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Banking Regulation

in 28 jurisdictions worldwideContributing editor: David E Shapiro

2013Published by

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Contents

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Banking Regulation 2013

Contributing editor David E Shapiro Wachtell, Lipton, Rosen & Katz

Business development managersAlan LeeGeorge IngledewRobyn HorsefieldDan White Marketing managerRachel Nurse Marketing assistantsMegan FriedmanZosia DemkowiczCady AtkinsonRobin Synnot Administrative assistantsParween BainsSophie Hickey Marketing manager (subscriptions) Rachel Nursesubscriptions@ gettingthedealthrough.com Head of editorial production Adam MyersProduction coordinator Lydia Gerges Senior production editor Jonathan Cowie Chief subeditor Jonathan Allen Senior subeditor Caroline RawsonSubeditor Harry Phillips Editor-in-chief Callum Campbell Publisher Richard Davey

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Germany Oliver Glück and Sebastian Walczak GSK Stockmann + Kollegen 45

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GermanyOliver Glück and Sebastian Walczak

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Regulatory framework

1 What are the principal governmental and regulatory policies that

govern the banking sector?

Bank supervision in Germany aims to ensure the stability, efficiency and integrity of the German financial market and the solvency of the companies in the banking business. Supervised entities are credit institutions (banks), financial services institutions, payment insti-tutions, e-money institutions, securities trading banks (together referred to as institutions), investment fund managers and insur-ance companies. Although investment advisory and brokerage services are generally exempted from licensing requirements under the German Banking Act and the German Securities Trading Act, under the condition that these financial services are solely confined to participations in collective investment products (eg, participations in Undertakings for Collective Investment in Transferable Securities (UCITS) funds that have the permission to be offered to the public), such independent advisers and brokers (Finanzanlagenvermittler) need permission by the competent local administrative bodies (see question 2).

Companies may only render banking, financial, payment or e-money services where their managing directors can prove their professional qualifications and personal reliability. Regulated institutions have to comply with statutory, regulatory, organisa-tional and capital requirements, and with specific rules of conduct; Finanzanlagenvermittler are subject to the same level of regulatory requirements (see question 2). Banking regulation in Germany has been further tightened, aiming to regulate all areas of the financial market and to comply with the fast-developing European financial law.

German banks may be private banks, cooperative banks, sav-ings banks or other public-sector or special banks subject to their legal form of organisation and the ownership of the bank.

2 Summarise the primary statutes and regulations that govern the

banking industry.

As a member of the European Union, Germany’s statutes and regu-lations governing its banking sector are considerably influenced by European law. The following German statutes and regulations are the most important in this context:• theGermanBankingAct(KWG)comprisesfundamentalregula-

tory provisions regarding the conduct of business of credit insti-tutions (banks) and financial services institutions and outlines the Supervisory Authority’s competencies; with regard to the latestamendmentstotheKWG,seequestions13,14and21;

• thePaymentServicesRegulationAct(ZAG)providesforlicens-ing and capital requirements for payment and e-money institu-tions (eg, credit card issuers and acquirers, money remittance service providers) in accordance with the requirements of the Payment Services Directive (PSD; Directive 2007/64/EC, for

more details see www.payment-services-europe.com) and the Second E-money Directive (2009/110/EC). In addition, theGerman Civil Code (BGB) contains specific rules on the execu-tion of payments, including provisions on payment service pro-viders’ and users’ liability and on the clearing and settlement of payment transactions;

• theOwnershipControlOrdinance(InhKontrollV)requirescon-trollers and persons that intend to acquire a major interest in an institution to provide certain information on their reliability, acquisition interest, financial condition and creditworthiness, a business plan and a description of strategic objectives and plans;

• theGermanInvestmentAct(InvG)providesforlicensing,organ-isational, product-related and distribution requirements for open-ended investment funds; it also covers, inter alia, UCITS funds implementing completely the current UCITS Directive(UCITSIV,2009/65/EC).BecauseoftheimplementationoftheAIFM-Directivefrom1July2013theInvGwillbereplacedbytheGermanActonCapitalInvestments(KAGB)asthesinglerulebook for managers of all types of collective investments vehicles (eg, UCITS, AIFs);

• theSecuritiesTradingAct (WpHG)defines, interalia,adhocnotification requirements and contains provisions to safeguard against illegitimate insider trading as well as rules of conduct complyingwiththeMarketsinFinancialInstrumentsDirective(MiFID,2004/39/EC);

• theAnti-MoneyLaunderingAct(GwG)obligesbanks,financialinstitutions, payment institutions and e-money institutions as well as certain types of agents (eg, e-money agents) to identify, verify and supervise their clients and their business transactions in order to prevent money laundering and terrorism financ-ing; the European Commission recently suggested amendments to the Directive 2005/60/EC (Third AML Directive) furtherextending the factual and personal application of the Third AMLDirective(seequestion7);

• under the German Trade Act independent advisers and bro-kers that solely deal with participations in collective invest-ment products (Finanzanlagenvermittler) need to apply for a licence with the competent local administrative bodies and are also subject to ongoing supervision by supervisory authorities; from1 January2013 theFinancial Investment IntermediariesOrdinance(FinVermV)subjectstheFinanzanlagenvermittler to the same level of regulatory requirements as applies to securities trading banks, for instance, rules of conduct in relation to the investors (disclosure of inducements, written record on invest-ment advice, etc) and organisational and transparency require-ments; this approach is purely national regulation and lacks corresponding EU regulation;

• theGermanPfandbriefActgovernstheissuanceofPfandbriefe. ThePfandbriefActprotectsPfandbrief investors with a safety net.CRDIVrequirementsalsotriggerchangestotheGermanPfandbriefAct;

Germany GSK Stockmann + Kollegen

46 Getting the Deal Through – Banking Regulation 2013

• asof11June2010theBGBhasbeenamendedbyalegalactimplementing the European Consumer Credit Directive; thisamendment strengthens the rights of consumer borrowers; since 1 August 2012 the failure to provide certain information ine-commerce business with consumers may render the contract void;

• the Stock Exchange Act regulates the organisation of theGerman stock exchanges; since28December2012 simplifiedaccounting requirements apply for small stock corporations;

• theSecuritiesAcquisitionsandTakeoverActcontainsrulesforpublic offers to acquire listed shares or comparable securities that are listed on an organised market; and

• regulations,ordinances,circularsandotherstatementsissuedbythe Federal Financial Supervisory Authority (BaFin), especially the Solvency Ordinance (SolvV), the Ordinance GoverningLarge Exposures and Million Loans Reporting (GroMiKV);in addition there are several regulations issued by BaFin con-cerning risk management and compliance of institutions and investment companies (recently revised MaRisk, InvMaRisk, InvVerOV, recently revisedMaComp) and theOrdinance onthe Regulative Requirements of the Compensation in Financial Institutions (InstitutsVergV). In future,many of these aspects(eg, large exposures) will be covered by European regulation, ie,rules implementingCRD,directlyapplicablerelevantCRRprovisions and technical standards laid down by European SupervisoryAuthorities(seequestion21).

3 Which regulatory authorities are primarily responsible for overseeing

banks?

Since2002,theFederalFinancialSupervisoryAuthority(BaFin)andtheDeutscheBundesbank(Bundesbank)(together,theSupervisoryAuthorities) jointly supervise banks, financial services institutions, payment institutions and e-money institutions exercising an ‘all-in-one financial supervision’. In addition, BaFin is solely responsible for thesupervisionofcompliancewithanti-moneylaundering(AML)requirements, trading in financial instruments and for supervision of insurance companies and investment fund managers.

