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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. Deposit Insurance in Germany. Introduction

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deposit insurance and financial markets supervision in germany

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

deposit insurance in germany
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
a note on the german banking system
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
the regulatory framework
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.
the rationale for reform
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
methods of supervision
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
the evolution of deposit insurance
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
the private banks deposit insurance fund
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?
the deposit insurance fund cont d
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
additional schemes
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
conclusions
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.
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Thank you for your attention!Dr. Jens-Hinrich BinderContact: Jens-Hinrich.Binder@jura.uni-freiburg.de