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The regulatory regime applicable to banks

i The basic structure of banking regulation

Banking regulation in Germany comprises two basic elements: a licence system to prevent untrustworthy institutions from doing business, and provisions regulating the way licensed institutions should operate, including a bank's minimum capital and liquidity, risk management and general conduct of business.

Germany participates in the single supervisory mechanism (SSM) established within the eurozone. The SSM covers the main aspects of prudential regulation of institutions that conduct at least deposit and lending business (CRR credit institutions). Within the SSM, responsibilities are shared between the European Central Bank (ECB) and national competent authorities (NCAs): the ECB is generally responsible for the direct supervision of significant CRR credit institutions, with NCAs having only an assisting role. With regard to less significant CRR credit institutions, the NCAs are in charge of their direct supervision, with the ECB being generally limited to indirect oversight, but nevertheless having the final word on the granting and withdrawal of authorisations and the assessment of qualifying holdings in CRR credit institutions (common procedures).

The role of NCAs is carried out by the Federal Financial Services Supervisory Authority (BaFin). BaFin is also responsible for all tasks of prudential supervision that have not been conferred on the ECB, and the supervision of financial services institutions, insurance undertakings and asset management companies. The Bundesbank, the German central bank, is responsible for assisting BaFin and the ECB in the supervision of CRR institutions. The tasks of the Bundesbank include the gathering of prudential and statistical information reported by German banks, and the analysis of their compliance with capital adequacy and risk management requirements. The Bundesbank may not issue administrative instructions to individual institutions.

ii Regulatory regime: selected licensing requirements

As a Member State of the European Union, Germany has fully implemented the Capital Requirements Directive (CRD IV) and the Markets in Financial Instruments Directive II (MiFID II). Therefore, the regulatory regime is quite similar to those of other EU Member States.

Anyone wishing to conduct a banking business (credit institutions) or to provide financial services (financial services institutions) commercially in Germany, or on a scale that requires a commercially organised business undertaking, generally requires a licence or an EU passport.

Banking businesses include, inter alia, the acceptance of deposits or other repayable funds from the public (deposit business), the granting of loans (lending business), safe custody services, and the purchase and sale of financial instruments in one's own name for the accounts of clients (principal broking service). Financial services include, inter alia, the purchase and sale of financial instruments for one's own account as a service for clients, high-frequency trading, portfolio management and investment advice.

Regulated activities are performed in Germany if they are offered to customers in Germany repeatedly and in a commercial manner. This includes services offered from other countries to customers in Germany by mail, telephone, fax or email. Concerning internet activities, an institution is assumed to offer regulated services in Germany if it advertises its products actively through the internet to customers in Germany. Further indications are the adaptation of offers to German law and to the expectations of German customers, as well as a German internet address or cooperation with German institutions.

Institutions are only eligible for a licence if they have a head office in Germany. Foreign entities must therefore set up a German subsidiary or branch. Generally, no particular legal form is required. However, entities carrying out banking businesses must not be operated as a sole proprietorship. Furthermore, to obtain a licence, sufficient initial capital is needed and must be available in Germany. The exact amount of the required initial capital depends on the business conducted.

An institution must employ at least one qualified manager. Credit institutions and financial services institutions that are authorised to own or possess funds or securities of customers must have at least two managers. All managers must be fit and proper, that is to say, sufficiently qualified and trustworthy. Concerning professional qualifications, designated managers must have sufficient theoretical and practical knowledge (i.e., experience) in the business concerned. A person with three years' experience at a bank of similar size and type of business in a leading position is normally deemed to be sufficiently experienced. Trustworthiness could be excluded where the designated manager has committed certain crimes (such as fraud or breach of trust), violated regulatory provisions, or shown bad personal or business behaviour. Supervisory board members must also be trustworthy and sufficiently qualified.

The number of mandates per person is limited for both managers and supervisory board members. Managers and supervisory board members of CRR credit institutions that are of significant importance (this includes, inter alia, all CRR credit institutions under direct ECB supervision) are subject to the following restrictions: one manager position and two supervisory board memberships, or four supervisory board memberships. Directorships held within the same group (which applies to groups of institutions, financial holding groups, mixed financial holding groups and mixed holding groups) are counted as one directorship. With regard to other institutions, supervisory board members are not permitted to hold more than five supervisory board mandates within undertakings supervised by BaFin.

In individual cases, BaFin may exempt entities other than CRR credit institutions from specific regulatory duties (including the licensing requirement) if supervision is not deemed to be necessary. This exemption can also be used, inter alia, by non-EU institutions wishing to provide cross-border services into Germany (see below).

If a banking business is conducted or financial services are provided without the required licence, BaFin may order the immediate cessation of that business. Managers may be subject to criminal liability in these cases.

iii Regulation of branches of foreign banks, representative offices and the cross-border activities of foreign banks

Like German banks, subsidiaries of foreign banks established to conduct regulated business in Germany are subject to licensing procedures and monitoring. Likewise, dependent branches of foreign banks conducting banking business or providing financial services in Germany generally require a licence.

Foreign banks domiciled in another EEA Member State may conduct certain regulated business either through a branch or on a cross-border basis without a German licence if they hold an EU passport. An EU passport requires that the entity is licensed and supervised by the competent authorities of its home state, and that the business the entity intends to conduct in Germany is covered by the home state licence.

No licence is required for a representative office of a foreign bank in Germany. The representative office must not conduct any regulated business. Prior notice of the establishment of such a representative office must be given to BaFin.

No licence is required if foreign banks perform requested services (also known as reverse solicitation). German residents and companies domiciled in Germany may request the services of foreign institutions at their own initiative. An institution offering these services following such a request does not need a licence in Germany, provided it does not conduct any business on German territory or on a cross-border basis (including by means of telecommunication) directed towards potential customers residing in Germany. BaFin specifies, in a guidance note, the differences between requested services that are not subject to the licensing requirement, and cross-border banking businesses or financial services requiring a licence or an EU passport.

An exemption of non-EU institutions from the licensing requirement may be granted by BaFin at its discretion, provided that the bank in question is effectively supervised in its home country by the competent authorities in accordance with internationally recognised standards, and that the competent home country authorities cooperate satisfactorily with BaFin. Additionally, the applicant company must submit a certificate from the competent authorities of its home country confirming to BaFin that it holds a banking or financial services licence, and that the provision of the intended cross-border services in Germany raises no supervisory concerns. As a general rule, an exemption for the conduct of banking businesses and the provision of financial services to private clients will only be granted if a foreign bank uses a German credit institution or an EEA credit institution with an EU passport as an introducing agent.

As a consequence of a bilateral agreement between BaFin and the Swiss Financial Market Authority, Swiss banks have the option of applying for a simplified exemption procedure under which they can directly solicit private German clients without a credit institution acting as an introducing agent; however, in such a case they would be subject to compliance with strict MiFID and other requirements.

iv Regulation of payment services and e-money business

Germany has implemented the second Payment Services Directive and the second E-Money Directive. Payment services institutions and e-money institutions (other than CRR credit institutions) are required to hold a payment services or e-money licence and are supervised by BaFin. It is possible for licensed payment services and e-money institutions registered in other EEA Member States to conduct their business in Germany through a branch or on a cross-border basis without a German licence if they hold an EU passport.