This has led many banks to consider establishing new subsidiaries or moving business to existing subsidiary institutions, many of these in Germany. Raimund Röseler, Chief Executive Director of banking supervision, explains how BaFin has prepared for this, how it will support the institutions with their plans, and what it expects from them.

Mr Röseler, are British banks welcome in Germany?

Of course British banks are welcome, just like banks from any other country. This does not mean that I am pleased about Brexit – I deeply lament this decision. But now that it has happened, nothing remains but to find ways to deal with the consequences. Incidentally, this affects all institutions that are currently domiciled in the United Kingdom and conduct business from there in other EU countries. That doesn’t just mean British banks; it also includes institutions from Japan, Switzerland, the USA, the Arab states and China, for example.

What advantages could choosing Germany have for these banks?

Over numerous discussions with the banks, we have established that BaFin offers the benefit of being a strong, competent and reliable financial supervisor. In addition to this, if we talk specifically about Frankfurt am Main, there is also the vicinity to the European Central Bank and the high degree of internationalisation. Moreover, Germany’s convenient location in the heart of Europe is certainly another important advantage.

How much sway do these advantages hold?

Germany is certainly one of the places that will benefit from Brexit – although that is perhaps the wrong way to put it, given how regrettable the situation is. There are, of course, a number of banks that are going to Dublin or other cities. In most cases, however, this is for a specific reason, for instance that they already have a greater presence there. Overall, Frankfurt is certainly a desirable location.

How many banks have decided in favour of Germany so far?

BaFin is currently working on ten authorisation procedures in total. This number may yet increase, however, as Germany is a possibility for quite a number of institutions that are still in the process of deciding. In addition to this, several institutions that already conduct business in Germany as banks will expand their business, which means that they will not be required to submit a formal application for authorisation.

How long does it take for a decision to be made regarding an application for authorisation?

By law, the deadline is six months from the point at which BaFin has all of the documentation. In practice, however, we hold discussions with institutions even before the formal application has been submitted and, furthermore, cases where we have all of the documentation as soon as the application is submitted are the exception rather than the rule. Large institutions should therefore expect the process to take approximately a year.

When should institutions approach BaFin at the latest to make sure that Brexit doesn't catch them off guard?

As soon as possible, I would say. We need enough time to hold discussions with the institutions, and our resources are limited too. If we assume the worst-case scenario of a hard Brexit, institutions may need authorisation as early as March 2019 if they wish to continue being able to conduct business here.

What are the possible ways for foreign institutions to conduct business here?

In principle there are two options: they can either establish a subsidiary, i.e. an independent bank, or set-up a third-country branch in Germany. The decision is up to the banks, and primarily depends on their business model. In most cases, however, it might make sense to choose the subsidiary option, as the subsidiary could then also offer banking services in other EU countries using the European passport.

What do we look at when examining an application for authorisation?

The same things apply here for banks from the UK as for any other bank: we take into consideration the business model, the organisation and the risk management system, whether the management board members are fit and proper, the capital resources, the business plan and so on. The German Banking Act (Kreditwesengesetz – KWG) and the Minimum Requirements for Risk Management (MaRisk) clearly set out the requirements that institutions must fulfil in order to be allowed to conduct business.

For most banks from the United Kingdom, this will be the first time that they have been through this process in Germany. Are there any particular difficulties or obstacles that come up again and again in such situations?

There aren't really any typical problems – these banks are too different from each other for that. But there are certainly typical questions: for instance, how we deal with internal models and how much outsourcing we will allow.

And what are the answers?

It's not really possibly to give a hard and fast response to that. The right solution depends on the business model of the particular bank. We deal with each case individually. In principle, however, we will approach these things with pragmatism.

What does that mean?

It would be practically impossible for us to authorise internal models in all cases before Brexit; we simply don't have the resources to do that. We are therefore prepared to temporarily accept internal models that have been authorised by the PRA¹ – if they are appropriate for the new business model. We have an established relationship of mutual trust with the PRA and are able to judge the colleagues there well. But, of course, institutions will still be required to obtain formal authorisation later.

And what about outsourcing?

We expect every bank to establish an appropriate organisational structure in Germany. In other words: risks that originate here must be managed here. To do this, institutions will require adequate infrastructure, i.e. sufficient employees in the risk management and risk controlling departments, a compliance structure and a competent management board. For that reason, we will not accept any empty shells, by which I mean pure sales offices or representative offices.

But we have to think pragmatically here as well. We are well aware that the institutions will not be able to relocate sufficient staff from London for all departments straight away on the starting date.

Does BaFin allow "back-to-back" booking models?

The same applies here: we will certainly proceed pragmatically to begin with, but it depends on the specific business model. For many banks, London is not just the booking centre for business from Europe, but also for business from Asia, for example. In certain shapes and sizes, models of this type can make perfect sense. They allow institutions in London to hedge risks arising in Europe with risks in Asia. But the fact still remains: we will not accept any empty shells, and risks that remain in Germany must be properly managed here.

In BaFin's view, is it necessary for all members of the management board to speak German?

No. Knowledge of the German language is not a decisive factor for us when it comes to granting authorisation for a member of the management board.

What support will BaFin offer the institutions?

First of all, I have to emphasise that there will not be any regulatory concessions. But we are trying very hard to provide specialist support to the institutions. We have therefore set up a specialised team within BaFin for every bank that wants to come to Germany. This means that the bank always deals with the same contacts, which – in my understanding – has proven to be a significant help.

We are also conducting ongoing discussions not just with the banks, but also with associations – and that means with all of them, i.e. with the Association of Foreign Banks in Germany as well as various international industry associations. We also provide comprehensive information on our website, have organised workshops² on the topic and have set up a specific contact address via which we provide prompt responses to individual questions.

Brexit might permanently change the German banking landscape. What effect will that have for BaFin?

We will adapt our organisational approaches to fit this changing landscape and focus knowledge at central locations. Indeed, many of the banks that are coming to Germany have business models that have never existed here before.

You have emphasised a number of times that there are certain structures that BaFin will not accept. Might the case be different in other countries? Do you think there is a risk of supervisory arbitrage?

No, that is not something that worries me. Of course, it is quite possible that one or two national supervisors will take a less strict view than we do. But that is why there is still the ECB and the EBA³, which ensure convergence within Europe. It is a topic that both bodies are focusing on. The EBA has already appointed a senior task force which is to focus, among other things, on preventing supervisory arbitrage and creating consistent rules for all of Europe.

The ECB also plays an important role in the authorisation procedure. Who is the point of contact for banks?

While it is the ECB that makes the final decision about authorisation, it is BaFin that prepares this decision. This means that BaFin, i.e. the national supervisor, is always the first point of contact.

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