Category: Practical Experience

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Establishment of banks: an option for corporations? – Part 2

As explained in the preceding post regarding the recent PwC-Whitepaper “Establishment of banks: an option for corporations?”, the establishment of corporate-owned banks is not a strategic option for the german industrial sector even though the automotive industry is using them with great success.

These results contrast with the high demand for individualized financial services. Every other surveyed corporation wishes for increased efficiency and professionalization of financing activities within the firm. Beyond that working capital-management (36%), securing sales (34%), securing the supply-chain (27%) and diversification of business activities (27%) were central needs.

Commercial banks will not be troubled by emerging competition in terms of corporate-owned banks for now but they must not feel too secure as this is not due to the quality of their service but rather the enormous barriers of entry for corporations. The Whitepaper provides not only fields of action – especially in terms of consulting and product design – but also opportunities for the development of new business areas. Proposed actions might be structured financing for sectors or unions, supplier credit platforms, joint distribution activities or the offering of white-label-products. However, corporate decision-makers have to get themselves into banksided innovations and try to comprehend and exploit their potential together. Financial Covenants are agreed upon increasingly but are often seen as a burden for corporations. If those risk management benchmarks are individualized to fit specific sectors or corporations, they will have a positive impact for both parties. While various forms of cooperation between commercial banks and cooperations may appear promising, each party has to be aware that the realization of actual surplus value requires honesty, timely exchange of knowledge and the willingness to progress.

Establishment of banks: an option for corporations? – Part 1

It’s hard to imagine an automotive industry without corporate-owned financial institutions. Sector expertise concerning customer data, residual values and distribution channels allow for lending and leasing as well as the offering of appropriate insurance-models at attractive terms. In addition to these products the corporate-owned banks also offer classic banking products such as day-to-day money or credit cards. Thus they do not only optimize corporate financial activity but also enhance customer loyalty. Are corporate-owned banks therefore the next logical step towards an evolved industrial business model and can increased establishment be expected in the future?

The latest PwC-Whitepaper “Establishment of banks: an option for corporations?”, which can be obtained from PwC, deals with this exact question. According to the whitepaper the establishment of their own bank is not a strategic option for the vast majority of corporations. Only 6% of the 90 surveyed decision-makers representing corporations with a total of 177 billion € stated they would be considering it. There are multiple reasons behind the restraint. The most central being their size (31%), the remoteness to their core business (22%) and the effort that comes with regulatory compliance (18%).

Also read our next post regarding this issue. It deals with motivators explaining the urge to establish their own banks and tries to define fields of action and propose actions for commercial banks.

Swiss banks: New chances for market entry in Germany by means of a simplified regulatory framework

FINMA and BaFIN finally came to an agreement regarding all the required concrete measures for the so called “Simplified Exemption Procedure”. Thereby the regulatory framework for the market entry of Swiss banks in Germany will be facilitated.


In the past, Swiss banks going for a business activity in Germany without establishing a physical presence were required to meet several conditions which made conducting business operations more complicated. In particular, Swiss banks had to involve a locally active German / EEA bank for the customer identification of private clients.

Since 2013, there have been efforts by the Swiss Confederation and the Federal Republic of Germany to intensify cross-border cooperation in the financial sector. For that purpose, the so called “Memorandum to procedural aspects of cross-border activities in the financial sector” was established. One of the objectives of this Memorandum is enabling Swiss banks with cross-border customer relations to a simplified market entry in Germany, similar to the institutes of the EEA region.

However, this method put forward for the simplified market entry could not be applied yet, although the political will to establish the process was there. Nonetheless, the specific guidelines, which laid down the obligation for banks and the role of the FINMA and the BaFin in the practical implementation and a common understanding on the application of the money laundering law had yet to be completed.

Since July 4, 2015 all the conditions are now met and Swiss banks can take the so called “simplified exemption procedure” at BaFin before engaging in business in Germany in the future. In particular, no Swiss bank has to involve a locally active German / EEA bank anymore.

New 5th edition of Banking Business in Germany is due for 2016

As time goes by …

Although it seems to me as if the 4th edition of Banking Business in Germany was finalised only yesterday: The regulatory pace is still high and changes the framework of the financial services market day by day. So the authors from Association of Foreign Banks in Germany (Verband der Auslandsbanken in Deutschland e.V.) and PwC will convene once more over the next months in order to implement the latest developments into a new 5th edition of this practical guide for foreign banks establishing a subsidiary or a branch in Germany.

So I would like to encourage you to send in the comments below your feedback on the current 4th edition as well as your suggestion for anything we should take into consideration when we start to make up our minds on the content for the new 5th edition of Banking Business in Germany.

The new 5th edition is due for 2016.

Calculation of the contributions to the German deposit guarantee scheme – Overview and preview of the new contributions regulation

When establishing or acquiring a bank in Germany, a regulatory business plan must be provided to the German Federal Financial Supervisory Authority which contains, amongst other things, the expected costs. These costs include the mandatory contribution payments to the German deposit guarantee scheme Entschädigungseinrichtung deutscher Banken GmbH (EdB).

