires FMSA to adopt necessary measures to implement SRB resolution decisions and to abide by SRB guidelines and instructions.

### MOF delegated powers and secondary acts
- The MOF is mandated to adopt various secondary legal acts specifying details such as:
  - recovery plan content,
  - substance of simplified obligations for recovery plans,
  - criteria for exemption of institutions belonging to IPS,
  - criteria for assessing negative effects of an institution’s failure on financial markets and details of recovery plans to be developed by IPS,
  - requirements for approval of internal group financing,
  - triggers for the use of early intervention measures.14
- Authorities confirmed any such secondary legal acts will be prepared in line with EBA guidelines and RTS.
- In practice BaFin will prepare these secondary legal acts; the MOF can delegate such specifications to BaFin which shall adopt such measures in consultation, or agreement with the Bundesbank. These delegations have not yet taken place.

*IMF staff summary of chapter content*

### 27.      Overall domestic financial stability is the responsibility of the Financial Stability

### Overall domestic financial stability is the responsibility of the Financial Stability Committee (FSC)

### Institutional arrangements and mandate
- The Financial Stability Committee (FSC) comprises the MOF, BaFin and Bundesbank as voting members and FMSA as a non-voting member.
- The Secretary of State of the MOF chairs the FSC.
- The FSC meets on a quarterly basis—or more often, if needed—and its main focus is on macro-prudential policy.
- FSC tasks include strengthening cooperation between the authorities represented in the event of a crisis situation.
- The Act establishing the FSC does not envisage a formal role for the FSC in the operational-decision-making process for specific bank resolution decisions.
- Communication channels and secretariat functions between FSC members have been strengthened.
- It is understood that the MOF will be informed about any bank failing, or likely to fail.
- The FSC has developed an internal Handbook that lists and elaborates on all the crisis prevention and management measures that can be taken by the various authorities involved.

### Assessment and recommendations (summary)
- The SSM Regulation has put an EU level and domestic institutional framework in place for the supervision of, inter alia, German banks; this framework covers recovery planning, crisis prevention and early intervention and has been in place slightly over a year and is operational.
- The efficiency of the SSM’s decision-making processes should be reviewed in due course.
  - The SSM’s SB prepares a large number of draft decisions, and only the ECB’s Governing Council can adopt binding supervisory decisions.
  - A non-objection procedure deems SB proposals accepted by the Governing Council if not objected to within a maximum period of ten working days; this may not be sufficient to ensure timely decision-making.
  - The current review of the SSM Regulation could be used to evaluate and enhance the efficiency of this decision-making framework.
- German (FMSA) and euro area (SRB) resolution authorities have clear resolution powers but are still in the process of becoming fully operational.
  - The SRB can coordinate and adopt resolution decisions for an individual bank that is failing or likely to fail.
  - Consideration should be given to developing further the coordination mechanism for complex cross-border and systemic crises and conducting a crisis management exercise focused on such complex scenarios.
- The efficiency of the SRM’s decision making procedure should be reviewed in due course to simplify an intricate decision-making structure once the SRB is fully operational.
- BaFin and Bundesbank have undertaken initial work in resolution planning and have acquired relevant institutional knowledge and capacity.
  - Supervisory and resolution frameworks allocate clearly defined roles for recovery planning, resolution planning, early intervention and resolution decisions.
  - Cooperation agreements exist to ensure cooperation and exchange of information between these authorities.
- There are no established arrangements for coordination and cooperation between SRB, ECB and the German authorities in the event of a system-wide crisis in Germany; a coordination mechanism is needed to ensure cooperation in systemic crises between European and domestic authorities.

### Crisis prevention — A. Recovery Planning: Powers
- Recovery plan obligations expanded to include all banks, regardless of size; requirements are adequate and in line with EBA standards and guidelines.
- LSIs’ recovery plans must be submitted for review to BaFin and the Bundesbank; SIs’ recovery plans are submitted to the ECB.
- FMSA reviews LSIs’ recovery plans in the context of its resolution planning; SIs’ recovery plans submitted to the ECB are shared with the SRB.
- Supervisory authority can grant banks simplified obligations for recovery plans:
  - BaFin performs this role for LSIs, in consultation with the Bundesbank.
  - ECB does so with respect to SIs.
  - Simplified obligations can apply to contents and level of detail of recovery plans, time limits for preparing/updating plans, and information to be provided for recovery and resolution planning.
  - Upon request by banks belonging to an IPS, subject to Bundesbank’s consent BaFin can exempt banks from the requirement to prepare a recovery plan except where the bank poses a systemic risk, is supervised by the ECB, or has assets exceeding € 30 billion.
- Group recovery plan must include:
  - courses of action which may be implemented both at the level of the superordinated entity and at the level of subordinate entities,
  - provisions ensuring the compatibility of the courses of action to be implemented by the superordinated entity and any subordinate holding company, subsidiary or significant branch, and
  - provisions providing for possible intra-group support in case of a group financial support agreement.
- ECB and BaFin powers to rectify deficiencies in recovery plans:
  - ECB can request an SI to provide a revised plan and require specific changes; if insufficient it can require changes to the bank’s business activities and, if necessary, require more specific measures including reducing the bank’s risk profile or strengthening its governance arrangements.
  - BaFin has similar powers with respect to recovery plans prepared by LSIs and the two recognized IPSs with respect to their members.
- ECB and BaFin can require a SI, or LSI, to implement recovery measures specified in its recovery plan and can instruct a bank to take recovery measures as early intervention measures.
- When the supervisory authority is the consolidating group supervisor it must seek to agree the group recovery plan with members of the group’s supervisory college.
  - Under the SAG BaFin is required to submit an LSI’s group recovery plan to NCAs in Member States in which subsidiaries and significant branches are located and to NRAs of Member States in which subsidiaries are located, as well as to FMSA.
  - The SAG does not require BaFin to submit the plan to supervisors or resolution authorities in third countries, but this reportedly is done in practice.
  - BaFin must try to reach a joint decision with the NCAs of subsidiaries on the assessment of the adequacy of the group recovery plan and any measures to rectify deficiencies; BaFin can request the support of EBA; ultimately BaFin can take decisions alone or with a subset of the NCAs.
  - The same approach applies when the ECB is the consolidating supervisor of an SI based in Germany.
- When the supervising authority is the host supervisory authority it must seek to agree the adequacy of a group recovery plan with the consolidating (home) supervisor; BaFin may request EBA support but can take independent decisions regarding individual recovery plans and measures to rectify deficiencies.
- BaFin and Bundesbank are preparing an Ordinance, in consultation with the ECB, to further specify recovery planning requirements:
  - The Ordinance will elaborate further on requirements for full-scope recovery plans, including governance and reporting requirements, and the nature of and minimum requirements for stress scenarios and indicators to be used in recovery plans.
  - It will also elaborate on requirements for and the nature of simplified obligations.
  - Insofar as this Ordinance exercises options provided for in Union law, the competent authority will be empowered to apply it to LSIs (BaFin and Bundesbank) and to SIs (the ECB).
- BaFin had earlier, with Bundesbank’s input, published Minimum Requirements for the Design of Recovery Plans (Ma-San: Mindestanforderungen an Sanierungspläne).