BaFin’s main objectives are solvency and market supervision (operation of markets under fair and transparent conditions) and, byvirtueoftheFinancialStabilityMonitoringActdated25October2012(FinStabG),alsoconsumeraffairs.BaFinensurescompliancewith the statutory and regulatory principles. It is empowered to license, monitor and audit institutions and it may carry out on-site inspections, impose restrictions on banking business, appoint a special representative to replace the management and, finally, close institutions. BaFin may also confer large systemically important banksuponstate-ownedSPVs(bridgebanks)asalast-resortmeas-uretomaintainfinancialstability.OnthebasisoffederallawsBaFinalso issues general instructions and definitions through principles and regulations on how to carry out banking business.

The Bundesbank is mainly responsible for the ongoing monitor-ing process that includes the evaluation of reports, annual accounts, documents and auditors’ reports submitted to it by the institutions as well as regular audits of banking operations and prudential audits. The Bundesbank is also responsible for the monitoring of the stabil-ity of the financial system. For these purposes a standing commit-tee, introduced by the FinStabG, may issue warnings to the federal government, to BaFin or any other public authority if it comes to the conclusion that a risk may affect financial stability; the standing committee may also make suggestions on appropriate counteractive measures. The FinStabG also fosters the cooperation and exchange of information between BaFin and the Bundesbank; it also estab-lishes reporting duties for certain financial capital companies.SinceJanuary2011theEuropeanSupervisoryAuthorities(ESA)

and the European Systemic Risk Board (ESRB) mainly coordi-nate the supervisory authorities within the EU, but under special

circumstances they may address decisions directly to the national supervisoryauthorities.Since8December2011therespectiveEUDirective (2010/78/EU) has been implemented into German law,imposing certain cooperation and notification duties on BaFin with regard to ESA and ESRB and governing the involvement of ESA into the German supervisory process. In anticipation of the planned European Banking Union, systemically important credit institutions (banks) shall be supervised by the ECB under a Single Supervisory Mechanism (SSM) to ensure consistent and independent cross-border supervision; EBA, however, shall remain responsible for the establishment of a EU-wide uniform regulatory framework and con-sistentsupervisionofbanks.ECOFINagreedonalegalframeworkforthecreationoftheSSMinDecember2012.Bankswithabal-ance sheet total worth more than €30billionor20percentofthegross national income are considered systemically important (there areprobably150intheEUand39inGermany).TheSSMshallstartinMarch2014.

4 Describe the extent to which deposits are insured by the government.

Describe the extent to which the government has taken an ownership

interest in the banking sector and intends to maintain, increase or

decrease that interest.

In the event of the insolvency of a deposit-taking credit institution or a securities-trading institution, both deposits and liabilities are protected by various compensation schemes.

Minimum protection is granted by statute to deposit-taking credit institutions based on the European directive on deposit guar-anteeschemes;throughthisregime100percentofeachbalanceincurrent accounts, savings accounts and fixed-deposit accounts held by private individuals and business enterprises is covered. Minimum protection is also granted in the case of securities-trading institutions based on the European directive on investor compensation schemes; 90percentoftheliabilitiesarisingfromcertainsecuritiesbusinessesaretherebycovered.However,depositguaranteesaswellasinves-tor compensation are limited to a maximum amount of €100,000(deposits) and €20,000(compensationforinvestors’liabilities)percustomer and institution.

In addition to the statutory deposit guarantee scheme, various banking associations have established their own deposit guarantee funds on a voluntary basis. The most important private scheme is theDepositProtectionFundheldwith theAssociationofPrivateBanks in Germany. It provides additional protection if and to the extent that claims are not fully covered by the statutory deposit guaranteescheme.TheDepositProtectionFundprovidescompen-sationofupto30percentoftherelevantliablecapitalofabankpercustomer including the protection of deposits and interests. As the required minimum liable capital of a bank in Germany is currently €5million,theprotectionderivingfromtheDepositProtectionFundgenerally exceeds the compensation granted by the statutory deposit guarantee schemes.On the European level, the Commission passed a legislative

proposal for a close revision of the Deposit Guarantee SchemesDirective.TheCommission suggests a faster disbursementwithinone week’s time and a granted compensation up to €100,000for deposits and €50,000 regarding compensation for investors.Furthermore, it is intended that all of the deposit guarantee schemes will build a fund together.

In relation to further governmental intervention into the bank-ingsectorseequestion7.



5 Which legal and regulatory limitations apply to transactions between a

bank and its affiliates? What constitutes an ‘affiliate’ for this purpose?

Briefly describe the range of permissible and prohibited activities for

financial institutions and whether there have been any changes to how

those activities are classified.

Generally, under section10KWG,banks, financial services insti-tutions, groups of institutions and financial holding groups are required to comply with specific capital and liquidity requirements, limitations in respect of major shareholdings in non-financial enter-prises, restrictions on major shareholdings for e-money institutions and rules in relation to the establishment of corporate ties. In the future, capital and liquidity requirements, including the definition of eligible own funds elements, will be covered exhaustively by the CRR; section 10 KWGwill be limited to supplementary regula-tiononownfundsimplementing,forinstance,article100ofCRD,which grants power to the competent authority to impose specific own funds requirements on institutions under certain circumstances.Sections13cand13dKWGprovidefornotificationdutiesand

in addition, require the prior consent of BaFin for certain intra-grouptransactions.Pursuanttosection15KWG,forexample,aninstitution may grant loans to:• managersoftheinstitution;• enterprisesinwhichtheinstitutionoramanagerholdsamajorinterestamountingtomorethan10percentoftheenterprise’scapital; or

• enterprisesthatholdamajorinterestintheinstitutionamount-ingtomorethan10percentofitscapital,subjectineachcaseto the unanimous decision of all managers of the institution and the explicit approval of the supervisory board. In future, the underlying principles will be covered by European legislation (seequestion21).

‘Subsidiaries’, as used in the above-mentioned provisions, are enterprises:• inwhichtherelevantenterpriseholds(pursuanttosection290

of the Commercial Code): • the majority of the voting rights; • the right to appoint the majority of the administrative body,

the management body or the supervisory body and is, at the same time, a shareholder; or

• has the right to exercise a dominant influence; or• onwhichadominantinfluencecanbeexercised,irrespectiveof

its legal form and domicile.

‘Affiliated enterprises’ are enterprises that have a common parent entity.

The regulatory framework in Germany contains provisions regarding a prohibited business for institutions. According to sec-tion3KWG,forexample,thefollowingactivitiesareprohibited:• the conductofdepositbusiness if themajorityof thedeposi-

tors are persons employed by the enterprise (employee savings banks), unless other banking business is conducted that exceeds the scale of such deposit business;

• theacceptanceofsumsofmoneyifthemajorityofthelendershave a legal right to loans being granted to them or objects being supplied to them on credit out of the sums of money (saving enterprises for specific purposes); this does not apply to building and loan associations; or

• theconductoflendingbusinessordepositbusiness,if,byagree-ment or in line with normal business practice, it is impossible or very difficult to withdraw the amount of the loan or the deposits in cash.

The aforementioned prohibitions existed already before the finan-cial crisis; since the financial crisis there have not been any changes to how those activities are classified.

6 What are the principal regulatory challenges facing the banking

industry?

OneofthemainregulatorychallengesisthatEuropeanandnationalregulation has become very dense and starts to affect even entities whose business activities do not constitute banking business in the strict sense. This especially holds true for:• factoringandleasingcompanies;• themanagementandthedistributionofparticipationsin(alter-

native) investment funds (eg, participation in closed-ended investment fund vehicles);

• companiesinthemobilesector(eg,withregardtomobilepay-ments); and

• certain business models within the payment sector such asacquiring, operating of ATMs or even – as the case may be – processing of online payment transactions (possibly qualifying asmoneyremittanceserviceunderthePSD);

In Germany, online platforms have come under particular scrutiny fromBaFin.OnaEuropeanlevel,theEuropeanCommissioncon-tinues its efforts to cover regulatory gaps and to regulate opaque markets and overly complex products that have not been under supervision before, such as shadow banking (see question 8).Whatfurtheraddstothelevelofcomplexityofapplicableregu-

lation is the recognisable trend of the European regulator to make more use of directly applicable regulations rather than directives, which require national implementation; only necessary accompa-nying arrangements are left to the national regulator, while more and more even technical standards are created by the European Supervisory Authorities (EBA, ESMA, EIOPA). Though thisapproach leads to a higher level of harmonisation in the EU, it also considerably reduces clarity of different regulations and increases their interaction with national legislation. The banking industry is also forced to monitor regulatory developments on the national, EU and international level, which increases costs and leaves less time to adapt to new developments. There is also a recognisable trend for the national regulator to introduce ‘transitional rules’ in anticipa-tion of European regulation (for example, on high frequency trade, short-selling, fee-based advisory services and living wills).

