ECB opinion on protection from risks and separation of banking businesses

19 April 2013

On 25 February 2013, the ECB received a request from the German Federal Ministry of Finance for an opinion on a draft law on protection from risks and on the planning of recovery and resolution of credit institutions and financial groups (the 'draft law').

The draft law contains rules on the following:

• recovery plans to be prepared by credit institutions (CIs), and resolution powers, including the drawing up of resolution plans, for the Federal Financial Supervisory Authority (BaFin),
• the separation of areas of risk within CIs, and
• requirements for governing bodies of CIs to safeguard sound risk management, including administrative and criminal sanctions. It supplements the Law on restructuring and the Law on reorganisation of credit institutions.

With respect to recovery and resolution plans and the BaFin’s powers in this regard, the draft law aims to require systemically relevant CIs and financial groups to plan recovery measures in advance of a crisis. Such CIs and financial groups must provide for various possible courses of action that could be taken in order to stabilise and improve the economic situation of the CI or group in question, thereby securing its ability to survive, without needing to have recourse to public stabilisation measures. Further, the draft law empowers the BaFin to establish an organisationally separate resolution unit within the BaFin itself. Such unit will draw up resolution plans in cooperation with the Bundesbank and the BaFin’s supervisory departments.

The draft law prohibits specific speculative transactions such as proprietary trading and transactions with hedge funds and alternative investment funds (highly leveraged institutions) in order to separate the areas of risk of CIs or groups with a high level of overall trading activities or where such trading activities account for a relatively large proportion of a CI’s or the group’s balance-sheet total. The draft law contains exceptions for transactions carried out in the form of services for others.

Further, the BaFin has the power to prohibit:

• market-making activities within the meaning of Regulation (EU) No 236/2012 of the European Parliament and of the Council of 14 March 2012 on short selling and certain aspects of credit default swaps, and
• other transactions entailing a comparable level of risk, if such transactions might endanger the solvency of the CI.

CIs and financial groups may continue to engage in the above transactions if these have been transferred to a financial trading institution which is economically and legally separate. Such financial trading institution:

• must be licensed under the Law on banking to carry out the types of transactions in question,
• will be subject to the supervisory regime under that Law,
• must be able to refinance itself independently, and
• must fulfil information requirements vis-à-vis BaFin.

The financial trading institution is not permitted to provide payment services.

In addition, the draft law requires Managing Directors of CIs to safeguard risk management. Compliance therewith will be monitored by the BaFin. The BaFin is also competent to issue instructions. Non-compliance with such instructions may result in administrative fines of up to €200,000 and prosecution under criminal law if, as a consequence, the assets of a company in the financial sector, and thereby financial stability, are endangered.

Full opinion

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