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The German Government has recently adopted a bank separation bill (Trennbankengesetz) designed to protect against the risks associated with speculative trading, and providing for recovery and resolution planning by credit institutions and financial groups.
The law encompasses three regulatory areas. Firstly, the law creates regulations governing recovery and resolution planning to ensure that early and preventative measures are taken for ailing, systemically important banks. They require institutions to draw up and submit their own recovery plans.
According to the German finance ministry, this measure is an additional element with which to effectively counter the so-called "too-big-to-fail" or "too-interconnected-to-fail" problem, whereby large and complex financial institutions are unable to exit the market without negative consequences because of their strong interconnection to other parts of the financial system.
Germany now has a range of instruments to ensure that in future taxpayers are not left with the costs of a collapsing bank. These include the country’s restructuring law, which established instruments for the orderly liquidation of banks, the bank levy, the restructuring fund, and the bank separation law.
Together with France, Germany is one of the first European Union (EU) member states to adopt a legislative regulation for such planning, referred to as a "bank testament," which was agreed internationally by the Financial Stability Board back in October 2011.
Despite adopting a pioneering role with this new law, the German Government will nevertheless continue to constructively support ongoing discussions pertaining to an EU resolution and recovery directive.
The second focus of the law is aimed at improving protection against the risks of speculative trading, to benefit banking clients and ultimately taxpayers.
The bill is based on the findings and recommendations of the Liikanen report and implements an agreement with France to press forward with plans for a two-tier banking system in Europe with national regulations. Retail banks and groups will be required to separate risky proprietary trading activities from retail banking when trading activities exceed 20% of the total balance (relative threshold) or EUR100bn (USD134bn) (absolute threshold).
Finally, the bill addresses the issue of individual responsibility, bestowing on bank and insurance managers specific risk management requirements. Violation of these key risk management obligations may result in imprisonment for up to five years, if a credit institution is put at risk.
German Finance Minister Wolfgang Schäuble highlighted the fact that the Government has pursued, since the beginning of the legislative period, one clear goal: that no financial market, financial actor or financial product may remain unregulated. The Government has therefore progressively created a new regulatory framework for the financial markets, Schäuble stressed, pointing out that the Government has addressed the issue of a lack of crisis resilience in the financial system and the problem of a lack of responsibility and accountability among the banks and bankers.
The regulations adopted by the German cabinet are due to enter into force in January 2014, following entry into force of the CRD IV implementation law. Separation of banking activities must then take place – as in France – by July 2015.
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