Institutions posing a potential systemic risk have to produce a recovery plan meeting all the requirements of the German Recovery and Resolution Act (Sanierungs- und Abwicklungsgesetz – SAG; only available in German); observe the limitations of positions for management board members and for the members of the administrative or supervisory body based on the German Banking Act (Kreditwesengesetz – KWG; only available in German); comply with the requirements of the Remuneration Regulation for Institutions (Institutsvergütungsverordnung – InstitutsVergV; only available in German) regarding the remuneration system; and communicate capital adequacy information pursuant to the Financial and Internal Capital Adequacy Information Regulation (Finanz- und Risikotragfähigkeitsinformationenverordnung – FinaRisikoV; only available in German) more frequently than other institutions. In addition, institutions posing a potential systemic risk and are also global systemically important institutions (G SIIs) and/or other systemically important institutions (O-SIIs), must hold a capital buffer pursuant to sections 10f and 10g of the KWG.

Identification by BaFin and the Deutsche Bundesbank

In agreement with the Bundesbank, BaFin has identified an initial 37 institutions as posing a potential systemic risk and has informed them that they have to fulfil the additional supervisory requirements.

BaFin and the Bundesbank have developed a holistic identification method which combines the various international and national supervisory requirements. Based on the legal definition of institutions posing a potential systemic risk in section 20 (1) sentence 3 of the SAG, the method is divided into three main sections: the identification of G-SIIs, the identification of O-SIIs, and the identification of institutions for which no simplified obligations regarding recovery planning may be granted. This holistic method enables a consistent and coherent supervisory approach. It ensures that administrative practice is standardised and it offers legal certainty for supervised institutions.

Identification of G-SIIs

The identification of G-SIIs is based on the criteria laid down in section 10f (2) of the KWG and follows the methodology specified by the European Commission in its Delegated Regulation No 1222/2014. It corresponds to the approach used by the Basel Committee on Banking Supervision (BCBS) to identify global systemically important banks and uses an indicator-based scoring model, i.e. a points system. The scoring model uses indicators from the categories size, cross-border activities, interconnectedness, substitutability and complexity (see table 1).

Table 1: Indicators for the identification of global systemically important institutions

Source: BaFin

For the identification, every institution authorised in Germany with a total exposure of over €200 billion (currently seven institutions) is given a score. The score is the simple arithmetic mean of the scores from the individual categories, which in their turn are calculated as the simple arithmetic means of the standardised indicator values. Institutions with a total score of at least 130 basis points (bp) are G-SIIs and thus also institutions posing a potentially systemic risk.

Identification of O-SIIs

In Germany, O-SIIs are identified pursuant to section 10g (2) of the KWG and in line with the guidelines of the European Banking Authority (EBA) on the assessment of other systemically important institutions, which in its turn takes into account the BCBS framework for domestic systemically important banks. The identification is carried out using the categories size, importance for the economy of the European Economic Area and Germany, cross-border activities and interconnectedness with the financial system.

The approach for identifying O-SIIs consists of two steps. In the first step, the institutions are assessed according to a scoring model specified by the EBA in order to ensure a comparable and transparent identification of O-SIIs in all EU Member States. Institutions reaching a particular total score are automatically classed as O-SIIs. In the second step, which is a supervisory assessment, national supervisory authorities can class additional institutions as O-SIIs. National supervisory authorities are given this scope for discretion in order to ensure that the specificities of the relevant country's banking system can be taken into account.

Step 1: Scoring model with standard EBA indicators

In the first step, a total score is calculated for each institution using the EBA's standardised scoring model. The indicators applied in this process are presented in table 2. If these indicators are not available due to the accounting rules used by the institution, proxies are used instead.

Table 2: Indicators for the identification of other systemically important institutions

* Second Trans-European Automated Real-time Gross Settlement Express Transfer System. Payment system used by Eurosystem central banks for rapid settlement of transfers in real time.
Source: BaFin

All of the over 1,700 institutions in Germany are included in the analysis. In this case, too, the total score for each institution is the simple arithmetic mean of the scores from the individual categories, which in their turn are calculated from the standardised indicator values of the respective category. Data consolidated at group level as of 31 December of the previous year, primarily from the banking supervisory reporting system, are used for the indicators.

