A few days ago, Germany’s
finance minister, Dr. Wolfgang Schäuble, introduced Germany’s
planned banking reform to the parliament:
Wir
versuchen, Wege zu finden, wie wir Eigenhandel, Investmentbanking und
die normalen Bankgeschäfte so voneinander abgrenzen können, dass
Risiken in einem Bereich keine Ansteckungsgefahren für andere
Bereiche bedeuten können.
We are trying to find ways to separate proprietary trading,
investment banking and normal banking transactions to ensure that
risk in one area does not entail a risk of contagion for other areas.
Ich
glaube, es ist vernünftig, dass wir bei der Regulierung von Banken
nicht das Kind mit dem Bade ausschütten, sondern immer daran denken,
dass die Funktion und Leistungsfähigkeit unserer Banken in einem
starken Maße vom Erfolg auf den Weltmärkten abhängt.
When it comes to banking regulation, I think it is reasonable not
to spill out the baby together with the bathwater, but to keep in
mind that the function and performance of our banks depends, to a
great extent, on their success on the world markets.
The general goals of the
German reform are to allow a winding-up of systemically relevant
financial institutions without impairing public funds and counter
effectively “too big to fail” situations.
It has three main
pillars:
- Restructuring and liquidation of financial institutions
- Risk protection for financial institutions
- Criminal liability of risk management executives
A. Restructuring
and liquidation of financial institutions
Reorganization Plan
Systemically important
financial institutions are bound to establish a reorganization plan.
The German regulator
qualifies a financial institution as systemically important on the
basis of qualitative and quantitative factors such as
- size;
- domestic and cross-border business activities;
- interconnectedness with other financial institutions in the financial system;
- (im)possibility to replace the financial institution as regards its financial services and infrastructures.
The reorganization plan
- defines indicators to disclose a crisis early on;
- describes stress scenarios;
- analyzes the firm’s structure, business model, and main activities from a strategic point of view;
- evaluates the possibility for the financial institution to be rescued;
- reveals the firm’s options to restructure;
- sets up a communication plan for a crisis scenario.
The German regulator can
intervene if he feels that the implementation of the reorganization
plan is compromised. He can, for example, order the financial
institution to recapitalize or to revise its refinancing strategy.
If, nevertheless, the
financial institution continues to lack a sufficient degree of
operational security, the regulator might
- ask to conclude service agreements;
- put limits on the institution’s risk exposure;
- entrench information rights;
- order asset sales and spin-offs;
- require to reduce the complexity of the firm’s structure.
Liquidation Plan
In case a financial
institution is systemically relevant but not part of a financial
group that is monitored by the German regulator, the administration
will put a liquidation plan in place. Amongst other elements, the
plan analyzes the institution’s business strategy and internal
structure and illustrates if and how the business units can be
isolated in a crisis situation. The liquidation plan will not
necessarily be disclosed to the financial institution.
B. Risk protection
for financial institutions
Germany's government
intends to proscribe two types of activities:
- Proprietary trading (= trading activities on the bank’s balance sheet as opposed to deals done on behalf of clients)
- Granting of credit and guarantees to hedge funds and other comparable, highly leveraged institutions
By contrast,
market-making activities are, as a general rule, permitted.
Exceptionally, the regulator can prohibit them if they compromise the
solvency of the financial institution. Market-making refers to
activities which consist of
- posting firm, simultaneous two-way quotes of comparable size and at competitive prices, with the result of providing liquidity on a regular and ongoing basis to the market;
- fulfilling orders initiated by clients or in response to clients’ requests to trade;
- hedging positions arising from the fulfillment of the tasks above.
In addition, the above
restrictions only apply to financial institutions whose balance sheet
outstrips, on a consolidated level, one of the following thresholds:
- Available-for-sale financial assets exceed 100 BEUR.
- Available-for-sale financial assets represent a minimum of 20 % of total assets and, over the past 3 financial periods, total assets were at least 90 BEUR.
Finally, the proposal
expressly exempts asset liability management activities and long-term
strategic participations in other companies. Also, a brokerage
institution can still perform speculative activities if it is
economically and legally separated from any financial institution.
This independence namely means that the broker must refinance its
balance sheet on a stand alone basis. The exception intends to
leverage advantages linked to size and diversification of a financial
conglomerate.
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