Politics

Schäuble to ban short-selling

Germany’s finance minister wants to ban naked short-selling by law, and regulate covered short-selling more tightly. Transparency measures are to be introduced applying to all shares traded on a regulated market. An electronic information and disclosure system is to guarantee that those under disclosure obligations are identified and sanctions threatened where disclosure obligations are infringed. To prevent investors “creeping up”, i.e. building up major voting-rights positions without disclosing this, disclosure obligations under securities trading law are to be expanded. Additionally,  Schäuble wants investment consultancy on products on the grey capital market in future to meet the requirements of the Securities Trading Act, so that consultancy records must be kept and commissions disclosed. Financial services watchdog BaFin is to be able to impose fines for bad advice or failure to disclose commissions. Investment advisers must also be registered with BaFin and submit indications on consultants’ qualifications and experience. For repeated, sustained offenses, the Bonn authority is in future to be able to impose fines and order consultants no longer to be employed in an investment consultancy for a set period. Also, to prevent open real estate funds from not meeting their trading-session buyback obligation, a two-year minimum holding period is to apply to all investors. On top of this are periods of notice that may lie between six and 24 months. The shorter the notice, the more liquidity the funds have to set aside.

BaFin has to make disclosures

The Hessen Administrative Court (VGH) decided on appeal in March that financial services watchdog BaFin had to open the files on a bank it was monitoring in connection with a civil trial. In the specific case, a private person wanted to proceed against a credit institution that had mediated failed speculative transactions. The plaintiff accordingly asked BaFin to see the relevant documents, but the Bonn authority refused on grounds of business secrecy. The Hessian court’s unappealable ruling that has now been issued is based on the Freedom of Information Act of 2006 guaranteeing all citizens the right to see personally relevant documents of federal authorities. According to the ruling, the court now has to decide whether the BaFin documents contain information that requires secrecy to be kept. The plaintiff will not for the moment be allowed to see the documents. Even before the latest ruling, BaFin had several times refused to allow citizens to see documents, but then after several lost judgments in first instance ended by eventually giving them out. It would, however, itself decide which bits to black out or keep back from the plaintiff. In general, the Bonn financial watchdog fears institutions might suspend their voluntary collaboration with it if they could no longer be sure confidential data would not be given out.

New structure for oversight

The governing coalition wants to set up a holding company under the Bundesbank’s umbrella consisting of three pillars: financial services watchdog BaFin, the Bundesbank and the special financial-market stabilization fund SoFFin. On this model, BaFin is to take on all oversight of banks, insurers and securities trading, thus taking over the bank supervision that has hitherto been with the Bundesbank. The Bundesbank, minus its banking oversight, would then be the second pillar, with as its task the core business of a central bank. As the third pillar, SoFFin could be expanded into a permanent crisis fund for banks and insurers. The holding company is to be headed by a board, chaired by Bundesbank head Axel Weber and with the BaFin and SoFFin chairs also on it. The reform of oversight is to be brought before the Bundestag before the summer break.

New EU capital-market rules

At the end of this year, the EUs new internal market commissionaire Michel Barnier is to submit a draft law redefining bank regulation. On disputed points, like indebtedness limits or liquidity standards, individual governments and financial institutions must still be heard. By the end of 2012 the new regulations based on the Basel II proposals are to enter into force. The core of the new rules is a set of fixed liquidity buffers that banks must in future maintain in the form of easily saleable assets. Pfandbriefe and corporate bonds are to be included among these. Additionally, strict requirements are to be placed on the quality of equity capital. To put a limit on excessive indebtedness of banks, a maximum leverage ratio in relation to the balance-sheet total is to be provided for. Here it is not yet clear whether there will be a binding index or only one that will act as an alarm signal to monitors. Stricter core-capital provisions will according to the draft better secure the relevant counterparty’s default risk in relation to derivatives, pension transactions and security transactions. Derivatives traded off exchange are to be cleared through central counterparties to cushion counterparty default. Additionally, in good times banks are to build up capital buffers for poor times. By contrast with the US, the EU is not to set a size limit for banks. However, Europe-wide regulations are to set standards for credit provision.

A new levy on banks

The Federal Government wants the new special levy on banks to bring in around a billion Euros. Through this instrument, the government wishes to make the financial sector share part of the damage caused by the financial crisis. The money is to be administered by the special fund for financial market stabilization (SoFFin).

As well as the bank levy, the cabinet also decided that in future systemically relevant parts of a failing bank can be hived off and transferred to a “bridge bank”. To flank this, a reorganization procedure for credit institutions is provided for, to be able to restructure banks. To prevent a bank’s collapse, its restructuring is to be achieved by negotiation, and current insolvency law is to be extended for this purpose. Additionally, the existing five-year statute of limitations for misconduct by bankmanagers is to be doubled to ten years. The draft law is to be worked out by the Finance and Justice Ministries before the summer break.

Ackermann’s pay under fire

In August last year, the Act on Appropriateness of Executive Remuneration came into force. But if German trade union federation (DGB) board member Dietmar Hexel is to be believed, it has had little effect. Particular criticism goes to Josef Ackermann, who a year after his voluntary waiver of bonus in 2008 is to receive €9.6 million in pay for 2009, €8.2 million of it in bonus payments. Hexel, also a member of the Government Commission on Corporate Governance, lobbies the criticism that the sheer size of such pay can hardly be justified to citizens in an economic crisis probably caused by the banks. “Any pay over 2 million has nothing more to do with performance. It is a status symbol of a new managerial feudalism,” says the DGB expert.

Last year, with group losses of 4.8 billion, the Swiss Ackermann still received €1.4 million. The bank’s eight-member board took a total of just over 7 million euros in 2009, as against 4.5 million the previous year. As from this year, banks must have their executives’ pay reviewed by a remuneration committee on which there should be representatives of employees in every sector. While Ackermann is again the undisputed number one for pay in the German economy, RWE CEO Jürgen Großmann at 7.2 million and Siemens CEO Peter Löscher at 7.1 million are also receiving superlative pay. Daimler CEO Dieter Zetsche took pay of €4.2 million for last year, which ended with losses of €2.64 billion; in 2008 he got €4.8 million. In general, Supervisory Board responsibility in connection with executive remuneration has also increased. Deutsche Post is taking account of this by doubling annual remuneration for its Supervisory Board members in 2010, to €40.000.

EU regulates short-selling

The European Securities Regulators Committee (CESR) is to curb short-selling by uniform rules. In short-selling speculators borrow shares which they then sell and buy back at a lower price. They are thus betting on falling prices, and may accelerate this. To limit this practice, the CESR wants to insure that investors selling 0.2% of a firm’s share capital short must disclose this to oversight authorities. At 0.5% the public must be informed. Germany’s financial services watchdog BaFin has announced that rules to this effect also apply in Germany as from 25 March until 31 January 2011, though only for the shares of Aareal, Allianz, Generali Deutschland, Commerzbank, Deutsche Bank, Deutsche Börse, Postbank, Hannover Re, MLP and Munich Re. Since the start of the year, short-selling is in general allowed again in Germany.