Deposit Insurance and Financial Markets Supervision in Germany

1. Deposit Insurance and Financial Markets Supervision in Germany Presentation at the IADI Third Annual Conference, Brunnen 26-27 October 2004 Dr. Jens-Hinrich Binder, University of Freiburg and IFLU Contact: Jens-Hinrich.Binder@jura.uni-freiburg.de

2. Deposit Insurance in Germany • Introduction • A note on the German banking system • The regulatory framework • The evolution of deposit insurance within Germany • The Private Banks‘ Deposit Insurance Fund in particular • Conclusions

3. A note on the German banking system • Key characteristics: • Strong competition in the retail markets • Strong position of Public Savings Banks and Cooperative Banks • Commercial Banks group: • Four large banks (Deutsche, Dresdner, Commerzbank and HypoVereinsbank) • Numerous regional and small private banks • Insolvencies in the past confined to commercial banks

4. The regulatory framework • Prior to 2002: Functions-based financial supervision at Federal and Länder level • Federal Banking Supervisory Authority • Federal Securities Supervisory Authority • Federal Insurance Supervisory Authority • Decentralised Exchange Supervisory Authorities • From 2002: Single Financial Supervisory Authoriy (Bundesanstalt für Finanzdienstlei-stungsaufsicht) … • As a result of a merger of the three Federal bodies … • while exchange supervision continues to be local.

5. The rationale for reform • The need to redefine the Bundesbank‘s position within the regulatory framework versus • Increasing cross-sector activities between financial services providers • The UK model as a standard • Reform primarily institutional with no major amendments to the existing legal framework

6. Methods of supervision • Discretionary powers under the Banking Act (“orders”) and (“directions”) • Administrative moratorium to be imposed by supervisory authority in case of insolvency (§ 46a Banking Act) • Various rule-making powers under the applicable laws

7. The Evolution of Deposit Insurance • The Deposit Insurance Fund • A subsidiary of the Private Bankers‘ Association • Established in 1969 – first scheme in Europe • Reinforced in the aftermath of Herstatt insolvency • Complemented by mandatory arrangements as a consequence of transposition of the EC Deposit Protection Directive

8. The Private Banks‘ Deposit Insurance Fund • Membership voluntary, but most private banks participate • Restrictive entry and membership criteria • Supervision by Auditing Association of German Banks • Significant role in the detection of financial crises • Financing on a mixed ex ante / ex post basis • Debated: an individual right to protection?

9. The Deposit Insurance Fund (cont‘d) • The Fund‘s mandate: • Either payout of insured deposits … • or financial assistance to insolvent institutions. • Generous level of protection: • All deposits of non-banks … • up to 30 per cent of bank‘s liable capital per depositor

10. Additional Schemes • Compensation Scheme of German Banks • Responsible for the provision of minimum protection required by EC law • Less important than Deposit Protection Fund, for most banks continue to participate in the Fund • Compensation Scheme for Public Banks • Institutional assistance schemes for Cooperative Banks

11. Conclusions • The Deposit Insurance Fund as a unique model: • Deviations from international “best practice” • Independent body • Strong de facto influence on prudential regulation and crisis management • Virtually unlimited protection • Seems to avoid adverse incentives • Tailored to the specific market structure. • No interrelation with single financial supervisor.

12. Thank you for your attention!Dr. Jens-Hinrich BinderContact: Jens-Hinrich.Binder@jura.uni-freiburg.de