Any supervised entity has to fulfil a number of organisational requirements, particularly transparency and information duties in relation to its clients and an increasing number of reporting duties to Supervisory Authorities. Credit institutions in particular have to establish an internal security system to prevent the committing of any criminal offences by internal or external persons that might pose a risk to the values of the institution. In reaction to the recent crisis, there is also a recognisable trend for strengthening preventive controls rather than relying on internal or external detective con-trols(seequestion7),forinstance,thelegallybindingrequirementtoestablish a compliance function and to integrate it into the existing internal control system of the entity as well as stringent reporting rules on liquidity and capital requirements.

Increasing requirements regarding the professional qualifica-tions and personal reliability of managing and supervisory directors (and other key personnel, including compliance functions) of insti-tutions, investment funds and insurance companies, and increased personal liability of managing directors and supervisory directors for failure to meet minimum organisational requirements may ham-per the recruitment of qualified staff.

Increased capital requirements and planned restrictions on cer-tain speculative transactions exceeding defined thresholds, will trig-ger further organisational changes in the banking industry, and may force some institutions to reduce the volume of business or even ceasecertaintypesofbusiness(seequestions17and21).

Furthermore, controllers and acquirers of major interests in an institution have to submit a large and time-consuming number of documents to the respective regulatory bodies, for example, with



regard to the good repute of the acquirer and its managers (see ques-tion30).

Finally, banks may face strategic challenges when deciding whether to apply for state aid, especially when it comes to possible competitive disadvantages or advantages on the one hand and loss of control on the other. In compliance with European state aid law, state aid measures could be accompanied by a duty to restructure and to downsize the bank in large parts; these standards were and arecurrentlyappliedtotheformerGermanWestLBandtheformerGermanHypoRealEstate.

7 How has regulation changed in response to the recent crisis in the

banking industry?

Both the federal government and BaFin have taken several measures in reaction to the financial crisis.

The stabilisation measures taken by the federal government, including the establishment of the Financial Markets Stabilization Authority (FMSA), the establishment of the Financial Market Stabilisation Fund (SoFFin) and the Restructuring Fund for Credit Institutions proved sufficient in the years of crisis to restore confi-denceinthestabilityoftheGermanfinancialmarkets.Nevertheless,asof1January2013theGermangovernmentoncemoreextendedtheapplicabilityofSoFFin(untiltheendof2014)givingcreditinsti-tutions the possibility to apply for state aid, in particular to be able tomeetfuture(CRDIV/BaselIII)capitalrequirementsandtoover-come liquidity squeezes. For that purpose SoFFin funds can, upon request, be used by FMSA to issue state guarantees, assume risk positions and acquire interests in financial sector enterprises. So far, nine different credit institutions have received state aid from SoFFin. Should the amount of money granted to SoFFin prove insufficient, SoFFin will receive funds from the Restructuring Fund so that banks will contribute also to the stabilisation of the financial system. The Restructuring Fund, which is a reserve for future financial crises, is financed by a ‘banking fee’ that all credit institutions are obliged to pay according to their size in terms of balance sheets. Credit institu-tionsmayconferuponastate-ownedSPV(badbank)toxicassetsand non-strategic business divisions; in certain circumstances, the RestructuringActof1 January2011 (amendmentof section48aKWG)empowersBaFintonationalisesystemicallyimportantbanksby means of transfer to state-owned ‘bridge banks’ in order to restore financial stability. The Restructuring Fund is supposed to finance such measures taken by BaFin, including the transfer of systemically important credit institutions to ‘bridge banks’. Furthermore, the fed-eral government presented a draft act introducing the requirement formandatoryrecoveryplansforinstitutions(seequestion14).

Finally, institutions must comply with new capital requirements inimplementingtheCRDII,III(seequestion17)andprospectivelywiththeCRDIV/BaselIIIrequirements(seequestion21).

The law banning uncovered short-selling transactions in all shares and in government bonds issued by EU member states has been replaced by the EC Regulation on short selling and certain aspectsofcreditdefaultswapsasof1November2012inthemean-time. The EC Regulation requires that all short sales be disclosed and that investors notify BaFin of significant net short positions in shares, sovereign debt and uncovered sovereign credit default swaps; the regulation also introduces further restrictions on uncov-ered short sales in shares and sovereign debt as well as credit default swaps. BaFin is entitled to prohibit short sales or similar transac-tionsundercertaincircumstances.Paralleltothis,ESMAhasarightof intervention.OnboththenationalandEUlevel,corporategovernanceand

internal control requirements (regarding, for instance, risk manage-ment and the compliance function) have been, or will be in near future, further tightened and extended (for example, CRD IV,Solvency II, new EBA Guidelines on Internal Governance, refined and extended Minimum Requirements for Risk Management for

banks and financial services institutions (MaRisk), revised com-pliance standards for financial services institutions (MaComp) implementingESMA’s‘GuidelinesoncertainaspectsoftheMiFIDcompliance function requirements’ and ‘Guidelines on certain aspects of theMiFID suitability requirements’). In particular theactive role of the compliance function as a preventive control has been strengthened.

Both the European and the national regulator place a stronger focus on consumer protection, establishing additional challenges with regard to retail investment products, which present regulated entities with ever more documentation requirements towards their customers. In addition to the already existing documentation and information requirements regarding participations in investment funds(KIID)andthemandatoryshortinformationsheetforsecuri-ties(PIB),inJuly2012theEuropeanCommissionpresentedafinaldraftofaregulationonkeyinformationdocuments(KID)forinvest-ment products. Introducing the definition of packaged retail invest-mentproducts(PRIPS),theregulationlaysdownuniformrulesontheformatandcontentoftheKIDanduniformrulesonprovidingit to retail investors. PRIPS cover all typesof investmentswhere,regardless of the legal form of the investment, the amount repayable to the investor is exposed to fluctuations in reference values or in the performance of one or more assets which are not directly purchased by the investor (for example, open-ended and closed-ended invest-ment funds, UCITS and structured products whatever their form is). Right now in Germany, providers of participations in collective investment products (for instance, participations that entitle the holder to participate in the result of a company, closed-ended funds, participation certificates and registered bonds) as defined in the VermAnlG,must provide a product information document (VIB)priortothepublicofferingoftheparticipations;theVIBmustcon-tain inter alia information on the type of investment, the investment policy and strategy and investment purposes, risks of the investment product as well as the costs of investment product, including any commission paid.Withtheimminentintroductionoffee-basedadvisoryservices

regarding financial instruments, institutions will have to decide whether to stay with a success-based commission model or whether to switch to fee-based advisory services with all its consequences.Parallel to the Financial Action Task Force (FATF), adopt-

ing a new set of recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism&Proliferation (FATFRecommendations) in February 2012, theEuropean Commission reviewed the application of the Directive2005/60/EC (Third AML Directive) and in February 2013 pre-sented amendments to the draft Third AMLDirective. The pro-posed changes include inter alia a reduction of thresholds for traders in high-value goods dealing with cash payments, extend-ing the scope of the directive to include providers of gambling ser-vices and domestic politically exposed persons and natural persons entrusted with prominent public functions (such as heads of state, heads of government, ambassadors and members of administra-tive, management or supervisory bodies of state owned enterprises), strengthening the risk-based approach (with further guidance from ESA planned), tightening the rules on simplified customer due dili-gence and improving clarity and accessibility of information on the beneficial owner. The explanatory memorandum also announces the Commission’s plan to propose further criminal law harmonisation for money laundering.