The institutions' total scores are used to compile a ranking of systemic importance. In accordance with the EBA guidelines, institutions with a score equal to or higher than 350 bp are automatically classed as O-SIIs. All other institutions with at least 4.5 bp may be classed as O-SIIs at a national level in step 2.

Step 2: Scoring model in Germany

In Germany, the quantitative analysis of step 2 is based on an expanded, indicator-based scoring model (see table 2), which is also oriented on the requirements of the EBA guidelines. It is based both on the mandatory indicators of the standardised scoring model – which in some cases are covered in more detail – and on the optional indicators from annex 2 of the guidelines. The aim of this is to ensure that the specificities of the German banking system are adequately taken into account. Data consolidated at group level, primarily from the banking supervisory reporting system, forms the basis for the expanded scoring model, too. In this case, as well, all institutions in Germany are taken into consideration in order to avoid a distortion of the assessment of systemic importance.

The total scores calculated are used to compile another ranking of systemic importance. Institutions with a total score of 100 bp or more are designated as O-SIIs, in addition to the institutions already designated in step 1. This affects about 1 percent of institutions in Germany, which together have about 62 percent of the business volume (total assets plus contingent liabilities) of all institutions.

The plausibility of the result is then verified by the experts from BaFin and the Bundesbank. In particular, they analyse the institutions which just missed the 100 bp threshold and use certain indicators to assess whether these institutions should also be designated as O-SIIs.

Identification of institutions without simplified obligations

The identification of institutions for which no simplified obligations may be specified for the recovery plan is based on the criteria laid down in section 19 (2) of the SAG and takes into account the EBA guidelines on the application of simplified obligations. These prescribe that in the specifying of simplified obligations, the effects of the failure of an institution should be taken into account, depending on its size, the nature, scope and complexity of its activities, its shareholding structure, its legal form, its risk profile, its interconnectedness and its membership of an institutional protection scheme (IPS). Moreover, the question of whether the institution's winding-up in insolvency proceedings would have negative effects on the financial markets, on other companies of the financial sector including their funding or on the real economy is also considered.

The identification of institutions for which no simplified obligations may be specified is carried out using a quantitative analysis which may also be complemented by a further analysis.

Quantitative analysis

The assessment of the granting of simplified obligations is tied to the systemic importance of the institutions, so many of the indicators of the two EBA guidelines are identical. This means that the nationally expanded, indicator-based scoring model for the identification of O-SIIs can in some cases also be used to identify those institutions for which no simplified obligations can be specified. The ranking compiled using the calculated total scores thus forms the basis for the determining of these institutions.

Institutions with a total score of between 20 and 100 bp cannot utilise simplified obligations and are therefore designated as institutions posing a potential systemic risk. Around 2 percent of all institutions in Germany exceed the 20-bp threshold; together, they make up around 71 percent of the business volume. At these institutions, one or more of the indicators are so pronounced that the failure of the institution and its winding-up in insolvency proceedings would be likely to have a highly negative impact on the financial markets, other institutions and their funding or on the real economy. In such cases, it is unnecessary to carry out a full assessment of these institutions using the EBA guidelines, since it is evident that they cannot be granted simplified obligations.

Further analysis

BaFin and the Bundesbank conduct a further analysis of institutions with a total score of less than 20 bp in order to ensure that all those institutions whose failure and winding-up would have negative effects on the financial markets, on other companies from the financial sector or their funding or on the real economy have been identified. In this, they assess the possible effects of the failure and winding-up of these institutions using the criteria laid down in section 19 (2) of the SAG which were not previously taken into consideration, that is:

• the institution's risk profile,
• its legal status,
• the nature of its business,
• its ownership and shareholding structure,
• its legal form
• and its membership of an IPS or other cooperative mutual solidarity system pursuant to Article 113(7) of the European Capital Requirements Regulation (CRR).

Appropriate indicators are used for the analysis, in line with the EBA guidelines. BaFin and the Bundesbank always take into account the special circumstances of each individual case in their overall assessment. It may therefore happen that institutions with a total score of less than 20 bp are also designated as institutions posing a potential systemic risk.