The German Bank Separation Act (Abschirmungsgesetz) of 7 August 2013, Federal Law Gazette I, p. 3090, has led to extensive prohibitions being incorporated into section 3 (2) of the German Banking Act (Kreditwesengesetz – KWG). The Act entered into force on 31 January 2014. The transitional provisions set out that the provisions are to become applicable for the first time as from 1 July 2015 (section 64s (2) of the KWG). The objective of the provisions is to ring-fence the deposit and credit business of large institutions from certain risky activities, often involving trading activities with financial instruments, and to help solve the “too-big-to-fail” issue.

The prohibitions under section 3 (2) sentence 2 of the KWG relate to proprietary business, lending and guarantee business with certain hedge funds, with EU AIFs and with foreign alternative investment funds as well as high-frequency trading, provided this is not conducted as market making. The prohibition does not apply to business that is used to hedge client transactions, manage the institution’s interest rate, FX or liquidity risks or for purchasing or selling long-term participations.

The CRR credit institutions and groups affected by the provisions are required to identify prohibited business by conducting a risk analysis within six months (section 3 (3) sentence 1 no. 1 of the KWG). Any business identified within this context must either be discontinued or transferred to a financial trading institution within twelve months (section 3 (3) sentence 1 no. 2 of the KWG). The financial trading institution must be economically, organisationally and legally independent (section 25f of the KWG). Since 1 July 2016, BaFin has also had the power to order (on a case-by-case basis) that other transactions – particularly market making – be ceased or transferred in accordance with section 3 (4) of the KWG. Conducting prohibited business is punishable by imprisonment or a fine (section 54 (1) no. 1 of the KWG).

Together with the Deutsche Bundesbank, BaFin drafted interpretative guidance on the Bank Separation Act and published this guidance on 14 December 2016. Since its publication, many additional questions have emerged in relation to the application of the Act and the interpretative guidance. For this reason, BaFin and the Bundesbank jointly drafted an updated version of the interpretative guidance, for which a public consultation was held.

The issues addressed in the updated version of the interpretative guidance essentially cover the scope of the Bank Separation Act, the determination of thresholds for the subjective scope of application, the scope of the risk analysis, the scope of the prohibitions and the provisions on exemptions from the provisions, and the regulatory provisions regarding financial trading institutions. BaFin will make further amendments to this guidance if necessary, particularly if the legal framework or supervisory standards change or if such amendments are required due to findings in supervisory practice.

This interpretative guidance does not release the institutions from the obligation to clearly and comprehensively document the identification of business activities that may be prohibited and to independently subsume such business activities under the applicable prohibitions. The institutions are required to exercise due care when documenting the facts and legal assessment relating to prohibited business and potential borderline cases; otherwise, the institutions’ staff risk facing prosecution.

Questions and interpretative guidance relating to the Bank Separation Act

The notes for this Interpretative Guidance can be found here.