Furthermore, the authorities passed regulations for the financial sector regarding remuneration in financial institutions (InstitutsVergV):forexample,settingoutrequirementsforvariableremuneration regarding the amount, payable period and percent-age regarding the total remuneration for the managing directors and the members of the supervisory board. In addition, rules were passed regarding the appointment of supervisory boards in institu-tions: for an appointment of new members of supervisory boards



the institution must submit to BaFin the curriculum vitae, criminal record and proof of legal or economic expertise in comparable insti-tutions of the designated member; BaFin may decline or dismiss a member of the supervisory board for lack of reliability or required expertise. Regulation regarding remuneration is also planned by ESA for investment service providers, managers of AIFs (ESMA guidelines) and for credit institutions and investment firms (EBA guidelines); in general, the remuneration policies shall prevent future excessive risk-taking behaviour of relevant management.

8 In what ways do you anticipate the legal and regulatory policy changing

over the next few years?

We expect a strengthening of international cooperation betweenthe different supervisory authorities, at least on a European level (see question 3). Following such ‘cross-border’ supervision, theregulatory standards for institutions as well as the equity capital requirements will be continuously harmonised between the different destinations (eg, unique regulations with regard to the admission of hybrid capital as core capital). Therefore, we anticipate that the separation of home state and host state supervision will soften in the future.

There is a recognisable trend to integrate different supervisory activities into a comprehensive European supervisory framework; in this context a number of directives and regulations are being or have already been revised taking into account the experience gained dur-ing the recent crisis and new regulation fields have been introduced.TheGreenPaperonshadowbankingpresentedinMarch2012

documents the European Commission’s intention to extend pru-dential regulation and supervision to entities and activities that can ‘carry systemic risks, both directly and through their interconnect-edness with the regular banking system’. The definition of ‘shadow banking’ refers to the ‘system of credit intermediation that involves entities and activities outside the regular banking system’. Many aspects of shadow banking are already covered by recent regulatory activities(CRDII,IIIandIV,SolvencyII,MiFIDII,UCITS,IFRS7,10,11and12).IncoordinationwiththeEuropeanCommission,theFSB initiated five work streams tasked with analysing these issues in more detail and developing effective policy recommendations. The preliminaryresultsweresummarisedinareportinNovember2012.Detailedpolicyrecommendationsareexpected tobepublished inthesecondhalfof2013.The European Directive on Alternative Investment Fund

Managers(theAIFMDirective,2011/61/EU)isonegoodexampleof how EU regulation aims to fill any gaps in the supervision of collective investment schemes, in particular, hedge fund and closed-endedfundstructures;inGermanytheAIFMDirectivewillmainlycover closed-ended funds. For further details with regard to the AIFMDirective,pleasesee‘Updateandtrends’below.Other examples of ongoing revision and harmonisation of

European regulation are:• in February 2012 the federal government presented a draftimplementation act to implement theDirective amending theFinancialConglomeratesDirective(FICOD)andfurtherdirec-tives with regard to supplementary supervision of financial entities in a financial conglomerate (2011/89/EU); relevantprovisionsintheKWGandintheGermanActonSupervisionofInsuranceUndertakings(VAG)willberepealedandanActontheSupervisionofFinancialConglomerates(FKAG)willbeintroduced;theprovisionsofDirective2011/89/EUneedtobetransposedintonationallawby10June2013;

• in October 2012 the European Parliament passed a revised‘Markets in Financial InstrumentsDirective’ (MiFID II), par-ticularly concerning rules on market transparency, protection of investors and supervision, for example, new information duties for the distribution of financial products, restrictive rules on ben-efits, rules for internet and algorithmic trading and requirements

for business of non-EU investment firms within the EU; and• the implementationofSolvencyII is,however,currentlypost-

poned and the capital requirements for insurance undertak-ings will probably not become effective before 2017. BaFinconsiders a partial implementation in case Solvency II should befurtherdelayed.BetweenJanuaryandMarch2013,aSixthQuantitative Impact Study focused on the effects of Solvency II capital requirements on long-term guarantees, which are of particular importance for life insurers.

WithCRDIVtheEuropeanlegislatornotonlycontinuestoincreasecapital requirements for institutions, but also wants to strengthen their corporate governance; inter alia, institutions will have to retain more capital of higher quality and provide improved risk manage-ment and risk-controlling and compliance functions (see question 21).

Supervision

9 How are banks supervised by their regulatory authorities? How often

do these examinations occur and how extensive are they?

The main means of examination by the Supervisory Authorities are:• annualreportsandaccounts(togetherwithanauditreportby

external auditors);• monthlybalancesheets,on thebasisofwhich theamountof

own funds, the credit institution’s liquidity, the major balance sheet items and risk positions and changes therein can be identi-fied (monthly returns and liquidity reporting);

• pursuanttosection44KWGbanksarealsoobligedtoprovide–upon request at any time – information about all business activi-ties and present documentation to BaFin and the Bundesbank in order to check the accuracy of the data supplied;

• basedon theDirective236/2012/EUonshort sellingandcer-tain aspects of credit default swaps, market participants must notify BaFin of net short-selling positions in securities where the positionreachesorfallsbelowathresholdof0.2percentandpublish the same where the position reaches or falls below a relevantpublicationthresholdof0.5percent;thresholdsforsig-nificantnetshortpositionsinsovereigndebtandsovereignCDSare specified by ESMA; and

• finally, BaFin can gain a further insight into an institution’sfinancial situation by way of special on-site inspections with or without giving prior notice or hearing (ad hoc inspections).

The obligations to provide information and present documentation to the Supervisory Authorities also apply to holders of a major inter-est in a bank.

10 How do the regulatory authorities enforce banking laws and

regulations?

BaFin has all regulatory decision-making powers in order to enforce banking laws and regulations, for example:• writtenwarnings(seriousobjections)andfines;• specialauditsthroughon-siteinspections;• withdrawalofthebank’slicenceandclosingofitspremises;• sanctionsinordertolimittherisksforortoprohibitthetaking

of deposits or funds or securities from customers; and• orderstoremoveorreplaceseniormanagersforlackingneces-

sary qualifications.

In the case of imminent danger of insolvency of a bank, BaFin has special powers to avoid insolvency proceedings. It may temporar-ily issue a ban on sales and payments by the institution (morato-rium), order the institution to be closed for business with customers, institute a special representative and prohibit the acceptance of



payments not intended to discharge debts with the institution, unless the appropriate deposit guarantee scheme or investor compensation scheme undertakes to fully satisfy all entitled creditors; ultimately BaFin may also nationalise a systemically important institution (see questions13and20).

11 What are the most common enforcement issues and how have they

been addressed by the regulators and the banks?

According to the latest available annual report issued by BaFin in 2012,theSupervisoryAuthoritiescarriedout270specialauditsin2011(258 in2010)particularlywithregardto internalorganisa-tionandrisk-managementfeatures.Asaresult,BaFinobserved87seriousfindingsoflawviolations(136in2010)andimposedseveralsanctions. Four measures were imposed on managing directors (seri-ous warnings) and two revocations of mandates regarding supervi-sory directors were issued. BaFin has twice imposed a fine against an institution. In two cases BaFin took measures because of an immi-nent danger of insolvency of the credit institution. The total number ofmeasuresdroppedfrom187in2010to98in2011.

12 How has bank supervision changed in response to the recent crisis?

Under its ‘all-in-one-supervision’ competencies, BaFin has taken increasinglyincisivemeasuressince2009.