### Crisis prevention — A. Recovery Planning: Practices and implementation
- Submission and phasing:
  - The submission of recovery plans by banks designated as systemic institutions has been phased-in over the last three years.
  - By early 2016 banks must prepare full scope plans.
  - This includes the 22 banks/groups supervised by the ECB and twelve supervised by BaFin/Bundesbank.
  - By early 2016 revised plans had been submitted (in most cases), or as initial plans (in a few cases).
- Feedback and remediation timelines:
  - Feedback is provided by the authorities within 6 months.
  - If material deficiencies are identified, the banks have 2 months (which can be extended with an additional month) in which to revise and resubmit their plans.
  - Material deficiencies in recovery plans are reported to the ECB SB which can take enforcement action subject to no-objection by the ECB Governing Council; to date, this has not been required for any German bank.
- Further rollout:
  - Recovery plans from other banks will be required once the Ordinance is adopted, likely within the next few months.
  - Banks will be identified (inter alia with assets of less than € 30 billion) and will be able to submit plans under simplified obligations, though the bank’s supervisors can propose to require full scope plans.
  - Most savings banks and cooperative banks are expected not to have to prepare recovery plans, and will instead be covered under recovery plans developed by their respective IPS.
  - Savings and cooperative banks retain the option to prepare their own plans.
- Review process and cooperation:
  - For ECB supervised German banks and groups, recovery plans are assessed by the ECB jointly with BaFin and Bundesbank within the JSTs.
    - The JST is formally responsible for reviewing recovery plans; BaFin and Bundesbank sub-coordinators/JST members are involved in analysis supported by horizontal units in BaFin, Bundesbank and ECB.
    - Plans are assessed using a structured evaluation framework developed by the ECB.
    - Initial results are presented during a meeting with the bank which provides feedback; JST members prepare a draft feedback letter finalized by the ECB JST coordinator in consultation with JST sub-coordinators and members and sent by the ECB to the banks.
    - The JST transmits its assessment to the group’s supervisory college when one exists and must consider the views of college members.
    - The SRB (for SI) and FMSA (for LSI) also review recovery plans to identify any actions that may adversely impact resolvability.
  - BaFin and Bundesbank review recovery plans of banks and groups not supervised by the ECB, including 12 banks/groups designated as high priority LSIs that must prepare full scope plans; BaFin shares these plans with FMSA to identify measures that might adversely affect resolvability.
  - For ECB supervised banks/groups, the JST communicates recommendations or required changes; where material deficiencies or impediments exist it must notify the bank/group and require a revised plan demonstrating how deficiencies or impediments will be addressed.
  - For banks/groups supervised by BaFin/Bundesbank, BaFin issues instructions to banks for improving plans and scope for improvements must be addressed in subsequent annual plans.
- Cross-border cooperation in recovery planning:
  - Practices for cross-border cooperation are generally well established.
  - For over five years the German authorities have led a CMG that coordinated oversight of a recovery plan developed by a G-SIB involving EU and non-EU authorities.
  - Coordination within the EU adheres to explicit guidance in EU directives, regulations and guidelines.
  - BaFin has entered MoUs with relevant national supervisory authorities globally; most MoUs describe how supervisors will interact in a recovery situation.
  - Information can only be shared with third country authorities to the extent that they are subject to confidentiality requirements comparable to those set out in SAG and KWG.

### Crisis prevention — B. Early Intervention: Intervention powers and recovery plan triggers
- Supervisory powers:
  - Supervisory authorities’ powers include early intervention powers specified in SAG and supervisory powers according to the KWG.
  - BaFin and the ECB in principle have the same range of powers vis-à-vis German banks.
  - BaFin is responsible for applying early intervention measures for LSI; the ECB is responsible for early intervention measures for banks falling under its direct supervision (SI).
- Scope of early intervention powers:
  - BaFin and the ECB can require implementation of courses of action set out in recovery plans and can require a bank to present a plan to restore compliance with supervisory requirements and set a deadline for implementation.
  - Powers include restricting the business of the bank, requesting divestment of activities, imposing specific liquidity requirements, removing members from the management body, and implementing recovery plan measures.
  - Recovery plan triggers and early intervention triggers do not necessarily comply with each other (recovery triggers are set by the banks themselves whereas early intervention triggers initiate supervisory actions).
  - In a draft under discussion, when actual capital falls below required capital plus 1.5 percentage points, BaFin may require the bank to take measures to improve its financial situation.
  - BaFin can prohibit payment of dividends and bonuses, restrict new lending, order the management body to examine its situation and identify measures to overcome problems with a specified timetable, and require regular reporting on implementation.
- More severe interventions:
  - BaFin and the ECB can prohibit taking new deposits and granting new loans, prohibit or limit payments to affiliates or payments of dividends, prohibit managers from carrying out certain activities, impose a temporary ban on payments, and order that the institution be closed for business with customers.
  - Supervisory authorities can appoint temporary administrators and specify their tasks and powers, including replacing some or all managers.
  - BaFin and ECB can appoint a Special Representative with the power to manage and govern the bank; the Special Representative can assume the duties of managers and governing bodies.
  - They can require a bank to draw up a plan for negotiating the restructuring of its debt vis-à-vis some or all creditors.
- Intervention in voting rights:
  - BaFin and ECB can intervene in the voting rights of entities controlling a LSI or SI in the context of supervision of financial groups.
  - Under certain circumstances, including if the person managing such an entity is not trustworthy or lacks necessary professional qualifications, they can prevent such entities from exercising their voting rights.

