The Act has four sections. Article 1 deals with recovery and resolution planning for credit institutions. Article 2 relates to ringfencing, and articles 3 and 4 to criminal liability for certain acts by senior managers in the area of risk management.

Recovery and resolution planning

In accordance with article 1, all credit institutions that pose a potential systemic risk must compile recovery plans within six months of the Act entering into force. These plans have to be updated at least once a year. The objective is to ensure that the institutions address in good time the organisational and business measures they have to take in the event of a crisis and to enable them to overcome any crises as quickly and effectively as possible using their own resources. Groups of institutions or financial groups have to prepare recovery plans for the entire group. Whether an institution poses a potential systemic risk is for BaFin and Deutsche Bundesbank to assess jointly. Their analysis will focus in particular on the size of the bank, its domestic and cross-border business activities, its links to the domestic and global financial system and whether it is replaceable. BaFin can order an institution to initiate and implement recovery measures.

In addition, under the new Act BaFin will establish a special unit that develops resolution plans and takes other preventive resolution planning measures for credit institutions that pose a potential systemic risk. Among other things, the unit will assess the resolvability of banks and financial groups and work towards ensuring that the entity concerned eliminates potential impediments. If it fails to do so, BaFin can order measures on an individual basis.

Current state of affairs at EU level

On 27 June 2013, the EU’s finance ministers agreed on rules for the recovery and resolution of banks in the event of a crisis. This allows the European Parliament to re-examine the directive establishing a framework for bank recovery and resolution. The aim of the proposed directive is to shift responsibility in future for rescuing failing systemically important banks from the taxpayer primarily to the banks’ owners and creditors (bail-in). In the event that further funds are required, national resolution funds are planned, which are to be financed by the institutions. In addition, the powers of intervention of the national resolution authorities are to be strengthened. The resolution directive is a key component of the planned banking union, which is expected to take effect starting in mid-2014. From then on, the European Central Bank is to supervise the eurozone’s major banks. The third pillar of the banking union, which is still being negotiated, is a joint European deposit protection scheme.

Ringfencing: separation of commercial and investment banking

Article 2 of the new Act prohibits certain high-risk activities. The prohibition will enter into force on 1 July 2015. In addition, from 1 July 2016 onwards, BaFin will be able to prohibit further types of activities carried out by specific institutions, if this threatens to endanger the solvency of an institution. Breaches of the prohibition will be punishable by imprisonment for up to five years.

Groups may continue such activities only if they ringfence them and transfer them to a separate financial trading institution. However, the separate institution may still be part of the group. The provision applies to credit institutions that accept deposits and other repayable funds and grant loans for their own account. In addition, they have to be large. The materiality threshold is such that only those banks are affected whose trading portfolio and liquidity reserve either exceed €100 billion (absolute threshold) or exceed 20% of total assets and amount to at least €90 billion (relative threshold). The prohibition does not apply to hedging activities performed to hedge transactions with clients, to manage interest rates, currencies and liquidity, or to buy or sell long-term equity investments.

Sanctions for risk management shortcomings

Articles 3 and 4, which will take effect from 2 January 2014, additionally set out the risk management duties of senior managers of credit and financial services institutions and insurance undertakings. These managers have to ensure that the relevant legal requirements are complied with. The Act provides for the criminal liability of senior managers who fail in their risk management duties where such failure contributes to an extremely strained financial situation at the bank.