Banks & financial services providers
A properly functioning banking and financial services system is indispensable for the performance potential of a country's economy. An efficient banking supervision system is therefore essential for the whole economy. The Single Supervisory Mechanism (SSM), launched on 4 November 2014, is supposed to ensure the resilience and solidity of the European banking system and to enhance financial integration and stability throughout Europe. As Germany’s national competent authority (NCA), BaFin forms an integral part of the new European banking supervision system. At present, BaFin supervises around 1,740 banks and 674 financial services institutions in Germany.
Legal bases of banking supervision
Various national and European laws and regulations govern the way banks and financial services providers are supervised. The primary legal bases for the supervision of banks and financial services providers are the German Banking Act (Kreditwesengesetz – KWG), the European Capital Requirements Regulation (CRR; Regulation (EU) No 575/2013 on prudential requirements for credit institutions and investment firms) and the SSM Regulation (Regulation (EU) No 1024/2013 conferring specific tasks on the European Central Bank concerning policies relating to the prudential supervision of credit institutions). The SSM Regulation defines the nature and scope of the ECB’s duties and governs the ECB’s cooperation with national competent authorities such as, in Germany, BaFin.
The Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and a number of special Acts, such as the Pfandbrief Act (Pfandbriefgesetz – PfandBG), the Safe Custody Act (Depotgesetz – DepotG), the Building and Loan Associations Act (Bausparkassengesetz – BauSparkG) and the Savings Bank Acts (Sparkassengesetz – SpkG) of the federal states are also examples of laws and regulations with relevance for banking and financial supervision in Germany.
The above-mentioned laws and regulations lay down rules for banks which they have to observe when they are being established and when they are carrying on their business. These rules are designed to prevent undesirable developments that might disrupt the smooth functioning of the banking system. How closely banks are supervised depends on the nature and scale of the business they carry on, i.e. on the risks incurred. This is why banking supervision is also described as risk-oriented supervision. As a matter of principle the supervisors concentrate firstly on whether institutions have adequate capital and liquidity and, secondly, whether they have installed appropriate risk control mechanisms.
The laws on which banking supervision is based are consistent with the principles of the free market economy. Consequently, the banks' management board alone is responsible for the banks' business policy. However, the institutions do have to meet both basic qualitative and quantitative conditions and have a statutory obligation to open their books to the supervisors. As part of its solvency supervision tasks, including the monitoring of liquidity risks, BaFin may – if necessary in consultation with the ECB – take supervisory measures if it identifies major deficiencies at an institution, provided certain legal conditions are met.
Division of responsibilities between the Deutsche Bundesbank and BaFin
BaFin and the Deutsche Bundesbank share banking supervision in Germany. Their cooperation is governed by section 7 of the German Banking Act (Kreditwesengesetz – KWG), which stipulates that, among other things, the Deutsche Bundesbank shall, as part of the ongoing supervision process, analyse the reports and returns that institutions have to submit on a regular basis and assess whether their capital and risk management procedures are adequate. In consultation with the Deutsche Bundesbank, BaFin has issued a "Guideline on carrying out and ensuring the quality of the ongoing monitoring of credit and financial services institutions by the Deutsche Bundesbank" (Supervisory Guideline).