In its supervisory practice BaFin has tightened the organisational and capital requirements for institutions, in particular with regard to the cross-border involvement of agents when providing banking activities. Accordingly, BaFin requires an organisational incorpo-ration of tied agents that render specific investment services solely under the liability and on behalf of an institution, as well as a high degree of quality and good repute of agents rendering payment ser-vicesordistributinge-moneyundertheZAG.

From a practical market view, it is noticeable that BaFin con-ducts its examinations regarding the authorisation of new market participants very densely and with a more critical attitude than before the crisis, especially for those applicants unknown to BaFin before the licensing procedure (eg, payment institutions). This is par-ticularly demonstrated by the obligation to provide detailed docu-mentation regarding the internal control system, risk management, anti-money laundering controls as well as contracts with service pro-viders (regarding, for example, outsourced services) or retail product documentation together with the application for a licence.

BaFin has also adopted a proactive (investigative) approach and conducts extensive research to identify entities rendering banking, financial or insurance services without having a proper licence; in such cases, BaFin directly approaches such entities requesting either an adaptation of market appearance or, where BaFin is convinced that the services rendered require licensing, even the cessation of business or applying for a licence. BaFin also adopts a very strict policy regarding violations of supervisory law or administrative practice.

Resolution

13 In what circumstances may banks be taken over by the government or

regulatory authorities? How frequent is this in practice? How are the

interests of the various stakeholders treated?

Undersection48aKWG,BaFinmayissueatransferordertotrans-fer the systemically important components of a distressed institution to an existing bank or a state-owned bridge bank established by the FMSA where the institution’s continued existence is threatened (Bestandsgefährdung) and this therefore threatens the stability of the financial system (Systemgefährdung), and the threat to the institu-tion’s continued existence cannot be overcome by means other than a transfer order (ultima ratio); furthermore, the acquiring entity

mustgiveitsconsenttothetransferinanotarisedform.Section48bKWGdefinestheindeterminatelegalconceptBestandsgefährdung as the risk of a collapse of a credit institution due to insolvency unless corrective measures are taken, whereas a Systemgefährdung is assumed if it is to be feared that the Bestandsgefährdung will sub-stantially negatively affect other undertakings in the finance busi-ness, the financial markets or generally the confidence of depositors and other stakeholders in the functioning of the financial system.

So far, BaFin has not made use of its wide powers of interven-tion;theformerHypoRealEstatewasnotnationalisedundertheprovisions of the Rescue Act (RettungsG), but taken over by FMSA by a squeeze-out of shareholders after an increase of share capital by making use of the provisions for a simplified takeover introduced by the Supplement Act to the Financial Market Stabilisation Act dated April7,2009(namely,abail-in).

The transferring entity (not its shareholders) will receive com-pensation where the transferred assets outweigh the transferred liabilities; generally, compensation is paid in share capital of the acquiring entity (section 48dKWG). In case the acquiring entityreceived benefits from the Restructuring Fund, BaFin may fully or partially prohibit payments to interest holders of the acquir-ing entity, payments to other equity capital holders of the acquir-ingentityandpaymentstocreditorsbytheacquiringentity.Whereabusinessorpartofabusinessistransferred,section613aoftheGerman Civil Code applies, that is, the acquiring entity succeeds to the rights and duties under the employment relationships exist-ingatthetimeoftransfer(section48gKWG).Contractualobliga-tions may not be terminated solely on the grounds of the transfer; any contractual provision to the contrary will be held invalid. The acquiring entity’s liability for the transferred liabilities is limited to the revenue a creditor would have received in insolvency proceed-ings of the transferring entity and only to the extent that satisfaction of respective claims cannot be achieved from the transferring entity. After the completion of the transfer BaFin may withdraw the trans-ferring bank’s licence and order the closing of its premises.

14 What is the role of the bank’s management and directors in the

case of a bank failure? Must banks have a resolution plan or similar

document?

The general provisions for insolvent entities according to the German Insolvency Code (InsO) and the applicable corporatelaw apply also to banks; these are modified with regard to certain aspects(seequestion20).Theinsolvencyproceedingsarecarriedoutby an insolvency administrator, who is appointed by the competent court; different from usual, only BaFin may apply for the opening of insolvency proceedings.

The Restructuring Act introduced two-tiered voluntary structured reorganisation procedures for credit institutions under the supervi-sion of BaFin. The reorganisation proceedings (Sanierungsverfahren or Reorganisationsverfahren) allow a credit institution autonomous restructuring measures to strengthen its financial stability. The open-ing of the reorganisation proceedings requires an application to BaFintogetherwithareorganisationplan.Whereacreditinstitu-tion thinks that a Sanierungsverfahren has no prospect of success, it can apply for a Reorganisationsverfahren.Onlythelatterallowscompulsory intervention with creditor rights. The reorganisation plan may include measures such as debt-equity swaps, transfer of assets and even the liquidation of the credit institution. An external restructuring expert, who is appointed by the competent court, is responsible for the implementation of the reorganisation plan and has far-reaching powers at the reorganised credit institution.

At present, banks do not need to have a resolution plan in place. However, in anticipation of the European directive (see question16)thefederalgovernmentinFebruary2013presentedadraftactamendingtheKWGwhichrequirespotentiallysystemicallyimpor-tant banks and financial services institutions to have recovery plans



in place; the recovery plan must cover measures that from the per-spective of the institution will stabilise its financial situation in case of a financial imbalance. BaFin and the Bundesbank will decide jointly, which institutions are potentially systemically important for the domestic or international financial markets and hence need to submit a recovery plan. The act also provides detailed requirements on format and content of the recovery plan; institutions must pro-vide sensitive information (even business secrets) to BaFin. Recovery plans need to be updated with BaFin annually. BaFin will also con-tinuously assess the ability of every institution to be liquidated and prepare liquidation plans for potentially systemic institutions; as a last resort BaFin may demand restructuring of legal or operational structures of the institution to address barriers to the liquidation of an institution.

15 Are managers or directors personally liable in the case of a bank

failure?

Executive directors and members of the supervisory board are subject to the general corporate regulation on the liability of man-agement; additionally they have to observe statutory, regulatory, organisational and capital requirements as well as specific rules of conduct. The limitation period for claims for damages against mem-bers of administrative, management or supervisory bodies of banks is, contrary to the general rule (five years), 10 years (section 52KWG)aftertheclaimarises.Withregardtoabankfailure,manage-ment may be in particular liable for a delayed notification to BaFin accordingtosection46bKWG(seequestion20)orforpaymentsmade by the bank after that date.

16 How has bank resolution changed in response to the recent crisis?

To summarise, the legislature has recognised that the general pro-visions for insolvent entities may not be suitable for banks and financial institutions and has introduced specific proceedings with the Restructuring Act, granted additional powers to BaFin to ensure stability of the financial system and extended the possibility to pro-vide state aid to ailing institutions.

Currently, the FSB is working on an EU-wide regulation for resolution of systematically important financial institutions (see question21);paralleltothis,theEuropeanCommissionpresenteda draft directive for a harmonised cross-border crisis management and a structured bank resolution. The draft comprises preventive and early intervention measures and confers additional powers on competent national supervisory authorities, including resolution measures such as sale of business, establishment of bridge banks, asset separation and bail-in (ie, recapitalisation of the ailing bank with shareholders wiped out or diluted and reduction or conver-sion of creditors’ claims to shares). Also, institutions need to present a recovery plan to the competent supervisory authority, providing measures that in the event of a deterioration of their financial situ-ation shall restore their viability, and update it on an annual basis (seequestion14).

Capital requirements

17 Describe the legal and regulatory capital adequacy requirements for

banks. Must banks make contingent capital arrangements?

