Prudential regulationi Relationship with the prudential regulator
The ECB and BaFin may examine institutions routinely or in the event of a special cause. The regulators may enter and inspect an institution's offices for this purpose during normal business hours. This right generally also applies to an institution's subsidiaries. Furthermore, BaFin representatives may attend a bank's general meeting and meetings of the supervisory board. An institution and its managers must provide the ECB, BaFin and the Bundesbank upon request with all relevant information and documentation.
Institutions are subject to numerous ad hoc and regular reporting and notification obligations. Generally, notifications must be sent both to BaFin and the Bundesbank, whereas regular reporting (such as COREP and FINREP) is received by the Bundesbank only. Institutions have to notify BaFin and the Bundesbank annually of their participating interests in other enterprises, any qualified participating interests they hold in the reporting institution and the number of domestic branches.
Within the SSM, a slightly different reporting regime applies to CRR credit institutions that qualify as significant and are thus directly supervised by the ECB. Generally, these institutions must submit their notifications to the ECB, with copies going to BaFin and the Bundesbank. An exception applies to those notifications by which significant CRR credit institutions notify their intention to appoint a manager, the appointment of a supervisory board member or the end of term of any of these individuals. In relation to these notifications, the NCAs (i.e., BaFin and the Bundesbank) act as the single point of entry.ii Management of banksTypical management structures and the influence of holding companiesStock corporations
Commercial banks in the legal form of a German stock corporation have a management board consisting of the managers and a supervisory board. This two-tiered structure can be seen as an important element of self-regulation and internal governance of banks. The management board is responsible for both the day-to-day affairs of the bank and the business strategy. It represents the bank when dealing with third parties. In performing their duties, managers must act solely in the bank's best interests, without being subject to instructions from any third party, including the supervisory board. The supervisory board is responsible for supervising and advising the management board, and it appoints managers and can dismiss them with reason (a loss of confidence is sufficient to satisfy that requirement). To the extent set out in the bank's articles of association or the management board's by-laws, the management board must obtain the prior approval of the supervisory board for certain transactions and other actions of the bank, which may, for example, include the establishment and closure of branches and the purchase and sale of companies. Supervisory board members are elected by the shareholders; therefore, large shareholders are regularly represented on the supervisory board. Legal persons cannot be members of the boards.
Shareholders may communicate recommendations to the management board and the supervisory board, as long as those recommendations are legally and factually non-binding (unless a domination agreement is concluded).Limited liability companies
Limited liability companies only require a supervisory board if they have more than 500 employees. The shareholders of limited liability companies may generally render binding instructions to the management board, even regarding the day-to-day business. Nevertheless, the managers in limited liability companies are also solely responsible for compliance with all applicable laws and regulations.Domination agreements
German corporate law allows parent companies to establish the authority to give binding instructions (relating to day-to-day business and business strategy) to the management boards of their subsidiaries by concluding a domination agreement with them. In the case of banks, however, this possibility is not unlimited, because domination agreements conflict with the independence of bank managers required by regulatory law. Therefore, a domination agreement with a bank must provide that the controlled bank's managers must be independent from instructions to the extent necessary to comply with mandatory regulatory requirements.Regulatory duties of management of banks
A manager of an institution is required to carry out several regulatory duties. For example, he or she must report to BaFin and the Bundesbank (as well as to the ECB if the bank is directly supervised by the ECB) the commencement and termination of activities as a manager or member of the supervisory board or administrative board of another enterprise, as well as the acquisition and disposal of a direct participating interest in an enterprise, and any changes in the scale of such a participating interest.Restrictions on payments to the management of banksCompany law
The compensation of managers of a stock corporation must be appropriate in terms of personal performance and the common level of compensation. For example, to reduce the incentives for managers to focus on short-term profits, stock options are not exercisable in the first four years after they have been granted. These rules do not apply to managers of limited liability companies.Regulatory law
As required under the CRD IV, the variable component of the total remuneration paid to a manager or an employee generally must not exceed 100 per cent of the fixed component. The institution's shareholders may approve a higher variable component, but not exceeding 200 per cent of the fixed component for each individual. In addition, restrictions on payments are part of the Regulation on the Remuneration Systems of Institutions. Pursuant to these requirements, remuneration systems should be orientated around the objectives of the bank's strategy. Incentives to take disproportional risks should be avoided. The remuneration of bank managers should adequately reflect their functions and performance, and should not exceed the common remuneration without particular reason. Remuneration agreements between banks and their managers must be in written form. Banks are obliged to disclose information annually about their remuneration systems, and the total amounts of all fixed and variable compensations.iii Regulatory capital and liquidityRegulatory capital requirements
