Politics

BaFin tests banks’ Supervisory Board members

Since the Bundestag tightened up the credit industry in summer, the Federal Institution for Financial Services Oversight (BaFin) has been testing the competence of Supervisory Board members of German banks. The new powers may mean that banks’ Supervisory Board members are dismissed, or even barred from so working. Currently ten dismissal proceedings are in hand, stated the head of the oversight organization, Christoph Crüwell. Initially, BaFin was merely hearing those concerned. Crüwell however expects those involved perhaps to resign voluntarily. One of the bank Supervisory Board members tested is accused by the panel of understanding too little about banking business; three others have too many Supervisory Board posts. With the remaining six, the Bonn authority doubts their reliability. If along with his post a Supervisory Board member has a credit with the bank, according to BaFin there is a conflict of interest.

BGH blocks professional claimant

In 2007 Frankfurt Regional Court had already ruled that the action for avoidance by professional claimant Klaus Zapf and his lawsuit firm Pomoschnik against Nanoinvest AG (today Real Estate International) was contra bonos mores. The court then sentenced him to pay compensation for abuse of law. Zapf had demanded 3,500 option rights on new Nanoinvest shares to withdraw his lawsuit and those of four fellow plaintiffs. The court ruled that 38 options each would be appropriate. On appeal, the 2009 ruling was confirmed by Frankfurt Higher Regional Court. Now the Federal Court of Justice (BGH) has rejected Zapf’s appeal against non-admission of further appeal. That makes the original ruling unappealable. How much money the removal-firm owner will have to pay Real Estate International is for the moment unclear.

New financial oversight in the EU and in Germany

In mid September the European Parliament agreed to the new arrangements for financial oversight in the EU. While the model now adopted means that from the beginning of 2011 national watchdogs will continue to operate in day-to-day business, for the first time national financial oversight will if necessary have to follow instructions from the three new EU authorities. These are the EU Banking Authority (EBA) in London, the European Securities and Markets Authority (ESMA) in Paris and the EU Insurance and Occupational Pensions Authority (EIOPA) in Frankfurt. The new authorities, each with a director and 60 to 70 employees, can give banks, exchanges and insurance companies direct instructions in crises and emergencies, bypassing national watchdogs. The individual States can veto EU decisions only if they infringe their budget sovereignty. Additionally, the EBA will in future regularly subject banks to stress tests, and the ESMA take charge of licensing rating agencies, as well as being able in emergencies to ban certain derivatives, or trading techniques like short-selling. To supplement the new authorities, a risk board to signal impending dangers to the financial system. The European Systemic Risk Board (ESRB) will be set up as an agency under the European Central Bank, though able to make only non-binding orders. The board is to have central bankers and academics on it. The ECB President will initially head the body for five years. After a review it may also be possible for a non-Euro State such as Britain to take over the chair. On the model just adopted, the EU has abandoned a unitary super-watchdog.

After the rearrangement at the EU level, a new oversight system for Germany is also crystallizing out. After the initial attempt by the black-yellow coalition in June had to be postponed because of disagreements between coalition parties FDP and CDU, Federal Finance Minister Wolfgang Schäuble indicated in September that he could imagine a similar model for Germany to the one at EU level. This would make the Bundesbank responsible for the stability of the system, and BaFin for specific individual cases. In general, Schäuble rejects having the Bundesbank centralize all financial oversight, with BaFin’s divisions falling under the Bundesbank’s umbrella. Schäuble did not set out any concrete timetable for the new arrangements in Germany.

Basel III ready for decision

So that in future it will no longer be the taxpayer who has to come in to rescue banks, the finance ministers of the G20 countries are likely at their November meeting in Seoul, South Korea, to adopt stricter rules for credit institutions. The central bankers and banking watchdogs of 27 States initiated the draft in September. The new arrangements, known as Basel III, provide that banks will in future have to keep six percent of their risk-weighted assets as core capital instead of the current four. The so-called hard capital reserves should be 4.5%. On top of this will be a buffer for bad times of a further 2.5%. Individual countries can additionally set a further buffer of 2.5%. The rules are to be introduced gradually from 2013 until the end of 2018. It is expected that banks will in future retain profits, cut dividends and place capital increases on the market in order to strengthen their capital reserves.

For German banks too the new rules mean that they will have to expand their equity capital by 2019. A confidential Deutsche Bundesbank study has estimated the financial requirements for this at 90 billion euros, with the ten biggest German institutions alone needing €50 billion, says the Bundesbank. The Federal Association of Public Banks in Germany (VÖB) criticized Basel III as a regulatory leap in the dark. The arrangements would immensely shrink credit-providing possibilities and lead to a credit squeeze on small business.

EU wants more Corporate Governance

Many Corporate Governance rules are voluntary in nature and not equipped with legal force. The EU Commission thinks so, according to the Green Paper on Corporate Governance in Financial Institutions and Remuneration Policies presented in summer by the Commission, seeing it as one of the causes of the inadequacies that emerged during the financial crisis. According to EU director Pierre Delsaux, there was too little communication between those involved in the financial firms and the oversight authorities. The EU Commission wishes in this connection to reveal proposals for the composition of the bodies, the duration of appointments and qualifications for Supervisory Board posts.