In order to be authorised to conduct banking business a bank has to beendowedwithaminimumamountofinitialcapital(sections32and33KWG),whichvariesaccordingtothekindofbankingbusi-ness conducted. For deposit-taking credit institutions for example, the initial capital required is at least €5million,whiletherequire-ments for financial services institutions vary from €25,000 up to€730,000,asaminimum.InitialcapitalrequirementsarealsosetoutintheZAGwithanamountofinitialcapitalvaryingfrom€20,000

to €350,000dependingonthekindofpaymentservicesore-moneybusiness performed.

Banks must invest their funds in a way that guarantees an ade-quateliquidityforpaymentpurposesatalltimes(section11KWG).Additionally, a regulated institution must maintain appropriate capitalandadequatefunds.Section10KWGstatesinthisregard,that there are three different types of capital: core capital, additional capitalandTierIIIcapital.UndertheSolvV,whichspecifiesthepro-visionssetforthinsection10KWG,banksmustbackuptheiroper-ational risks, counterparty risks (default risks and settlement risks) and market risks (equity price risks in the trading book, interest rate risks, foreign exchange risks, etc) with their own funds. Furthermore, thefourthOrdinanceAmendingtheCountryRiskOrdinancesyn-chronisedtheCountryRiskOrdinanceandtheGroMiKV,expectingcredit institutions to report country risk reduction as part of their overall risk reporting. According to Basel II standards, the minimum amount of the bank’s own funds and liable capital to be held by a bank depends on the risks that are taken. For example, the bank’s default risks to be backed up by liable capital equal to at least 8 per cent of its risk-weighted assets under the standard approach, if no risk-based approach is chosen.Further,disclosurerequirementsofthere-castBankingDirective

have been implemented into national law by the insertion of the newsection26aKWGinconjunctionwithpart5oftheSolvV.Thedisclosure requirements relate to the application of the capital ade-quacy rules, the information provided on capital resources available and the qualitative and quantitative representation of risks incurred. Banks are required to calculate the minimum capital requirements at the close of each business day and to comply with those calculations on a daily basis.

Banks must report any large exposures to BaFin, namely loans exceeding10percentofthebank’sownfunds,millionloans(loansto one borrower totalling €1.5millionormore)andanyloanstonatural persons or companies closely associated to the bank (see GroMiKV,section15KWG).

In order to calculate the necessary capital, banks can – with BaFin’s consent – make use of either the standardised approaches as setoutintheSolvVoroftheirownriskmodels.As of 31December 2010, CRD II and CRD III encompass-

ing Directives 2009/27/EC, 2009/83/EC and 2009/111/EC, areimplemented into German law. This implicates, inter alia, technical changes to the capital requirements for the trading book (includ-ing credit risk management for counterparty credit risk), changes to the rules and regulations for large exposures and determination of specific hybrid regulatory capital components in the definition of core capital. In addition hidden deposits are counted towards Tier I core capital only if, in case of liquidation (and in the ‘usual case’) they rank pari passu with equity capital. Capital requirements for resecuritisation will double or triple (depending on the respective credit rating) and will be significantly increased (up to quadruple) with regard to credit risks in the trading book.InDecember2010theBaselCommitteeonBankingSupervision

published new capital requirements (Basel III), which shall be trans-ferredintoEuropeanlawbyCRDIV.TheenactmentofCRDIViscurrently postponed because of differences between the European Parliament, Ecofin and the EuropeanCommission regarding, forexample, regulation on management remuneration and liquidity requirements. Most recently, BCBS suggested a gradual phasing in ofthenewcapitalrequirementsuntil2019,whereastheEuropeanCommission, despite the recent delay, expects an earlier entry into force.Rightnow,CRDIVisnotexpectedtocomeintoforcebefore2014(seequestion21forfurtherdetails).

18 How are the capital adequacy guidelines enforced?

The capital adequacy guidelines are enforced through the ongo-ing supervision by BaFin and the Bundesbank and through BaFin’s



powers to enforce banking laws and regulations, as described in questions10,19and20.

For the purpose of compliance control, banks are required to submit monthly, quarterly, half-yearly and yearly reports to the Bundesbank, especially stating qualitative and quantitative informa-tion on their own funds, capital adequacy and the risks they have incurred and their risk-management procedures.

19 What happens in the event that a bank becomes undercapitalised?

Pursuanttosection45KWG,BaFinmayprohibitorlimitwithdraw-als by the proprietors or partners, the distribution of profits and the granting of loans to any bank that fails to satisfy the capital (risk) adequacy or holds inadequate liquidity. Furthermore, BaFin may order the bank to take certain measures to limit risks or prohibit the taking of deposits or funds or securities from customers. The cata-logueofmeasurestothatendhasrecentlybeenexpanded.Payoutsof earnings from equity capital instruments that are not fully covered bytheannualnetprofitmaybeprohibited.Likewise,paymentstogroup members (ring-fencing) may be prohibited, limited or linked if the payment would be detrimental for the credit institution. BaFin also has the power to undertake certain other actions, particularly measuresagainstthemanagement(seequestion10)andthesuper-visory board. It may even withdraw a banking licence under section 35KWG.BaFinorthecreditinstitutionitselfmayalso,accordingtotheRestructuringAct(seequestion14),instituteareorganisationprocedure, including a reorganisation plan to be adopted by credi-tors and shareholders, which may contain, for example, debt equity swapsorthetransferofriskassetstostate-ownedSPVs(badbanks).Furthermore, BaFin may appoint a special representative (section 45c KWG); the special representative can be empowered with acomprehensive right to participation and information, or BaFin may also substitute the management with the special representative or add the representative to the management.

20 What are the legal and regulatory processes in the event that a bank

becomes insolvent?

The procedure and competencies in the case of insolvency or danger of insolvencyare laiddown in section46 ssKWG.Additionally,the general provisions for insolvent entities apply according to the GermanInsolvencyCode(InsO)andtheapplicablecorporatelaw.

In case of illiquidity, imminent illiquidity or over-indebtedness, or where the bank is likely to be unable to meet its existing payment obligations at the time they become due, the managers or proprie-torhavetonotifyBaFinimmediately.OnlyBaFinmay–asalastresort – file for insolvency. Moreover, BaFin may revoke the banking licence of the credit institution.

In the run-up to a petition in bankruptcy and as a preliminary measure, BaFin has the right to impose a moratorium prohibiting the bank from receiving payments not intended to discharge debts with it in order to secure the bank’s remaining assets. BaFin may also issue a stoppage of disposals and payments by the relevant bank orappointaspecialrepresentativeaccordingtosection45cKWG.As to securities trading, own-account trading may be prohibited; however, termination of deals in progress may be still permitted undercertainpreconditions.Asanultimaratio,undersection48assKWG,BaFinmaynationaliseasystemicimportantcreditinstitutionorpartsofitbytransferringittoastate-ownedSPV(bridgebank)inordertorestoreorprotectfinancialstability(seequestion13).

21 Have capital adequacy guidelines changed, or are they expected to

change in the near future?