### Crisis prevention — B. Early Intervention: Cross-border cooperation
- Consultation and notification requirements:
  - Where BaFin, or the ECB, is the consolidating (home) supervisor for a LSI or SI it must consult with other supervisors in the supervisory college before deciding on early intervention measures, including temporary administration.
  - It must also notify EBA prior to taking any decision.
  - It is bound to consider the potential impact of intervention measures on group entities in other Member States (but not third countries).
  - BaFin (or the ECB in case of a SI) must notify the other supervisory college members and the EBA of such measures.
- Joint assessment and decision rules:
  - If another supervisory authority intends to impose similar measures, BaFin (or ECB) must participate in a joint assessment as to whether application of the measures is to be coordinated; the assessment must be documented in writing and forwarded to the parent entity.
  - BaFin (or ECB) may request EBA support in arriving at a joint assessment.
  - If the relevant supervisors have not agreed a joint decision within five days, BaFin (or ECB) can decide whether to enact the measures.

*Source: _cr16194 - 27. Overall domestic financial stability is the responsibility of the Financial Stability Committee (FSC).*

### 54.      Where BaFin, or the ECB, is a host supervisor, it must consult with the consolidating

### _cr16194 - 54.      Where BaFin, or the ECB, is a host supervisor, it must consult with the consolidating

### Consultation, early intervention, and referral (paras 54–56)
- BaFin, or the ECB, as a host supervisor must consult with the consolidating (home) supervisor prior to taking early intervention measures or imposing temporary administration.
- BaFin (or ECB) must notify the EBA prior to acting.
- BaFin (or ECB) must consider the assessment of the consolidating supervisor prior to taking action, but can act independently if this is not received within three days.
- BaFin (or ECB) must notify the consolidating supervisor and the other supervisors within the supervisory college and EBA of its actions.
- If the home or other host supervisory authority intends to impose similar measures, BaFin (or ECB) should seek to coordinate the measures.
- If the supervisors have not agreed a joint decision within five days, BaFin (or ECB) can decide to enact the measures.
- If BaFin, or the ECB, is notified of a decision made by a home or host supervisor in a Member State regarding imposition of certain early intervention measures and does not agree, it may refer the decision to EBA. The relevant measures include those requiring an institution to:
  - implement recovery measures affecting capital or liquidity;
  - prepare a plan for restructuring of debt; or
  - change its legal or operational structures.
- Where a decision proposed by BaFin, or the ECB, has been objected to and referred to EBA by another supervisory authority, BaFin (or ECB) is bound by the decision of EBA. However, if EBA does not issue a decision within three days, BaFin (or ECB) can decide as to whether to enact the measure.

### Assessment and supervisory implementation (paras 57–58)
- Recovery plan preparation implementation is proceeding well.
- A structured supervisory assessment framework is in place, and guidelines for identifying and remedying material deficiencies have come into force this year.
- The quality of plans reportedly varies considerably, but the supervisory assessment process is expected to yield higher quality and more consistent plans over the next couple years.
- The ECB and German authorities have an adequate range of early intervention powers, expanded to include the power to require implementation of recovery plan measures.

### Crisis management regime — Resolution planning and resolvability (paras 59–63)
- SRB and FMSA are responsible for drawing up and adopting resolution plans for institutions/groups within their mandates.
- The SRB draws up resolution plans after consulting the ECB or relevant NCAs and NRAs, including group-level resolution authority and NRAs of non-participating member states where subsidiaries or significant branches are located.
- German legislation mirrors the requirement for FMSA to consult the supervisor in the preparation of the resolution plan.
- SRB will issue guidelines and instructions addressed to NRAs for preparation of (group) resolution plans relating to specific institutions or groups.
- Resolution plans must not assume use of public funds at any point of resolution planning, including ELA from the Bundesbank.
- Plans must contain options for application of resolution tools and include details on business analysis, operational continuity, funding in resolution, MREL, information and communication issues, and an assessment of the institution’s resolvability.
- SRM and German legislation specify detailed requirements for resolution plans.
- SRM and German resolution frameworks allow simplified obligations in specified situations; EBA has finalized guidelines on application of simplified obligations.
- Criteria for simplified obligations include interconnectedness and membership of IPS.
- Where simplified obligations are applied the SRB and FMSA can determine:
  - the contents and details of resolution plans;
  - the date by which the first resolution plans need to be drawn up;
  - the contents and details of the information to be provided; and
  - the level of detail of the resolvability assessment.
- A bank or group is deemed resolvable if it is feasible and credible to either liquidate under normal insolvency proceedings or resolve by applying available resolution instruments while avoiding significant adverse effects for financial systems in affected Member States.
- If SRB or FMSA decide there are significant impediments to resolvability they will notify the bank/group and can propose remedial measures; acceptable measures must be implemented by the bank/group. If proposed measures are not acceptable, the resolution authority will instruct the bank/group to take necessary measures.

