Politics

Political decision on bank levy and bankruptcy procedures

In late August the “black-yellow” [Liberal plus Christian Democrat] government set both the long-controversial bank levy and a new bankruptcy procedure for credit institutions going. The model of the bank levy provides for the setting up of a restructuring fund, to be administered by the Financial Market Stabilization Institution (FMSA). Except for insurance companies and investment funds, all credit institutions, including savings banks and cooperative banks, will have to pay into the fund. Both liabilities (less equity capital) and customer deposits will be taxed. The tax rate starts at 0.02% for ten billion Euros and ends at 0.04% for all amounts exceeding 100 billion Euros. The amount of levy, to be paid annually, is capped at 15% of the group’s annual result. Calculations estimate the proceeds of the levy at up to €1.2 billion per year. Through this money the banks are not only to take a share in the course of the crisis but also create a vehicle through which in future money can be made available in critical situations. In the long term the new fund is to replace the Special Fund For Financial Market Stabilization (SoFFin) and to provide credit guarantees for up to 100 billion Euros.

The new bankruptcy procedures decided by the federal cabinet provide for a two-stage model in which large banks networked worldwide can be restructured in crisis situations. In a first stage, in a so-called rehabilitation process, a voluntary insolvency-plan procedure can be brought in. Here, the court can appoint a reorganization consultant responsible for implementing the procedure presented by the bank. At this stage no interference can be made with rights of third parties, including shareholders. In a second stage, systemically relevant parts of the bank can be hived off and transferred to a private purchaser or a governmental bridging bank. The relevant bills are to be passed in Parliament before the end of the year.

EU tightens up oversight over insurance companies

EU financial watchdogs want in future to take closer oversight of insurance companies and financial institutions operating across borders. Following three years of consultations, the Brussels officials want to equip national authorities for the purpose with new rights of intervention in parent companies and holding companies. Some 60 European financial groups are affected by the new regulations, including Allianz. If Member States and the EU parliament agree, the new rules could enter into force as from 2012.

More debts because of new accounting rules

According to the draft new joint accounting standards published in mid-August by the International Accounting Standards Board (IASB) and its US counterpart Financial Accounting Standards Board (FASB), companies are to disclose their leasing and rental contracts in full on their balance sheets as from 2013. In future the beneficial interest and corresponding commitments for utilization of the leasing object will be on the balance sheet, always and independently of the old rules. This means that the commitments to be disclosed by many companies, especially airlines, logistics firms and retail traders, will in future be considerably higher. The debts of DAX groups will increase by €76.3 billion on the new standard, stated Wirtschaftswoche. To date a distinction is drawn between financial and operational leasing, so that leasing rates did not appear on the balance sheet if leases were only for a short period. With the current accounting procedure some 640 billion dollars failed to appear on balance sheets, complained IASB head David Tweedie. Constant leasing rates are now replaced by write-offs on the beneficial interest activated as well as interest costs. This means a predating of expenditure which might mean that the degree of indebtedness of leasing customers could lead to poorer credit conditions. Companies involved are also making the criticism that the new accounting is inconsistent and increases the complexity of final accounts.

Balance-sheet rules should be reformed

Current standards for balance sheets have in the view of various experts helped to bring about the financial crisis. To make annual accounts more transparent and give more weight to sustainability, the International Integrated Reporting Committee (IIRC) has brought together major groups, regulators and auditors together with stock-exchange operators, who with support from the US accounting panel of the FASB and the European IASB wish to renew the regulations. The group is also supported by the four major accounting firms Deloitte, PwC, KPMG and Ernst & Young. Still in 2010, the committee wishes to develop a set of measures which will then be presented to the G20 States in the coming year. As well as the pure figures, comments by management and group management, an overview of executive pay and social and economic indications should also come into focus more. No German companies are part of the initiative.

Bank loans more uncertain in future?

The Basel Committee, responsible for bank regulation worldwide, suggested in August, according to the FTD, that banks should in future be able to give only Tier-2 loans that can in bad situations be converted into shares or written off. Investors could then no longer in the case of future bank loans be able to rely on the rescuing of a bank servicing their loans. The bank representatives have until 1 October to take positions on the proposal.

Consultant liability tightened

The Federal Court of Justice tightened the liability of financial advisers in a ruling in August. To date sellers of closed funds for real-estate or shipping investments rely on the fact that their customers are aware of the risks described in the sales prospectus. The judges in Karlsruhe have now ruled that the sole deciding factor is what the adviser said about the risks in talks. To date, moreover, a three-year statute of limitations applied to consultant liability, running from the date the sales prospectus is handed over. Now with closed funds the clock will start running from the date when the investor hears about the risk in the investment.

Damage compensation in the event of breach of trust is to require proof

In August the German Constitutional Court clarified the requirements for finding a manager guilty of breach of trust. For a verdict, accordingly, the courts must in future put more exact figures to the damage the group’s management have caused. The Constitutional Court accordingly set aside the judgments in the Berlin banking scandal and referred the cases back to the Regional Court. Managers of the Berlin bank were accused of having issued a loan of ten million Euros in the 1990s despite existing risks. The judges in Karlsruhe found that it had not been established beyond doubt that the conduct of the ex managers had actually caused damage to the bank. The decision went differently in the Siemens corruption case: the setting up of slush funds had clearly caused damage to the Munich group. The Siemens judgments accordingly needed no revision. The federal government sees no need to change the existing laws. All that was needed was to clarify an existing act.