17 October 2012

BFM: Extension of protection against systemic banking crises

The German Cabinet approved the extension of the Financial Market Stabilisation Fund (SoFFin) until the end of 2014, with the intent of prolonging the option for banks to receive stabilisation measures from SoFFin until the uniform European restructuring guidelines enter into force.

The initiative means that Germany is continuing to move forward on this issue together with its European partners. It is anticipated that a European Directive on recovery and resolution of credit institutions will not be implemented at the national level until the start of 2015. Under the currently applicable Financial Market Stabilisation Fund Act, applications can only be made to SoFFin up until the end of 2012.

An important change to the law is that in the event of possible future rescues, contributions from the bank levy can also be used to offset possible losses from potential future SoFFin stabilisation measures, thereby reducing the burden on taxpayers. In the future, those who are responsible for undesirable developments on the financial markets should bear the costs, rather than the state.

The draft law in detail

Under Germany's Restructuring Fund Act, banks that have got into difficulties can be restructured or closed down in an orderly fashion without endangering the stability of the financial markets. Until now however, an agreed European legal framework for cross-border cases has been lacking. That is something that will only be created once restructuring laws have been completely harmonised on the European level. In October 2011, the European heads of state and government agreed that Member States should set up national support mechanisms in order to be prepared for all eventualities, no matter how likely or unlikely they might be. Until the entry into force of a single European legal framework, the extension of the SoFFin fund which has now been initiated guarantees that Germany will continue to be ready for such eventualities. In most of the other Member States where such support mechanisms are available, the deadline for applying for stabilisation measures is later or even non-existent.

The draft text of a Third Act on the Implementation of Measures to Stabilise the Financial Market which was approved by the German Cabinet today, and which will now be presented to the coalition parties' parliamentary groups, marks an important change in approach for the German Government. SoFFin and the Restructuring Fund, which have previously been separate systems, are to be more closely integrated with each other. The financial resources which will, starting in 2013, accumulate in the Restructuring Fund, which is financed by the bank levy, will be used to cover possible losses arising from future SoFFin measures when the accounts of the SoFFin fund are finally closed. If the contributions which have been paid in by that point are not sufficient, then special levies can be imposed on all contributors to the Restructuring Fund. Existing thresholds for reasonable burden and the cap on the charge will continue to apply for individual credit institutions.

In addition, the group of institutions eligible to apply to SoFFin and the group of institutions required to pay the bank levy will be harmonised so that the bank levy can be used as a special levy for future stabilisation measures. As a further element in the desired integration of the two funds, the interministerial steering committee that is equally responsible for both funds will, when it comes to approving stabilisation measures, review whether a particular measure can also be implemented directly via the Restructuring Fund so that no burden is imposed on taxpayers.

Additionally, the draft law stipulates that the consent of the German Bundestag is required for any future statutory instrument on the dissolution of SoFFin. The guarantee facility of €400 billion and the borrowing authorisation of €70 billion, plus €10 billion subject to the approval of the Bundestag's Budget Committee, will continue to exist.

The tools established by the Financial Market Stabilisation Fund Act that include guarantees, recapitalisation funds and the ability to create bad banks, and which were already scheduled to continue in operation until the end of 2012, will also remain available. The existing catalogue of measures has proved its worth, meaning no changes are required in this regard.

The law does not require the approval of the Bundesrat.

The draft Third Financial Market Stabilisation Act which was approved by the German Government will be published once it has been discussed by the coalition parties' parliamentary groups.

Press release

© Bundesfinanzministerium