### Resolution objectives and legal triggers (paras 64–66)
- Resolution objectives include:
  - ensuring the continuity of critical functions;
  - avoiding significant adverse effects on financial stability (preventing contagion, including to market infrastructures and maintaining market discipline);
  - protecting public funds by avoiding reliance on extraordinary public financial support; and
  - protecting client funds and client assets.
- Resolution measures can be taken only if all the following conditions are met:
  - the bank is failing or is likely to fail;
  - there is no reasonable prospect that any alternative private sector measures, or supervisory measures, would prevent its failure within a reasonable time;
  - resolution action is necessary in the public interest, proportionate to one or more resolution objectives, and normal insolvency proceedings would not meet those resolution objectives to the same extent.
- The previous adoption of an early intervention measure is not a condition for taking a resolution action.
- If conditions are not fulfilled, a failing bank must be liquidated in accordance with normal insolvency proceedings.
- German law allows implementation of a voluntary court approved reorganization plan (Credit Reorganization Act; “KredReorgG”), which can be initiated by BaFin for a LSI and the ECB for a SI following a request by the relevant institution. Legislation requires approval of the reorganization plan by all the institution’s creditors and shareholders; this differs from the BRRD approach as it involves creditor approval prior to court approval.
- A bank shall be deemed to be failing or likely to fail in one or more of the following circumstances:
  - the bank infringes, or there are objective elements to support a determination that the bank will in the near future infringe, the requirements for continuing authorization in a way that would justify withdrawal of the authorization;
  - the assets of the bank are, or following a determination based on objective elements that the assets of the bank will, in the near future, amount to less than its liabilities;
  - the bank is, or there are objective elements to support a determination that the bank will in the near future, be unable to pay its debts or other liabilities as they fall due;
  - extraordinary public financial support is required except when provided to solvent banks to remedy a serious disturbance in the economy of a Member State, preserve financial stability and takes the form of State guarantees (i) to back central banks’ liquidity facilities, (ii) of newly issued liabilities, or (iii) an injection of own funds or the purchase of capital on terms that do not confer an advantage on the bank and is limited to addressing SSM-wide stress tests, asset quality reviews or equivalent exercises. (This support is conditional on final approval by the Commission under its State Aid framework.)

### Safeguards, valuation, and creditor treatment (paras 67–68)
- Frameworks provide power to write down or convert relevant capital instruments in clearly defined situations to prevent bank failure.
- Shareholders and creditors shall first bear losses and to the same extent as they would in insolvency proceedings; creditors in the same class are treated equitably; covered deposits are fully protected.
- The “no creditor worse off” (NCWO) principle is explicit; creditors can receive compensation if losses from resolution exceed losses in a normal insolvency procedure.
- Frameworks provide for legal due process.
- Both ex ante and ex post valuations by an independent expert are required.
  - SRB/FMSA must ensure an independent expert assesses assets and liabilities before a resolution measure is adopted.
  - If a full assessment cannot be carried out in time, a provisional assessment must be undertaken.
  - Following implementation of resolution tools, SRB/FMSA must obtain an assessment by an independent expert auditor determining whether and to what extent shareholders and/or creditors have been disadvantaged by the resolution decisions taken.

### Resolution instruments, contract powers, and contractual stays (paras 69–76)
- FMSA (and SRB) powers include requiring a bank/group entity to amend maturity or amount of interest payable under debt instruments and other eligible liabilities, and to require a bank under resolution or any of its group entities to provide services or facilities necessary to enable a recipient to operate transferred business, including where the bank has entered insolvency proceedings.
- Resolution authority can amend or cancel contractual obligations (e.g., maturity, amount of interest payable, or temporarily suspend payments).
- It may temporarily (for up to 48 hours) suspend:
  - termination rights;
  - some or all payment or delivery obligations; and
  - the enforcement of security interests.
- With respect to contracts entered into by a bank or banking group, FMSA has the power to amend contract provisions and decline fulfillment.
- Deutsche Bank has signed the ISDA 2015 Universal Protocol on Resolution Stays; this supports cross-border enforcement of temporary stay of contractual cross-default clauses and termination rights in relation to adoption of resolution measures. A number of German subsidiaries of G-SIBs have also adhered to the Universal Protocol.
- German legislation requires institutions to include in financial contracts governed by third country law provisions recognizing the power of resolution authorities to bail-in debt and suspend contractual termination rights.
- Principle of universality in German insolvency law generally extends insolvency proceedings to all assets of the insolvent institution, including those outside Germany and/or subject to foreign laws.
- For EU jurisdictions national implementation of the BRRD ensures automatic recognition within the EU of resolution decisions adopted by other EU member states’ authorities; contractual bail-in of debt issued in other jurisdictions may be subject to legal and/or judicial uncertainty and generally cannot be relied upon in the context of resolution planning.