The regulatory response to the ongoing financial crises is still under discussion at the European and national level. The European

Commission has already published several documents regarding possible changes to the existing Capital Requirements Directive.Most recently, the European Commission presented a draft regula-tion to implement Basel III into European law consisting of an EU Directive(CRD)andanEURegulation(CRR,togetherreferredtoasCRDIV);CRDmainlyaddressesEUmemberstatesandrequirestransposition into national legislation. CRR is designed as a ‘single rulebook’ mainly covering capital and liquidity requirements and addresses the institutions; it is directly applicable in all EU member states. From the EU Commission’s perspective a maximum level of harmonisation, which is necessary to prevent shifting of the expo-sures and risks to the shadow banking sector (see question 8) or from one EU member state to another, can only be achieved by way ofregulation.CRDIVshallbecomefullyapplicableasof2019;cur-rently,CRDIVisstillbeingnegotiatedandtheoriginallyplanneddateofentryintoforce(1January2013)hasbeenpostponed.CRD IV does not copy and paste Basel III and also widely

covers corporate governance rules for CRR credit institutions and CRRsecuritiestradingbanks.WithrespecttocapitalandliquidityrequirementsCRDIVcoversinteraliathefollowingissues:• amendeddefinitionofownfunds(TierIcapitalandTierIIcapi-

tal), eliminating Tier III capital and introducing stricter criteria for Tier I capital (common equity Tier I capital, CET I capital, and additional Tier I capital);

• harmonised capital requirements of up to 8 per cent of ownfundsinrelationtothetotalriskexposureamount,while4.5per cent of the total risk exposure amount must be covered by CETIcapitaland6percentbyTierIcapital;

• startingfrom2016,andinadditiontotheTierIcapital,require-ment to hold different capital buffers (capital conservation bufferof2.5percentofCETIcapital,individuallycalculatedcountercyclicalcapitalbufferofupto2.5percentofCETIcapi-tal); finally, the introduction of another capital buffer for nation-ally systemically important banks is currently being discussed;

• strengthenedcapitalrequirementsforcounterpartycreditrisk-exposures arising from derivatives, repos and specific securities financing activities;

• introduction of quantitative liquidity buffers and harmoniseddefinition of eligible liquid assets (eg, cash and deposits held with central banks to the extent that these deposits can be with-drawn in times of stress); and

• introductionofanon-risk-adjustedleverageratio,ie,theratiobetween Tier I capital and the sum of the exposure values of all assets and off-balance sheet items.

AlthoughCRDIVhasyet tobefinalised, theGerman legislaturepresented an implementation act for the CRD in October 2012(Implementation Act); the Implementation Act introduces:• harmonised requirements for the access to the activity of the

business of institutions and their supervision;• differentcapitalbufferrequirements;• sanctions for violation of the requirements of the CRD IV

regulations;• minimumrequirementsforthestructureofthemanagementand

the supervisory board of the supervised institutions, including standards for the professional qualification and personal reli-ability of its members;

• requirement to establish a compliance function (including awhistle-blowing mechanism); and

• provisionsforhousingcompanieswithsavingsfacilities(whichisnotpartofCRDIV).

Inimplementingarticle124aoftheCRD,theImplementationActproposesanadditionalcapitalbufferofupto3percent(5percentfrom2015)ofCETIcapitalforsystemicrisksthatmayjeopardisethe stability of the financial system. Following BCBS’s recommenda-tions, the German legislature also introduces an additional buffer for



globally systemically important banks and financial services institu-tionsofupto3.5percentofCETIcapitalinrelationtothetotalrisk exposure amount; a possible capital buffer for systemic risks is to be taken into account when calculating the capital buffer for glob-ally systemically important institutions. The German legislature also makes use of the authorisation to impose further capital require-ments in certain circumstances, such as for risks other than those coveredinarticle1oftheCRR(article100ofCRD).Definitions and specialmeasures for systematically important

financial institutions are not a part of the Basel III framework. HowevertheG20inNovember2011agreedthatadditionalcapitalrequirementsshallbeappliedonsuchfinancialinstitutionsby2016.

Ownership restrictions and implications

22 Describe the legal and regulatory limitations regarding the types of

entities and individuals that may own a controlling interest in a bank.

What constitutes ‘control’ for this purpose?

Ingeneral,therearenolimitationsundertheKWGregardingthetypes of entities or individuals that may own a controlling or a major interest in a credit institution or a financial services institution. BaFin, however, may nevertheless prohibit an acquisition or control, particularly where the reliability of potential acquirers of controlling ormajorinterestsisdoubted(seequestion27).TheKWGdistinguishesbetweena ‘controlling’anda ‘major’

interest in an institution. An entity is under ‘control’ if another entity – regardless of its legal form and domicile – is considered to be a parent entity (corporate entity consistently managing a group’s affili-ated companies), if another entity may exert a dominating influence in another way or if a similar relationship exists between a natural person or legal entity and the respective entity.However,ownershipcontrolundertheKWGalreadyoccursat

a much lower level of interest in an institution. It is sufficient to hold a ‘major interest’, which is the case where:• atleast10percentofthecapitalorofthevotingrightsinan

institution are held directly or indirectly through one or more subsidiaries or a similar relationship or through collaboration with other persons or enterprises; or

• significantinfluencecanbeexertedonthemanagementoftherespective institution.

Major interests held indirectly are to be attributed in full to persons and enterprises holding the indirect participating interest (interested acquirer).

The intention to acquire a major interest in an institution as well as the acquisition of a major interest in an institution itself have to be notified to the Supervisory Authorities observing in particular the InhKontrollV(seequestions27to31).

23 Are there any restrictions on foreign ownership of banks?

Therearenogeneral restrictionson foreignownership.However,BaFin may prohibit the acquisition of a major interest in an institu-tion or its increase for example, if the institution would become a subsidiary of an institution domiciled abroad that is not effectively supervised in the country where it is registered or headquartered, or whose supervisory body will not cooperate sufficiently with BaFin; if the participation structure is not transparent; or if the new share-holdersdonotseemtobereliable(seequestions27and28).

24 What are the legal and regulatory implications for entities that control

banks?

BaFin assesses the reliability of the entity or individual holding a major interest in an institution (including the entity’s financial state-ments and annual reports) on an ongoing basis.

Besides, where BaFin is in a position to prohibit the acquisition of a major interest as mentioned above (see question 22), the share-holder does not comply with its notification duties as mentioned above or the share has already been acquired or increased regardless of BaFin’s prior order of interdiction, BaFin may suspend the share-holder of a major interest and the entities in control from executing and disposing of certain relevant voting rights and shares.

The acquirer of a major interest in an institution may – depend-ing on its form of organisation – become subject to consolidated group supervision, namely, group financial statement regulations.

25 What are the legal and regulatory duties and responsibilities of an

entity or individual that controls a bank?

There are certain regulatory implications any shareholder holding a major interest in an institution needs to meet:• heorsheisobligedtoinformtheSupervisoryAuthoritiesabout

any relevant business concern upon request;• heor shemustproperlynotify theSupervisoryAuthoritiesof

any change of control and of the general partners of the share-holder of a major interest, together with relevant information for the assessment of the reliability of the shareholder;

• heorshemustnotifytheSupervisoryAuthoritiesoftheshare-holder’s intention to extend, quit or reduce the major interest in a way that his or her share exceeds or falls bellow certain percentages of the institution’s total shares; and

• heorsheisalsoobligedtoinformBaFinofpenalproceedingsfor tax fraud or offences brought against him or her.

Loans to shareholders holding a major interest in an institu-tion may only be granted with market-based conditions by virtue of the unanimous decision of the board of directors of the institution and the explicit approval of its supervisory body. BaFin, however, may order the limitation of the total amount of these ‘organ-loans’.Depending on the corporate structure of the institution, the

liability of the shareholders may vary. The liability is usually limited totheamountinvestedforacquiringthe(limited)shares.However,other legal forms may also result in the shareholder’s unlimited lia-bility as general partner. In case of insolvency or undercapitalisation of the institution, those shareholders would be required to invest additional capital into the bank.

26 What are the implications for a controlling entity or individual in the

event that a bank becomes insolvent?

Depending on the corporate structure of the bank, a control-ling entity or individual may be held liable for losses or claims, for example, as a general partner. Moreover, the legislature plans to implement provisions that include shareholders in the financial reorganisation of a bank in such a way that they cannot impede reorganisation plans.

Changes in control

27 Describe the regulatory approvals needed to acquire control of a bank.

How is ‘control’ defined for this purpose?