As of recently, the contributions to the EdB (these include non-recurring/one-off payments, annual contributions, special contributions, special payments) are no longer calculated according to the Deposit Guarantee Scheme and Investor Compensation Act (Einlagensicherungs- und Anlegerentschädigungsgesetz – EAEG) in conjunction with the EdB contributions regulation (EdB-Beitragsverordnung – EdBBeitrV). As part of the implementation of the Directive 2014/49/EU of the European Parliament and Council of 16 April 2014 on deposit guarantee schemes (DGDS), the previous Deposit Guarantee Scheme and Investor Compensation Act was “split” into the Deposit Guarantee Scheme Act (Einlagensicherungsgesetz – EinSiG) and Investor Compensation Act (Anlegerentschädigungsgesetz – AnlEntG). The Investor Compensation Act secures the liabilities from securities transactions whereas the Deposit Guarantee Scheme Act (EinSiG) secures the deposits.

The contributions of the CRR credit institutions are now calculated according to the EinSiG in conjunction with a new contributions regulation yet to be released which will contain the specific calculation methods (like the previous EdB contributions regulation). The general contribution model consisting of annual contributions, non-recurring/one-off payments, special contributions and special payments shall remain unchanged however.

A transitional regulation applies to the annual contributions for the calculation period 2014/2015 (1 October 2014 to 30 September 2015) which shall still be calculated according to the previous provisions.

In order to ensure consistent application of the DGDS, the European Banking Authority (EBA) was supposed to issue guidelines to specify methods for calculating the contributions to deposit guarantee schemes. Accordingly, on 28 May 2015, the EBA issued Guidelines on methods for calculating contributions to deposit guarantee schemes (EBA/GL/2015/10). They recommend specific and in detail the methods to be used for calculating the annual contributions. It remains to be seen how the expected contributions regulation will look like. However, considering the implementation history, it can be expected that the new EdB contributions regulation will mostly adopt these guidelines.

The guidelines recommend the calculation of the annual contributions of an institution which is a member of the deposit guarantee scheme according the following formula:

Annual contribution of a member institution = Contribution rate x Aggregated risk weight for member institution x Covered deposits for member institution x Adjustment coefficient

There is the possibility that the annual contributions will be higher in the future. Furthermore, it is unclear how the non-recurring/one-off payment, which is mandatory when being allocated to the EdB, will be calculated. This payment could also be higher in the future.

The deposit guarantee schemes, including the EdB, shall reach a target level of 0,8 % of the amount of the covered deposits of its members.

As soon as the new contributions regulation is available, we will provide you with an update here so that you will be able to determine the amount of the contributions for the target figures in the regulatory business plan.


SSM licensing procedure – first impressions

On November 4, 2014, the Single Supervisory Mechanism (SSM) became effective. It entrusts the European Central Bank (ECB) with the final approval of a credit institutions licence application. Here some first impressions from one of the SSM licensing procedures currently on the way:

Theory and practice of an SSM licensing procedure

While the corresponding EU-provisions describe ECB’s involvement in an SSM licensing procedure as having 10 (20) working days for its final approval once the national application procedure came to a positive preliminary result, the practice is rather different. In reality, ECB will be involved in an SSM licensing procedure from the first day the applicant approaches the national competent authority (the national regulator). Thereafter, ECB and the national regulator will liaise closely. The national regulator will remain the first point of contact for the applicant in the daily operations of the licensing procedure. However, ECB will join the meetings with the applicant once the application is filed.

Learning by doing

Beside this basic approach, ECB and national Regulators seem still busy with establishing their internal procedures and aligning them with each other. ‘Learning by doing’, sometimes paired with ‘try and error’, seems to be one of the best practices currently used. As an example, we experienced a situation where the national regulator cancelled a meeting for preparing the application on short notice by ECB. We were told that ECB would not allow any bilateral meetings between the applicant and the national regulator. We found such strong influence of ECB at this stage rather surprising. Especially so, since the application was not filed at that moment and, thus, the SSM procedure had not even started. Obviously, also our contact persons at the national regulator were baffled by ECB’s approach: They struggled in this situation to explain their next steps. A week later we were informed that there was a misunderstanding between the national regulator and ECB: ECB thought the application had already been submitted.

Digitalisation of application to come?

We also had the chance to have a first glance at the web portal which ECB currently develops for the national regulators to submit information on the application during the SSM licensing procedure. It seems that currently there is a lot of data keying expected from the national regulator’s staff. Maybe over time this will lead to a boost in digitalisation requirements regarding the format of an application.

It will be interesting to see which further usance for the SSM licensing procedure will develop from this ongoing liaising process between ECB and national regulators.

Our new Brochure about the regulatory market entry to Germany – This is how you can clear the regulatory hurdles to starting up your banking business

The desire to operate a bank (deposit-taking credit institution) is one of those projects that should be prepared carefully well in advance. In Germany, the banking sector is subject to comprehensive and stringent regulations – which is why it is important to have in-depth knowledge of these regulations and include them in the planning. In Germany, in general there are four possible approaches for the market entry in the banking sector. Your company can establish or acquire a bank or, by using the European Passport, set up a branch or provide cross border services.