### Bail-in scope, exclusions, hierarchy, mandatory subordination, and MREL (paras 72–77)
- Resolution tools: i) sale of business/sale of shares of the bank; ii) establishment of a bridge institution; iii) asset separation/transfer; and iv) in any case a bail-in.
- Power to write down and convert relevant capital instruments immediately before resolution action exists; write down/conversion can be exercised independently of resolution action or together with resolution tools.
- Sale of business, sale of shares, transfer to bridge institution, and transfer to asset management company may be exercised more than once in a single resolution.
- BBRD’s Government financial stabilization tools (temporary public ownership and public equity support) are not included in the SRM Regulation, nor the SAG.
- SAG ensures FMSA (and SRB) has powers necessary to apply bail-in. Bail-in can be applied to:
  - recapitalize a bank to restore ability to comply with authorization conditions and sustain market confidence;
  - convert to equity or reduce principal amount of claims or debt instruments transferred to a bridge institution to provide capital for that bridge institution; or
  - serve as a complement to sale of business or asset separation tools.
- SRM and German frameworks allow exclusion of specific eligible liabilities, or categories of liabilities, from bail-in where necessary and proportionate to ensure continuation of critical functions and avoid contagion. Exemptions also possible if:
  - application of bail-in would lead to losses borne by other creditors being higher than if liabilities were excluded from bail-in; or
  - application of bail-in is not possible for the relevant liability within a reasonable period of time.
- Commission must be notified before an envisaged exclusion; it can prohibit or modify a decision if the exclusion could require a contribution from the SRF.
- Use of bail-in must respect hierarchy of claims; bail-in will potentially apply to all unsecured liabilities subject to exceptions.
- Creditors of a bank under resolution bear losses after shareholders in accordance with priority of claims under normal insolvency proceedings, save as expressly provided otherwise in the SRM.
- A delegated Commission Regulation specifies circumstances when resolution authority can totally or partially exclude certain liabilities from bail-in application.
- A recent new German law clarifies hierarchy of claims and introduces mandatory subordination of certain unsecured debt instruments. The provision stipulates that if a bank becomes insolvent claims under certain unsecured debt instruments will be subordinated to general senior unsecured liabilities. The subordinated instruments include:
  - bearer bonds, order bonds, and similar rights tradeable in capital markets;
  - promissory note loans and registered bonds.
- Mandatory subordination means these instruments will bear losses prior to other creditors, notably all uncovered depositors. This splits the previous heterogeneous class of senior unsecured debt and creates a new layer of tradeable senior unsecured debt to serve as a reliable source of loss-absorbing liabilities.
- The provision on the hierarchy of bonds becomes applicable on January 1, 2017.
- Resolution authority will set institution-specific MREL. This requirement applies formally from 2016, with a transition period of up to 48 months.
- MREL requires banks to have sufficient own funds and eligible liabilities to ensure losses can be absorbed and the bank can be recapitalized.
- MREL will be calculated as the amount of own funds and eligible liabilities expressed as a percentage of the total liabilities and own funds of the bank.
- Determination of MREL will be made on the basis of:
  - the business model, funding model and the risk profile of the bank and parent undertaking;
  - the extent to which deposit guarantee schemes could contribute to financing of resolution measures; and
  - the extent to which failure of a bank and parent undertaking would have significant adverse consequences for the financial system or present a threat to financial stability due to interconnectedness.
- FMSA has ultimate discretion but must explain to the supervisor when it departs from prudential requirements in setting MREL.

*Source: _cr16194 - 54. Where BaFin, or the ECB, is a host supervisor, it must consult with the consolidating (excerpts).*

### 78.      FMSA is in the process of developing additional criteria for MREL. These criteria will

### _cr16194 - 78.      FMSA is in the process of developing additional criteria for MREL. These criteria will

### MREL criteria and status
- FMSA is developing additional criteria for MREL following the EBA draft RTS on MREL (recently adopted by the Commission) and SRB guidelines.
- The RTS specify resolvability, risk profile and systemic importance as relevant criteria.
- For G-SIBs the RTS provides that MREL will be implemented consistent with the FSB’s TLAC requirement.
- Pending adoption of the RTS on MREL by the Commission, FMSA has not finally determined additional criteria.
- In 2016 the European Commission issued a discussion paper on reducing overlap between MREL and TLAC; this discussion is ongoing.

### Eligible liabilities and bail-in capacity
- Authorities consider that, based on a range of surveys, German banks generally have sufficient eligible liabilities, including much issued under German law.
- It is reported that German banks have mostly issued debt instruments which provide for cross-border effects to the exercise of German bail-in powers in European jurisdictions.
- Statutory subordination of certain unsecured debt instruments is applicable from January 2017.
- Recommendation: German authorities should closely monitor whether German banks have sufficient eligible liabilities to enable a sufficient level of bail-in and should monitor and encourage banks to ensure the adequacy of available bail-inable liabilities of large banks.

### Cross-border resolution framework and information exchange
- The SRM and German legislation require balancing interests of various EU Member States when resolution measures affect other Member States but lack an explicit provision requiring formal consideration of effects in third countries.
- Strict preconditions limit exchange of confidential information with third country authorities to cases where:
  - i) third country authorities are subject to confidentiality provisions at least equivalent to German legislation (as assessed by the resolution or supervision authority);
  - ii) the information is necessary for third country authority resolution measures comparable to those of German authorities;
  - iii) personal data can only be forwarded if the third country’s data protection legislation is of an appropriate level within the meaning of German legislation.
- Cooperation agreements are being put in place with third country authorities to allow in practice the exchange of confidential information.

### Recognition of third country resolution measures and right of refusal
- Third country resolution measures are not automatically recognized or effective in Germany.
- German resolution framework allows refusal to recognize or enforce third country resolution proceedings where proceedings would:
  - i) have adverse effects on German financial stability (or that in another EU Member State);
  - ii) have significant fiscal implications;
  - iii) conflict with German law; or
  - iv) where independent resolution action is necessary with respect to a German Union branch.

### Resolution colleges (RCs), CMGs and cross-border coordination
- Resolution Colleges (RCs) have yet to be established; they will include national resolution authorities, resolution authorities of other relevant EU Member States, the Bundesbank, the ECB if direct supervisor, BaFin, other relevant EU Member States supervisors, MOF, other relevant EU Member States’ Ministries, and relevant supervisors of DGS.
- For groups under the SRB remit, NRAs of subsidiaries and significant branches are replaced by the SRB in colleges; draft SRB Cooperation Framework foresees participation of respective resolution authorities as observers.
- Third country resolution authorities may be invited to participate in RCs only as observers.
- In events where a third country institution or parent undertaking has subsidiaries or at least two significant Union branches established in Germany and at least one other EU Member State, the resolution authority will establish a RC with the other relevant EU member state resolution authorities.
- The framework contemplates CMGs that would also involve non-EU authorities; CMGs will closely involve relevant third country authorities, similar to arrangements for G-SIB Deutsche Bank and other German banks.
- It is understood the SRB currently envisages co-existence of RCs and CMGs.

### Functions of resolution colleges
- RCs are to address:
  - i) exchange of information relevant for development of a group resolution plan;
  - ii) assessing group resolvability;
  - iii) exercising powers to address impediments to resolvability;
  - iv) deciding on the need to establish a group resolution scheme;
  - v) specifying MREL at group level;
  - vi) coordinating the use of financing schemes.

