With the adoption of the Regulation (EU) framework, the founding of the European Banking Authority (EBA), and the development of the Single Supervisory Mechanism, German banking supervision has experienced significant changes. German rules and regulations and directly applicable EU regulations have developed a sound legal foundation for banking supervision. While the functional structure between the Federal Financial Supervisory Authority (BaFin) and the Bundesbank concerning the management of Less Significant Institutions (LSIs) is well established, the blueprint for the Single Supervisory Mechanism is evolving. There are still unknowns about the particular functional roles of each authority in the new surroundings (Pokorny et al., 2019).
The ambiguities reflect the complicated legal and operational structure but do not influence the market’s or authorities’ overall understanding of duties. The three supervisory agencies operate independently because the government or industry does not control them in their supervisory judgments. However, government and industry can exert indirect influence over BaFin’s supervisory aims through the budget approval process and the Federal Ministry of Finance’s necessary endorsement of BaFin’s internal organization and structure (MoF). The ECB’s decision-making process is complex, inhibiting the efficiency and punctuality of day-to-day regulatory decisions.
German law was updated to incorporate CRD IV and CRR, and the technical, regulatory standards produced by EBA and published by the European Commission were immediately applicable. The ECB also assumed direct supervisory authority over 21 of Germany’s largest banks, including one G-SIB. The most recent FSAP (2011) concluded that banking system supervision is generally sound, although there are significant areas for improvement—while some of these issues have been addressed, others persist. Recommendations were provided to strengthen the framework for substantial acquisitions, supervisors’ assessment of asset quality, risk management plan, capital formulation, liquidity risk mitigation, risk monitoring, stress testing capabilities, and supervisory remediation promptly (Pokorny et al., 2019).
Additional progress has been made in bolstering resources and knowledge for on- and off-site risk supervision, providing banks with other guidelines on supervisory anticipations for risk mitigation, and establishing an internal ladder of actions to facilitate more timely and consistent supervisory response. Very little progress has been made on guidelines concerning reporting to the MoF, related party exposures, political risks, and topics that are primarily governed by the EU-wide framework, such as capital requirements, significant acquisitions, and supervisory reporting. While the legal and regulatory framework is extensive, considerable gaps exist that impair corporate governance and control efficiency. While the German Banking Act (KWG) establishes standards of fitness and propriety for supervisory and management members of the board, defines the senior management board’s supervisory powers and the management board’s functions, governance is centered on the governing council.
Coordination and integration of these global teams pose several operational and motivational issues that will require long-term resolution by the SSM. For the more petite German SIs, the transition from local to ECB supervision appears to have entailed a significant shift in terms of reporting, minimum level of supervisory participation, intrusiveness, and supervisory obligations – including the capital increase arising from the SREP procedure (Kuo et al., 2019). For larger SIs that were already subject to extensive supervision, the supervisory approach appears to benefit from improved cross-country perspectives and benchmarking. However, the supervisory reaction seems to have been reduced due to the ECB’s complex decision-making procedures.
Comparison in governance levels.
Due to Germany’s less protected shareholders and the lower cost of control, German investors prefer controlling stakes. Large UK corporations became widely held, while new shareholders managed much higher holdings in large German firms. Wealth limitations become legally binding for UK shareholders, although German shareholders can evade this through pyramids. There are significant distinctions between acquisition by a concentrated shareholder and an acquisition by a widely held corporation (Leonida and Muzzupappa, 2018). In the United Kingdom, the likelihood of the former increases when the business is hazardous, tiny, and underperforming.
Basel 1,2 and 111
The Basel Committee on Banking Supervision (BCBS), is a group of banking watchdogs established by the heads of central banks, introduced the Basal Accords. Basel 1 capital adequacy required banks to keep capital of at least 8% of their determined risk profile. For Basel 2, the capital adequacy ratio is to be sustained at 12.9%. The least tier 1 and 2 capital ratios must be held at 10.5 % and 2% of the weighted risk assets. Basel 111, the capital adequacy requirements required the minimum adequacy ratio whereby banks had to maintain a rate of 8%.
In comparison, the minimum liquidity coverage needed to begin at 70% in 2016 and increase to 100% in 2019. The following measures have been taken to improve the global banking system: More accurate information is available (Lopez, 2022). Investors and regulators will be able to more correctly price “all risks, including systemic ones” in a financial system that is less complex and more transparent than the one in place before the financial crisis. As a result, there is reduced risk—lower levels of procyclical liquidity risk and lower leverage levels in the system. Higher and better-quality capital and liquidity buffers allow financial firms to endure periods of extreme turmoil better and avoid insolvency through more vigorous capitalism. The g7 and g20 are informal clubs of governance that hold annual summits to discuss global importance issues. Due to the 2007 financial crisis, the group has made reforms to improve financial stability. The central bank monetary policy was approached to aid in financial stability. Liquidity challenges and off-balance that lead to huge economic shocks resulted in the introduction of the securitization process to observe the global financial system.
Kuo, C. C., Shyu, J. Z., & Ding, K. (2019). Industrial revitalization via industry 4.0–A comparative policy analysis among China, Germany, and the USA. Global transitions, 1, 3-14.
Leonida, L., & Muzzupappa, E. (2018). Do Basel Accords influence competition in the banking industry? A comparative analysis of Germany and the UK. Journal of Banking Regulation, 19(1), 64-72.
López, J. C. V. (2022). Goals and Summary of Basel 1-2 Marseille in Conference League.| 03/17/2022. PAN, 3, 30.
Pokorny, B., Sotirov, M., Kleinschmit, D., & Kanowski, P. (2019). Forests as a Global Commons: International governance and the role of Germany. Report to the Science Platform Sustainability, 2030, 1-67.