The intention to acquire or increase a major interest in an institu-tion and the acquisition itself (see question 22) must be notified to the Supervisory Authorities, which may prohibit the acquisition or increase if: • theacquirer, its legal representatives, itspartnersor its future

managers lack reliability (eg, criminal record or charge, involve-ment in insolvency proceedings) or do not safeguard a sound and prudent corporate governance;



• theinstitutionfailstocomplywithregulatoryrequirementsorwould be integrated in a group structure that could obstruct effi-cient supervision;

• theinstitutionwouldbecomeasubsidiaryofanon-EEAinsti-tution that is not effectively supervised in its home country or where the competent supervisory authority does not sufficiently cooperate with the Supervisory Authorities; or

• oneoftheotherreasonsundersection2c,paragraph1bKWGare given.

If the Supervisory Authorities do not prohibit the acquisition before expiryoftheregulartimelimitof60workingdays(insomecases80or90days),theacquisitionmaybeaccomplished.

In case of (later) detection of reasons conflicting with the acqui-sition, infringement of notification duty or acquisition despite the Supervisory Authorities’ interdiction, the Supervisory Authorities may require the acquirer (as well as companies under its control) to refrain from exercising its voting rights or from disposing of its inter-est or share without the Supervisory Authorities’ assent.

28 Are the regulatory authorities receptive to foreign acquirers? How is

the regulatory process different for a foreign acquirer?

For a non-EEA acquirer, the period within which the Supervisory Authorities may prohibit the acquisition may be extended to a maximum of 90 (instead of 80) working days. The SupervisoryAuthorities might also take a ‘closer look’ at the non-EEA acquirer’s reliability.

29 What factors are considered by the relevant regulatory authorities in

an acquisition of control of a bank?

Generally, the Supervisory Authorities assess the information con-tained in the documents submitted by the acquirer together with the notification, particularly if relevant for reliability requirements. The higher the interest, the more likely it is that BaFin will go into an in-depth examination.

30 Describe the required filings for an acquisition of control of a bank.

In particular, the acquirer has to provide the following information (seeInhKontrollV):• generaldocumentsandstatementsregardingtheacquirer’siden-

tity and the identity of persons or entities owning or controlling the acquirer or initiating the acquisition;

AIFM DirectiveThe financial crisis has triggered a protracted debate about the regulation of so-called alternative investment funds (AIFs). While a respective European Directive on the future regulation of managers of alternative investment funds (AIFM Directive, 2011/61/EU) entered into force on 21 July 2011, the implementation of the AIFM Directive into the law of the member states must be completed by 22 July 2013. There is, in certain conditions, a further period of one year for a legal person to obtain authorisation as the manager of one or more AIFs from BaFin. The AIFM Directive provides a harmonised legal framework in Europe for managers of alternative fund vehicles. A decisive advantage of an AIFM authorisation is the possibility of managing and marketing AIFs throughout the EU (the so-called ‘European passport’).

Special attention must be paid to the Directive, particularly because of its broad scope of application. The addressees of the AIFM Directive are not the funds but rather their managers (AIFMs). In future an AIFM must apply to the competent national regulatory authority (in Germany, BaFin) for authorisation to manage and market all types of collective capital investments, in which more than one investor has invested and which does not require corresponding authorisation under the UCITS Directive; this includes for example licence requirements, minimum capital requirements, the requirement to determine a depositary for the AIFs and organisational provisions on risk management and remuneration systems. Accordingly, with the exception of UCITS funds, nearly all fund concepts with multiple investors will fall under the new regulation, irrespective of the fund’s legal form, structure or where the fund has its registered office.

However, it is proposed that for AIFMs who have or will have their registered office outside the EU, their entry into the European market – and therefore the option of using the European Passport (see above) – will initially be deferred and staggered over time (starting in 2015).

Managers of funds of a type that have so far not been subject to any particular supervision in Germany or in Europe (such as closed-ended funds), will in future be regulated. However, managers of funds of a type that have already been subject to regulation in Germany under the German Investment Act (such as special funds and open-ended real estate funds) will in future also have to comply with additional supervisory requirements (double regulation).

Only the marketing of AIFs to professional investors (as defined in the Markets in Financial Instruments Directive, MiFID) is regulated in the Directive. The marketing of corresponding products to private customers is at the discretion of the member states. However, any such stricter requirements may not apply to AIFs from other member states that are marketed in Germany on a cross-border basis.

The implementation of the AIFM Directive in Germany is becoming more and more palpable. Proposals for an AIFM Implementation Act and for a new German Capital Investment Code (KAGB) incorporated therein emerged in December 2012. The KAGB is supposed to replace the German Investment Act (InvG) and become the only legal framework for all types of investment funds in Germany.

Considering the immense relevance of products covered by the AIFM Directive for the retail market, the German legislature has decided that the German AIFM Implementation Act should also cover the marketing of AIFs to German retail clients; in this regard, however, the German legislature provides stricter rules for retail products such as asset and leverage restrictions or additional transparency requirements. Also, the current German draft of the AIFM Implementation Act is supposed to address the industry’s essential issues based on the opinions submitted in 2012 to the German legislature within a public hearing, in particular with the following results: • thefundtypologyconsistsofthedistinctionbetweenopen-ended

and closed-ended funds or between specialised and retail funds; open-ended real estate funds shall be maintained in Germany both as retail funds and as specialised funds;

• theAIFMmaybeorganisedaseitheraninternalorexternalAIFM;• anotificationisrequiredwhenmarketingAIFs;• infuture,therewillbenoprivateplacementofAIFsanymore;• withrespecttospecialisedfunds,thenewlydefinedcategoryof

‘semi-professional investors’ is permitted alongside professional investors;

• themaximumpermissibleleverageforclosed-endretailfundsshall be restricted (currently at 60 per cent)

• alongsidecustodianbanks,othertrustees,lawyersandnotaries,who are subject to special legal provisions or to professional codes of conduct, may be appointed as depositaries for certain closed-ended AIFs;

• outsourcingofportfoliomanagementorriskmanagementwithregard to AIFs to non-licensed companies is subject to prior approval by BaFin; and

• asidefromthelegalformsofanAG(Aktiengesellschaft,stockcorporation) or a GmbH (Gesellschaft mit beschränkter Haftung, limited liability company), an external AIFM may also take the legal form of a GmbH & Co KG (limited partnership with a limited liability company as the general partner);

Further details on AIFM can be found at www.aifm-directive.de.

Update and trends



• statements and documents regarding the reliability of theacquirer, its managers, general partners and authorised repre-sentatives. If the acquirer is not an individual, additional state-ments are required whether any company under its control has been prosecuted for criminal or administrative offences or has been involved in insolvency proceedings (in the run-up to an acquisition, it should be considered that gathering of this addi-tional information requires time and effort if the acquirer is a parent in a big group or a multinational company);

• thedistributionofownershipwithintheacquirer,groupaffilia-tion and influence capability;

• theacquirer’smotives;• theacquirer’ssolvencyandfinancialsituationaswellasinfor-

mation on the financing of the acquisition; and• adepictionofstrategicobjectivesandplans.

Similar requirements must be fulfilled by payment and e-money institutions applying for a BaFin approval under the ZAG (see

ZAGAnzV).With regard to the huge amount of data and docu-ments especially large institutions operating cross-border have to provide, theZAGwas amendedon30April 2011, givingBaFindiscretion to reduce the amount of required documents and infor-mation regarding the approval of payment and e-money institutions. Likewise,BaFinmayreducethenumberofrequireddocumentsandinformation regarding the acquisition of control of a bank where the applicant already submitted documents or information within thepast12months.

31 What is the typical time frame for regulatory approval for both a

domestic and a foreign acquirer?

The acquisition is not formally approved, but may be prohibited by the Supervisory Authorities. Starting with the notification, the SupervisoryAuthoritieshave60workingdaystointerdicttheacqui-sition.Thistimeframecanbeextendedto80or90workingdays(see above).

Oliver Glück [email protected] Sebastian Walczak [email protected]

Karl-Scharnagl-Ring 8 Tel: +49 89 288 174 0

80539 Munich Fax: +49 89 288 174 44

Germany www.gsk.de

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