### Resolution approaches and cooperation agreements
- Work is progressing on resolution approaches for cross-border firms; public information indicates SRB, global CMG, and FMSA assume bail-in under a Single Point of Entry approach as preferred resolution strategy for a G-SIB.
- EBA is responsible for concluding framework cooperation agreements with third countries; within that framework the SRB shall conclude on behalf of national resolution authorities MoU with resolution authorities of other EU Member States and MoUs/cooperation agreements with third country authorities.
- The EBA commenced work to establish framework cooperation agreements (FCA); in 2015 the draft FCA was shared with selected third country authorities in the US (FRB, FDIC, OCC, SEC, NYSDFS), Switzerland (FINMA), Hong Kong (HKMA) and Japan (FSA); discussions are ongoing.
- The Cooperation Agreement between the SRB and ECB specifies these authorities will keep each other duly informed of any non-binding cooperation agreements with third country authorities.

### Crisis management arrangements
- BaFin has established a Crisis Management Center and a Crisis Management Handbook detailing internal procedures; other German authorities have also established crisis management centers and developed coordination procedures.
- Arrangements for system-wide crisis management involving the MOF, the SRB and the ECB are not in place.
- Recommendation: Consider clarifying cooperation and coordination mechanisms to efficiently and effectively resolve a system-wide crisis involving potential failure and resolution of multiple banks/groups simultaneously.

### Assessment of resolution powers and safeguards
- SRM and German resolution frameworks contain clear resolution objectives and a comprehensive range of resolution instruments to resolve a bank or banking group.
- Both competent authority and resolution authority can determine an institution is failing or likely to fail and are to closely consult each other.
- German law provides the resolution tools set out in the BRRD and envisioned in the FSB Key Attributes, except provisions for temporary public ownership and public equity support which were intentionally not transposed; the SRM regulation also does not contain these tools—this might constrain authorities in systemic crises.
- German law also provides for voluntary court approved reorganization plans (an additional instrument differing from the BRRD approach) which is not used in practice; consideration could be given to removing this option.
- Shareholder and creditor safeguards are adequate; however the SRM and German frameworks do not explicitly allow departures from the pari passu principle for resolution powers other than bail-in, contrary to FSB KA 5.1—this may limit flexibility in using transfer powers outside of bail-in.

### Operational and timing challenges in resolution
- Authorities face challenges to implement resolution quickly, including:
  - i) ensuring sufficient loss-absorbing capacity is appropriately positioned within banking groups;
  - ii) timely valuation of assets and liabilities;
  - iii) giving operational effect to bail-in of multiple classes of liabilities;
  - iv) ensuring continued access to FMIs in resolution;
  - v) implementing necessary structural changes (e.g., asset transfers);
  - vi) ensuring adequate liquidity funding in resolution.
- FMSA is sponsoring working groups involving other authorities and industry to address these issues.
- Resolution planning must consider implications of these challenges for the speed of implementation.
- German legislation allows FMSA (and SRB) to impose a temporary stay on actions by certain counterparties for up to 48 hours to facilitate resolution; this may be insufficient.
- BaFin authority to impose a more general moratorium in event of a LSI (as set out in the KWG) and corresponding ECB power for a SI could complement the 48-hour stay; such powers should be limited in time to avoid negative market sentiment.

### Deposit protection and potential scope to bail-in uncovered depositors
- The private commercial banks’ voluntary protection scheme publicly commits to fully protect all deposits in all private commercial banks.
- While the voluntary protection scheme does not create a legal right, as a last resort authorities could bail-in uncovered deposits knowing depositors likely would be compensated by the voluntary scheme funded collectively by private banks.
- Mechanisms for compensating depositors whose deposits have been converted to some form of equity would need to be established.

### Guidance on MREL design and contractual recognition
- Recommendation: Consider providing guidance on minimizing rollover risk in the debt component when setting institution-specific MREL requirements (e.g., target duration of eligible debt instruments) to minimize MREL refinancing risks.
- A bank’s refinancing risk will be higher the lower the equity component of MREL.
- German legislation requires banks to include in financial contracts governed by third country laws provisions recognizing the power of the resolution authorities to suspend termination rights; it remains to be determined if third country jurisdictions will recognize such contractual clauses.

### SRF and resolution funding
- The SRM Regulation establishes the SRF to be built up to a target amount of at least 1 percent of covered deposits of all credit institutions within SRM participating member states (ca. € 55 billion over eight years).
- Initially the Fund will consist of national compartments to fund resolution measures for national banks; this will be mutualized over eight years.
- Germany has concluded a Loan Facility Agreement with the SRB, providing a backstop of around € 15 billion for the national compartment in the SRF; the backstop is not automatic and requires a MOF decision to activate.
- The SRF is funded by regular ex ante and extraordinary ex post contributions; a Commission Delegated Regulation with a Council Implementing Regulation defines the formula for banks’ contributions to the SRF.
- Contributions will be risk based with special provisions for small banks and members of IPS.
- For German banks the SRF will replace the existing domestic fund (“Restrukturierungsfonds”) which remains for entities not covered by the SRM.
- Annex I contains information on the previous domestic fund’s (“SoFFin”) outstanding commitments which was closed for new stabilization measures in 2015.
- Note on initial mutualization mechanics: national compartment amounts could be used by other SRM member states up to specified thresholds (40 percent in year 1, 60 percent in year 2 and + 6.6 percent during subsequent years).

