In June 2016, the International Monetary Fund (IMF) published its latest report on the stability of the German financial sector, which it had scrutinised as part of the Financial Sector Assessment Program (FSAP).

Clean bill of health for the German financial sector

Overall, the IMF gives the German financial sector a clean bill of health. The IMF paints a picture of an established financial system in Germany that is stable and robust overall, both in terms of the general stability situation and of structural issues such as crisis management, supervisory regime, macro-prudential tools and resolution and recovery.

The IMF report emphasised the significance of the German financial sector for the financial stability of Europe as a whole. Moreover, in the IMF's view, Germany's sovereign bond market functions as a global safe haven and is a key international benchmark.

Overall, the IMF's assessments are broadly consistent with those of all relevant German and European authorities. However, the IMF takes a significantly different view regarding individual issues.

Risk and stress tests

According to the IMF, the low interest rate environment in particular poses risks to the profitability of banks and insurers. Furthermore, a global growth shock, a sharp economic downturn in emerging markets or renewed tensions in the euro area could lead to a rapid hike in risk premiums and asset price volatility. This in turn would increase the probability of financial risks arising in Germany, as well as cross-border contamination risk. However, both banks and insurers did well in the IMF stress tests.

Banking regulation and supervision

Overall, the IMF's assessment of the regulation and supervision of banks in Germany, the first country to have been assessed under the Single Supervisory Mechanism (SSM), is positive. The downgrades as against the 2011 assessment were due to new weightings and the Core Principles for Effective Banking Supervision by the Basel Committee on Banking Supervision (BCBS) being tightened.

The downgrades were also are linked to the IMF assessors criticising and attaching particular weight to the German two-tier system, where the management board and supervisory board are two different entities. However, the BCBS itself (as the author of the core principles relevant in this regard) had already classified this as equivalent to the one-tier system, under which a single governing body performs both functions.

Financial market infrastructure

The review of compliance with the supervisory standards for central counterparties (CCPs) was very satisfactory. The IMF views the international Principles for Financial Market Infrastructures (PFMI) as almost fully met.

Insurance regulation and supervision

The IMF also reached a positive conclusion on the insurance sector, although it noted that the low interest rate environment is exacerbating the low profitability of the business models. Despite the challenges and the implementation of Solvency II, however, the IMF reported that life insurers retained significant loss absorption capacity.

Regulation and supervision of collective investment undertakings

The IMF assessed BaFin's supervision of collective investment undertakings as firm but fair. In terms of liquidity management, the IMF recommended further tools in this area. The current legal regime allows German asset managers only two options: the suspension of redemptions or redemption in kind. Changes in legislation would be required to introduce additional liquidity tools.

Combating money laundering and terrorist financing

The IMF specifically acknowledged the significant progress made with regard to the definition of money laundering as a criminal offence in accordance with section 261 of the German Criminal Code (Strafgesetzbuch). Extending the range of predicate offences to include so-called self-laundering means that the definition of the criminal offence now largely corresponds with international standards. In addition, the IMF considers the automated account information access procedure to be a highly effective tool.

Bank resolution and crisis management

According to the IMF, the crisis management framework has been significantly strengthened by transposing the EU Bank Recovery and Resolution Directive (BRRD)¹ and Deposit Guarantee Schemes Directive (DGSD)² into German law. This fulfils the recommendation made by the IMF during the previous FSAP to establish a uniform guarantee of €100,000 per depositor and to ensure adequate pre-funding for deposit guarantee schemes. The EU Deposit Guarantee Schemes Directive contains harmonised rules on guarantee limits and the funding of protection schemes.³

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