© istockphoto.com/antoniokhr
Erscheinung:22.10.2020 Resilient shielding
BaFin and the Deutsche Bundesbank have jointly published an updated version of the interpretative guidance on Article 2 of the German Bank Separation Act (Abschirmungsgesetz), which stipulates that large credit institutions must refrain from conducting certain risky business activities or separate them from other activities.
Under the German Bank Separation Act, large banks and banking groups are required to identify any business activities they are conducting that are particularly risky based on a risk analysis. They must either terminate such activities or separate them from their deposit business and other areas to be protected (see info box “A brief history of the German Bank Separation Act”). In the process of separating such business activities, the institutions must transfer the activities to an economically, organisationally and legally independent financial trading institution. The advantage in this case is that the risks are transferred to a separate institution – without the risk of infecting healthy parts of the banking group.
The prohibitions under section 3 (2) of the German Banking Act (Kreditwesengesetz – KWG) cover 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.
At a glance:A brief history of the German Bank Separation Act
When the 2007/2008 financial crisis arose, the “too-big-to-fail” problem came to the fore, posing the dilemma that large and complex banks that are interconnected with other market participants, or that play a significant role on the financial market, cannot simply exit the market in the event of a crisis. This is because the collapse of such “too-big-to-fail” banks poses a threat to financial stability. In the financial crisis, some institutions had to be bailed out using public funds. This was done at the expense of taxpayers and distorted competition.
For this reason, the European Commission set up an expert group chaired by the Governor of the Bank of Finland, Erkki Liikanen, (known as “the Liikanen Group”) in 2012. The group came to the conclusion that banks should separate certain high-risk business activities from their deposit business in particular – marking the beginning of various bank separation rules in Europe (see info box “International bank separation rules”).
German legislators built on the recommendations made by the Liikanen Group and adopted the Bank Separation Act, which entered into force on 14 January 2014. This also resulted in changes to the German Banking Act.
Scope
Section 3 (2) of the KWG covers large credit institutions that are subject to the Capital Requirements Regulation (CRR) in addition to companies that are part of a group that includes CRR undertakings if they exceed certain thresholds (see info box “Thresholds”). Smaller credit institutions conducting the aforementioned activities below these thresholds are not subject to the prohibitions or the obligation to separate their business activities.
At a glance:Thresholds
Credit institutions may qualify for the bank separation regime in two ways:
- either on the basis of international accounting standards if certain balance sheet items as defined in section 3 (2) sentence 2 no. 1 of the KWG exceed the absolute threshold of EUR 100 billion, or if total assets over the last three financial years amount to at least EUR 90 billion and the balance sheet items defined in the Act exceed at least 20% of total assets (relative threshold),
- or on the basis of national accounting rules under the German Commercial Code (Handelsgesetzbuch – HGB) if their trading portfolio and their liquidity reserves exceed EUR 100 billion (absolute threshold) or their total assets amount to at least EUR 90 billion over the last three financial years and the trading portfolio and liquidity reserves exceed 20% of the total assets for the previous financial year (relative threshold).
At the present time, ten institutions exceed the aforementioned thresholds and thus fall under the scope of the German Bank Separation Act based on the information available to BaFin. The institutions must themselves determine whether they meet the criteria and they are currently not obliged to notify BaFin of such information. In August 2020, the Federal Government proposed a draft bill to the Bundesrat. The Bundesrat must give an opinion before the law can be adopted in parliament by the Bundestag. This bill sets out that institutions must notify BaFin if they exceed the thresholds or fall below them again. This would increase transparency, particularly for the supervisory authorities.
Irrespective of the thresholds mentioned above, BaFin may order any institution under its supervision to cease or transfer particularly risky business activities other than those mentioned in the Act. BaFin can make use of such powers on a case-by-case basis if the activities in question threaten the solvency of the credit institution; this can also include market making. Anyone who continues to conduct prohibited activities nevertheless can expect to be sentenced to a term of imprisonment or a fine.
From the Bank Separation Act to interpretative guidance
Following the entry into force of the German Bank Separation Act, BaFin published the first version of its interpretative guidance in December 2016. This offered further guidance to those responsible at institutions on how to identify and treat prohibited business activities beyond the wording of the Act – which is a key issue in light of the criminal liability involved. Law enforcement agencies have also used this document for guidance.
Since the release of the first version of the guidance document, many other questions have emerged. For this reason, BaFin and the Deutsche Bundesbank jointly published an updated version of the interpretative guidance on 6 August 2020 following a consultation.
At a glance:International bank separation rules
In addition to the German Bank Separation Act, there are other bank separation rules – such as the Volcker Rule under the Dodd-Frank-Act in the United States or the Financial Services Act in the United Kingdom, which is based on a proposal made by the Independent Commission on Banking chaired by the famous economist Sir John Vickers.
In the EU, there are bank separation rules in France and Belgium, for instance. The European Commission’s draft regulation on banking structural reform with bank separation rules for the entire banking sector in the EU was, however, rejected at EU level.
Key changes in the second version
To give an example, the changes concern the scope of an exemption that had already been developed in the original version, under which fully collateralised lending and guarantee business with hedge funds and AIFs is still permitted – on the condition that the collateral is of sufficient quality. In addition, the interpretative guidance provides more details regarding the circumstances under which indirect lending and guarantee business with hedge funds and AIFs falls under the prohibition in section 3 (2) sentence 2 of the KWG – e.g. in connection with special purpose vehicles that are not hedge funds or AIFs themselves but that are used and significantly controlled by a hedge fund or AIF.
As regards the terms “hedge fund” and “AIF”, the updated version of the interpretative guidance now clarifies that the prohibition also covers lending and guarantee business with open-ended German special AIFs if the investment conditions do not rule out the use of leverage, i.e. leveraged transactions, on a substantial basis.
New structure
BaFin and the Deutsche Bundesbank have given the interpretative guidance a modular structure as this makes the guidance easier to use and allows further information to be added subsequently.
Given the penalties involved and the legal risks for institutions and their staff, BaFin is calling on banks to establish effective compliance processes that contribute in particular towards identifying prohibited business. This applies to both existing business and new product processes.
Authors
Max Sußbauer
Nina Linder
BaFin Division for Policy Issues relating to Restructuring
Please note
This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.