*Source: IMF staff report content as provided in the supplied document (canonical URL: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16194.pdf).*

### 101.      The SRF is a key source of resolution funding subject to certain conditions. Resolution

### The SRF is a key source of resolution funding subject to certain conditions. Resolution

### Role and conditionality of the SRF
- The SRF can be used to:
  - Partially recapitalize a firm in resolution if the firm cannot be fully recapitalized via bail-in.
  - Meet operational funding needs (i.e., liquidity) until the firm can regain access to market sources.
  - Be used indirectly as a source of loss absorption and recapitalization subject to certain conditions.
  - Provide liquidity by means of a loan or guarantee of third party funding, subject only to the requirement that a resolution tool (e.g., bail-in) has been used.
  - Make contributions to a bridge institution and an asset management vehicle.
  - Pay compensation to shareholders or creditors who have suffered greater losses than they would have done if the bank had been wound up under the applicable insolvency regime (NCWO principle).
- Decision and control:
  - Use of the SRF is decided by the SRB and subject to control of the EU Council of Ministers upon the advice of the European Commission.
  - The Commission must adopt a decision that the use of the SRF is compatible with the internal market and may impose conditions, commitments or undertakings on the beneficiary.
  - The SRM Regulation sets out conditions for SRF use and procedures for decision-making on authorizing its use.
- Capped and pre-condition limits for SRF support:
  - Shareholders and creditors must collectively first absorb losses of at least 8 percent of total liabilities including own funds of a bank under resolution.
  - The amount provided by the SRF must not exceed the lesser of 5 percent of the bank’s total liabilities or the means available to the SRF plus any amounts that could be raised through ex post contributions in the following three years.
  - Approval from the European Commission under the State Aid Framework is also required.

### Deposit insurance and Institutional Protection Schemes (IPS) in Germany
- Structure and recognition:
  - Germany has statutory DGS for commercial and public banks alongside voluntary DGS and recognized IPS.
  - Voluntary schemes provide supplementary deposit protection beyond statutory protection; statutory DGS cover claims up to amounts specified in the EinSiG while voluntary schemes cover amounts exceeding those amounts.
  - In line with the DGSD, German legislation allows for recognition of IPS. Recognized IPS are cooperative frameworks; members contribute premiums and the IPS can provide financial support for reorganization in line with their statutes.
- Legal framework and supervision:
  - The EinSiG entered into force on July 3, 2015, and covers both statutory DGS and IPS recognized as deposit guarantee schemes in accordance with the EinSiG.
  - Statutory DGS and recognized IPS are subject to supervision by BaFin, which is authorized to recognize an IPS.
  - Member institutions must inform statutory DGS and recognized IPS of any changes to business models that could increase covered deposits or the probability of compensation; the DGS/IPS must inform BaFin.
- Coverage and payout timing:
  - The amount of the claim for compensation from statutory DGS schemes/recognized IPS is set at € 100,000.
  - This amount can be increased up to € 500,000 in certain specified circumstances.
  - Depositors have a statutory legal claim for reimbursement; banks must inform depositors of applicable deposit guarantee provisions.
  - Statutory DGS and recognized IPS are obliged to pay out depositors after BaFin has determined a compensation case exists.
    - Up to May 31, 2016: payout required within 20 working days following determination.
    - As from June 1, 2016: claims for compensation shall be settled within seven working days, which is earlier than the deadline set in the DGSD (i.e., at the latest by the year 2024).
- Funding requirements and contributions:
  - EinSiG provisions on funding of statutory DGS and IPS are broadly the same; a recent MOF Ordinance specifies calculation requirements for the two statutory DGS.
  - All schemes are funded ex ante.
  - German law provides that, by the end of July 3, 2024, DGS’ financial means shall as a minimum reach a target level of 0.8 percent of the amount of covered deposits of their member institutions.
  - Ex-ante funding is raised by contributions from member institutions based on covered deposits and the degree of risk incurred; lower contributions may apply for banks in low risk sectors or members of recognized IPS.
  - DGS and recognized IPS must have annual plans demonstrating how they will reach the 0.8 percent target.
  - Ex post contributions may be required if available funds are insufficient to cover compensation expenses.
    - Ex post contributions for one year must not exceed 0.5 percent of all covered deposits of the member institutions of the DGS.
    - Each member institution’s share of ex post contributions corresponds to its share of total regular ex ante contributions.
  - If contributions are insufficient, statutory DGS/recognized IPS are required by law to take out loans to cover costs.
- IPS preventive support and limits:
  - Recognized IPS can implement measures to avert going concern risk for affiliated institutions; banks or depositors have no legal claim to such measures.
  - Examples of IPS measures: restructuring plans, early intervention measures, recapitalization, guarantees, taking over liabilities vis-à-vis third parties.
  - A recognized IPS is not allowed to take such measures if, after consulting FMSA, BaFin determines that conditions for resolution action have been met.
  - BaFin needs to confirm that affiliated institutions can pay extraordinary contributions needed to finance IPS pay-out.
  - Costs of IPS measures must not exceed costs needed to perform IPS functions.
- Historical IPS financial support (Box 3 figures):
  - BVR support:
    - 2011: volume of support measures amounted to € 114 million.
    - 2013: one new case with support of € 11 million.
    - 2014: one new support case required € 11 million.
  - DSGV support:
    - 2012: one new case in which a guarantee of € 57 million was provided with no availment yet; additionally € 10 million funds, € 12 million participation rights and € 11 million silent participation.
    - 2014: one new support case in which funds totaling € 35 million were provided; compensation across regions applied.
- Use of DGS in resolution:
  - DGS can be used to finance resolution measures where resolution action ensures depositors can continue to access deposits; the DGS to which the bank belongs will be liable for those costs.
  - If bail-in instrument is applied:
    - The scheme will be liable for the amount by which covered deposits would have been reduced in order to equalize the losses of the bank if covered deposits had not been exempt from bail-in.
  - If one or more other resolution tools are applied:
    - The scheme will be liable for the amount of losses which holders of covered deposits would have suffered with the same level of priority in liquidation proceedings.
  - In liquidation proceedings the DGS shall subrogate to the rights and obligations of covered depositors for an amount equal to its payment.
  - Recognized IPS could be used as a private sector measure to support members and to prevent failure and avoid resolution measures.