Regulatory capital requirements have been harmonised within the European Union and are part of the Capital Requirements Regulation (CRR). The CRR covers regulatory capital requirements in particular with respect to counterparty risk, market risk, operational risk and settlement risk. In addition to the capital requirements laid down in the CRR, banks are required to hold a minimum capital of €5 million in the form of Common Equity Tier 1 (CET1) capital.Capital buffers
Germany has also implemented the new CRD IV regime on capital buffers. For 2019, banks must thus maintain a capital conservation buffer of 2.5 per cent of their total risk exposure as well as an institution-specific countercyclical capital buffer equivalent to the weighted average of the national countercyclical buffer rates of those EU Member States in which relevant credit exposures are located. The current countercyclical buffer rate for Germany has been set at zero per cent. Additional buffer requirements apply to global and other systemically important institutions.Consolidated supervision
Concerning groups of institutions, (mixed) financial holding groups and financial conglomerates, consolidated supervision is exercised. A group comprises a parent company and subordinated companies. A parent company is an institution or a (mixed) financial holding company that is domiciled in Germany and is not subordinated to other institutions in Germany. Group member institutions taken together must fulfil the capital requirements laid down in the CRR. To determine whether a group has adequate capital, the capital of the group members, on the one hand, and the risk exposure amounts of the group members, on the other, are aggregated. As a general rule, intragroup positions will be eliminated to calculate capital requirements on a group level. If a parent company prepares consolidated accounts under IFRS, such consolidated accounts will be the basis of consolidated supervision.iv Recovery and resolution
As of 1 January 2015, Germany implemented the Bank Recovery and Resolution Directive (BRRD). In addition, on 1 January 2016, the SRM Regulation came fully into effect, establishing a uniform procedure for the resolution of CRR credit institutions established within the eurozone (single resolution mechanism (SRM)). The European and German recovery and resolution framework distinguishes mainly between the following areas of regulation: recovery planning by the banks themselves; resolution planning by the competent resolution authority; and resolution (i.e., the application by a resolution authority of one or more resolution tools to an institution that is in a crisis situation).
CRR credit institutions and their holding companies are required to prepare, and update annually, recovery plans describing how their financial stability could be restored in the event of a financial crisis. The recovery plans are to be assessed by the competent prudential supervisory authorities (i.e., the ECB for significant CRR credit institutions, and BaFin for less significant CRR credit institutions), which have also been granted extensive powers when recovery plans are regarded as insufficient.
On the other hand, resolution planning and the application of resolution tools fall within the scope of application of the SRM. Within the SRM, competencies and tasks are shared between the Single Resolution Board (SRB), a special agency of the European Union, and the national resolution authorities of the participating EU Member States. The national resolution authority for Germany was, until 31 December 2017, the Federal Agency for Financial Market Stabilisation; its role has since then been taken over by BaFin. While the SRB is competent and responsible for preparing resolution plans and adopting all decisions relating to the resolution of those CRR credit institutions and their parent undertakings that are subject to direct supervision within the SSM by the ECB or are part of a cross-border group, BaFin as the national resolution authority is responsible for resolution planning and the resolution of all other German CRR credit institutions.
When establishing resolution plans, the resolution authority (i.e., the SRB or BaFin) must identify and, where necessary and proportionate, address and remove any material impediments to resolvability. Similar to the powers of the competent prudential regulator when assessing a bank's recovery plan, resolution authorities have the power to require a bank to limit its risk exposures or to divest specific assets to restrict or prevent the development of new or existing business lines, or to require changes to legal or operational structures of the institution and the group, respectively.
Resolution tools and powers may be applied by the SRB or BaFin when an institution is failing or likely to fail, there is no reasonable prospect that any alternative private sector or prudential measure would prevent the failure of the institution, and the resolution action to be applied is necessary and proportionate to ensure the continuity of critical functions of the institution, provided this is necessary to protect depositors, client funds or client assets, to avoid a significant adverse effect on the financial system or to protect public funds from being used in a bail-out scenario. The resolution tools are:
- a sale of business, by which assets, rights or liabilities as well as shares in an institution can be transferred to an acquirer;
- a bridge institution, by which assets, rights or liabilities and shares can be transferred to a bridge bank owned and controlled by the resolution authority;
- an asset separation, by which assets, rights or liabilities can be transferred to a special purpose vehicle with the purpose of maximising the value of these assets through a sale or orderly wind-down; and
- a bail-in, by which shareholders and specific creditors may now be required to participate in losses and the recapitalisation of a credit institution or its group entities in a resolution scenario. With the bail-in tool, the SRB and BaFin have the power to write down equity and liabilities in whole or in part, and to convert liabilities into shares or other CET1 instruments of the respective institution or group entity or of a bridge institution. The requirements for the application of the bail-in tool, as well as the regime of liabilities that are either statutorily excluded from bail-in or may be excluded by the SRB or BaFin, are laid down in the SRM Regulation.
To ensure that sufficient own funds and liabilities are available for the application of the bail-in tool, credit institutions and respective groups must maintain a minimum amount of own funds and 'bail-inable' liabilities as required by the SRB or BaFin (minimum requirement of own funds and eligible liabilities).