Our new Brochure provides information on the regulatory requirements, which have to be considered during the different procedures, as well as the hurdles that must be overcome during the process.


The new European Single Supervisory Mechanism (SSM)

The introduction of the Single Banking Supervisory Mechanism (SSM) led to a substantial shift of supervisory functions from BaFin to ECB. Since November 4th 2014, ECB is not only the competent authority for the final decision within licensing procedures of deposit-taking credit institutions, the assessment of intended acquisitions or disposals of significant holdings in deposit-taking credit institutions but also amongst other things for supervising significant deposit-taking credit institutions. Thus, the new SSM is a first significant step towards unified supervisory practices in the European Union.

Regarding this topic, see also our article from April 9th 2015.

Banking Business in Germany, 4th edition – now available

We did it again: The 4th revised edition of “Banking Business in Germany” is now available.


Also the new edition was developed in close cooperation between the Association of Foreign Banks in Germany (Verband der Auslandsbanken in Deutschland e.V.) and PwC.

The book’s subtitle tries to explain its ambition in one short sentence:

“A practical guide for foreign banks establishing a subsidiary or a branch in Germany”

True. But actually the book covers much more: It presents a current overview of the economic, regulatory, legal and tax framework that applies to credit institutions and financial service institutions in Germany.

Due to the current numerous developments throughout the financial market it was necessary to shorten the interval for the new edition from four to two years in order to keep up to date. Especially the chapter on prudential supervision in German got more or less completely re-written. The book now also comprises a new chapter regarding the ‘Minimum Requirements for Risk Management (MaRisk)’ published by the German regulator Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). Since regulation is not likely to stop here, you can expect the 5th edition by 2016.

With so many new things to tell, we were concerned that the book might lose its character as a concise guide and become simply to voluminous. We therefore managed to enhance the book’s focus throughout the chapters. In addition, you find now a subject index for ease of use.

The book is available as paperback or e-book.

I hope you enjoy reading the book and look forward to receive your comments.

License procedure of AIFM under KAGB: Experience from the first months

Nearly half a year went by since the Kapitalanlagengesetzbuch (German Investment Act; “KAGB”) entered into force in July 2013.  Time for a first resume of the issues which crystallised in the due course of the license procedures for Alternative Investment Fund Managers (“AIFM”) since then.

Capital requirements and regulator’s usance in this area

While most of the draft applications complied with the general capital requirements pursuant to section 25 KAGB, it was sometimes necessary to remind of existing regulator’s usance in order to avoid otherwise predictable feedback by the regulator on this issue.  Occasionally applicants omitted that the volumes requested by section 25 par. 1 and 4 KAGB are minimum requirements, which can be missed, especially in case of starting losses.

Also it must be recognised that the regulator expects a sustainable business case:  This expectation includes usually that the own funds necessary to cover the starting loss were already provided by the initial capital contribution. Any additional capital contribution during the planning period of the planned figures filed with the application should therefore be avoided.

Appropriateness of the managing directors

As in all regulatory license procedures, the regulator ascribes also under the KAGB highest importance to the reliability and competence of the managing directors.

The regulator turns its attention especially to whether the approved business experience of the managing directors covers all types of assets and funds applied for. In single cases even two managing directors for each type of asset/fund were requested. Similar to the rules under the former Investment Act, the regulator requests also under the KAGB a corresponding restriction of the license application and thereby the later license to individual types of assets/funds. Especially in case of expansive business models the scope of license should therefore be considered carefully.

However, regarding the managing directors’ reliability the regulator seems rather pragmatic: Initially there were concerns that especially managing directors from the former unregulated business of closed funds could, due to their “insolvency experience” gathered there, would receive intensive feedback from the regulator regarding their reliability. In the current practise, however, only few remarks were recorded. The same applies regarding the number of additional activities due to parallel managing director positions in the individual AIF-companies, where also only few enquiries were raised; however, many managing directors already waived such parallel positions in anticipatory obedience.

Organisational requirements

With regard to the business organisation of the AIFM, the regulator especially picked up planned outsourcing arrangements. The transformation of existing business models usually involves either to add the AIFM as a most confined extension to the existing structure or the existing organisation is transferred to the new licensee thereby retaining a minimum structure for settling the unregulated former business which enjoys grandfathering. In both cases the smaller unit usually receives services from the bigger organisation under various outsourcing agreements. It was not always ensured that the regulated AIFM must be vested with appropriate authority to give directives and monitoring rights. In some case the unregulated unit was even designed as a fall back solution for the rather small organisation of the AIFM. The regulator did not appreciate such approach in the licensing procedure.

General observations

The license procedure takes usually more time than most of the applicants were expecting. Some applicants filed their applications already in July and still await the end of their license procedure. During this time some applicants felt being subjected more restrictive requirements compared to other license applications. At time one could get the impression that the coordination process between the regulator’s individual staff in charge for the application is still in an early stage. It remains to be seen how the regulator’s practise is going to even out. This would be helpful since another wave of applications can be expected to be filed during the now starting second half of the grandfathering period.