### Assessment and recommendations (selected)
- Liquidity planning and public backstops:
  - Resolution planning should deepen preparation to ensure availability of adequate temporary liquidity needed subsequent to a resolution decision.
  - Where market access to liquidity is insufficient, availability of public backstop facilities and access to standard central bank facilities should be assessed during resolution planning and preparation of resolution decisions.
  - By law, resolution plans cannot assume the provision of ELA by the Bundesbank.
  - Recommendation: Despite the discretionary nature of ELA, the Bundesbank and resolution authorities should discuss relevant matters during resolution planning, including:
    - How solvency and financial soundness determinations (both relevant for Bundesbank lending) will be made while implementing resolution actions.
    - Characteristics, potential amounts, and utility of various collateral not eligible for normal monetary policy credit.
    - At bank-specific level, discussion of the extent of possible liquidity needs following resolution.
- Progress against prior FSAP recommendations:
  - Recommendations in the 2011 FSAP Technical Note on Crisis management arrangements for DGS have been addressed: increased transparency and adequate ex ante funding.
  - German legislation implementing the DGSD has increased statutory DGS and IPS ex ante funding.
  - Introduction of a calculation formula incorporating risk-based factors has increased annual contributions by members.
  - Reimbursement period for covered deposits was reduced and transparency enhanced regarding claims procedures.
  - The deposit insurance framework remains fragmented following the three pillar model of the German banking sector.
  - Euro area jurisdictions have not yet agreed on a euro area wide deposit insurance scheme.
- SRF backstop and systemic flexibility:
  - Conditions attached to SRF use limit authorities’ flexibility in systemic scenarios but permit SRF use to ensure effective application of resolution tools (guarantees, loans, purchasing assets, contributions to bridge institutions and asset management vehicles, compensation to shareholders or creditors in specified cases).
  - The first line of defense is bail-in; SRF use is permitted only after specified creditor loss absorption and within the capped amounts noted above.
  - A credible common permanent backstop is necessary for the SRF.
    - ECOFIN Ministers have committed to agreeing on a common backstop for the SRF, fiscally neutral over the medium term, at the latest by the end of the transitional period for mutualizing the SRF.
    - For the transitional period, Germany and other euro area Member States will provide, as a last resort, bridge financing to their respective national compartments in the SRF that must be repaid by banks through ex post contributions.
    - The SRF framework allows for limited use of other national compartments prior to mutualization and for voluntary borrowings between compartments.
  - The backstop should be fiscally neutral over the medium term by ensuring public assistance is recouped by means of ex post levies on the financial industry.

*Source: IMF staff report excerpts on Germany (text provided).*

### Annex I. SoFFin Measures

### Annex I. SoFFin Measures

### Recapitalizations per December 31, 2015
- Commerzbank AG: 5.1 (Entity in € billion)  
- Portigon (ex WestLB): 2 (Entity in € billion)  
- Hypo Real Estate Holding AG: 8.8 (Entity in € billion)

### Guarantees
- nil

### Cumulated payments to Winding-up institutions (Assumption of risks)
- FMS Wertmanagement: 9.3 (In € billion)

*Source: FMSA*

### Annex II. State Aid Approved by the EU Commission since Mid-2011 (chronology of selected decisions)
- March 20, 2011: Commission approved the prolongation of a deadline for divestments that were part of the restructuring plan accompanying the recapitalization of Sparkasse Kőln Bonn for an amount of € 650 million. This had originally been approved in September 2010.
- July 18, 2011: Commission approved state aid to Hypo Real Estate in the form of capital injections (€ 10 billion), an asset relief measure with an aid element of approx. € 20 billion, as well as liquidit guarantees amounting to € 145 billion. These aid measures were conditional upon a restructuring plan (i.e., impaired assets were transferred to HRE’s winding-up institution, FMS Wertmanagement).
- December 20, 2011: Commission approved the split-up of WestLB which will lead to a sale and winding down of its banking activities. The Commission ruled that the price for the transfer of impaired assets exceeded the economic value of the assets; as a result the Commission required a revised restructuring plan.
- March 5, 2012: Commission approved the reactivation of the German aid scheme for financial institutions (SoFFin) until June 30, 2012. This covers guarantees, risk assumption and recapitalization measures in favor of financial institutions. The scheme had originally been approved in October 2008.
- March 30, 2012: Commission approved an amendment to a restructuring plan for Commerzbank AG which had originally been approved in May 2009. The restructuring plan accompanied silent participations (€ 16.4 billion) and the purchase of common shares (€ 1.8 billion) by SoFFin. In line with the amended restructuring plan most of Eurohypo’s activities on Commerzbank’s balance sheet will be run-off as well as a prolonged acquisitions ban.
- June 29, 2012: Commission approved the prolongation of the reactivated German aid scheme for financial institutions (SoFFin) until December 31, 2012. The scheme had originally been approved in October 2008.
- July 25, 2012: Commission approved approx. € 3.3 billion of restructuring aid for Nord/LB. This is conditional on divestments by Nord/LB and an acquisition ban.
- July 25, 2012: Commission approved restructuring aid for Bayern LB in the form of a capital injection of € 10 billion, a risk shield of € 4.8 billion and liquidity guarantees. The aid was subject to a restructuring plan and the repayment of € 5 billion of state aid over the next seven years.
- December 12, 2012: Commission approved the prolongation of the German aid scheme for banks (SoFFin) until June 30, 2013. The scheme is in favor of German banks, while other financial institutions will no longer be eligible for support. The scheme had originally been approved in October 2008.
- June 21, 2013: Commission provisionally approved an increase (in 2011 the Commission had already approved restructuring state aid) in a guarantee provided by the State governments of Hamburg and Schleswig-Holstein (the owners of the bank) to HSH Nordbank for an amount of € 3 billion to € 10 billion. At the same time it opened an in-depth investigation (see below decision in October 2015).
- August 22, 2013: Commission approved amendments to the restructuring plan for Nord/LB, which had originally been approved in July 2012. The amendments concern the requirement for additional divestments by Nord/LB and a prolongation of an acquisition ban until end 2016.
- October 19, 2015: Commission reached an agreement with the State Governments to approve an increase in guarantee provided by State governments to HSH Nordbank for an amount of € 3 billion to € 10 billion and the disposal of non-performing loans. Also, HSH Nordbank will be split into a holding company and an operating subsidiary which will continue the bank's current operations.

*Source: European Commission Memo, January 1, 2016, State aid: Overview of decisions and on-going in-depth investigations of Financial Institutions in Difficulty.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16194.pdf_