Whenever the Federal Financial Supervisory Authority (BaFin) imposes a moratorium on a credit institution, this represents the final act in a long chain of events. In such situations, the authority will have made prior attempts to use less invasive methods designed to provide the management the opportunity to find ways to rehabilitate their bank. However, if the institution faces insolvency or excessive indebtedness, BaFin puts on the brakes.
The word "moratorium" has become familiar as a term for a package of measures stipulated by the Banking Act (Kreditwesengesetz – KWG) "in cases of danger", specifically in the event of imminent insolvency. If such conditions exist, BaFin may for example prohibit the institution from making payments – such as disbursing deposits or committed loans – or disposing of assets. It may also prohibit the bank from accepting payments not intended for the discharge of debt owed to it (section 46 (1) sentence 2 nos. 4-6 KWG).
Customers' obligations remain in force
However, the moratorium has no effect on the obligations customers have towards the distressed bank. They are required to repay their loans as usual, without being requested to do so. If customers have pledged assets to the bank as collateral for a loan, those assets are not released until the collateralised loan has been repaid in full. Even though some customers perceive this as harsh, the law does not provide for exceptions to the above prohibition on disposals and payments unless doing so facilitates the administration of the institution, e.g., the payment of employee salaries or the bank's electricity and phone bills. The Banking Act is strict on this point for a reason: the moratorium is intended to protect the assets entrusted to the bank by its customers and to ensure that the afflicted institution's creditors are satisfied equally in a case of compensation. If a bank begins to experience difficulties, this should not represent the starting signal for a race between the fastest creditors who are satisfied in full, and the slower ones who leave empty-handed.
Access to safe deposit boxes and securities accounts
In any case, the winner of the race to the bank would not make it farther than the front door. In addition to imposing prohibitions on disposals, payments and the receipt of payments, BaFin usually orders that the bank building be closed for customer business. This also initially poses a practical problem for safe deposit box renters. However, they are entitled to relief in the form of a "right of separation" (Aussonderungsrecht), under which the assets held in their safe deposit boxes are separated from the bank's insolvency estate. This means that there is no risk that other creditors are placed at a disadvantage if the bank returns items held in a customer's safe deposit box to the rightful owner. A bank subject to a moratorium can petition BaFin for permission to open the safe deposit boxes for its customers. BaFin usually grants this permission. The customer must then contact the institution to schedule an appointment to access the safe deposit box at the closed bank building.
Customers are also able to access their securities accounts: the securities are the property of the customer, and the bank merely holds them in its custody. There is no risk to the interests of the bank's other creditors if it returns the securities to their owners. If a customer would like his/her securities account to be transferred to another bank, the institution may comply with this wish in spite of the general prohibition on transfers and disposals. However, the transfer of the customer's account by a bank under a moratorium remains subject to BaFin's authorisation.
Moratorium – now what?
The purpose of a moratorium is to remove the pressure created by an outflow of assets so as to make it possible to find out whether an institution is still financially healthy enough to resume operations – if necessary, with third-party assistance. If the outlook is negative, many moratoria often transition into the insolvency of an institution. BaFin holds a monopoly on insolvency applications meaning that only BaFin can lodge the application for insolvency. What does this mean for the clients, particularly for depositors? If a moratorium lasts longer than six weeks, BaFin declares the compensation event. However, it may do this sooner if it becomes apparent that the institution can no longer repay deposits or can no longer settle debts from securities transactions. This means that the relevant responsible deposit guarantee schemes take on the case. In Germany, every private credit institution or securities trading firm must cover its deposits and liabilities through membership of a compensation scheme. At present, the statutory compensation per customer is EUR 100,000 for deposits and 90% or a maximum of EUR 20,000 for liabilities from securities transactions. Cash receivables not denominated in euros or another EU currency are not covered. Only public-law savings banks (Sparkassen) and cooperative banks (Genossenschaftsbanken) are not assigned to any compensation scheme because they are members of special guarantee schemes safeguarding the viability of institutions. In addition to statutory guarantee schemes, there are voluntary deposit guarantee schemes of the banking associations in Germany, e.g. the Deposit Protection Fund of the Association of German Banks (Einlagensicherungsfonds des Bundesverbandes deutscher Banken e.V.) or the Voluntary Guarantee Fund of the Association of German Public Banks (Einlagensicherungsfonds des Bundesverbands Öffentlicher Banken Deutschlands e.V.).