Meaning of Banking Supervision

To put it bluntly, the banking supervision of a country ensures the functioning of the respective national financial market. Banking regulation and banking supervision are often used synonymously. Strictly speaking, however, banking regulation sets the legal guard rails within which banks operate. The banking supervisory authority ensures that these are complied with. A distinction must be made between two systems of banking supervision within the euro zone. On the one hand, this task lies primarily with the national central banks. The European Banking Authority (EBA), based in London, only develops uniform standards for a harmonious approach. However, the European Central Bank (ECB) will take over control of the banks from autumn 2014.

• Section 6 of the Banking Act (KWG) regulates the tasks of banking supervision in Germany.
• In order to monitor ongoing business operations, it is primarily important to check that a bank has sufficient liable equity capital.
• If a bank violates guidelines or requirements, various sanctions are available.

The tasks of banking supervision

Section 6 of the Banking Act (KWG) regulates the tasks of banking supervision in Germany. It stipulates that banking supervision, in Germany split between the Bundesbank and the Bafin, must counteract possible grievances in the financial services sector. These grievances include events, which

• could jeopardize the deposits of customers entrusted to the banks;
• lead to the fact that the business activities of a bank according to KWG do not exist, or
• can bring considerable disadvantages to the entire economy.

The control of the institutes is primarily based on the type and scope of their business activities. The legal basis for the control is based on the KWG, which aims to counteract possible undesirable developments in advance. The division of tasks between Bafin and the Bundesbank makes the difference between regulation and supervision clear. The Bafin issues the necessary guidelines with regard to the banking business, the Bundesbank monitors their implementation.

The legal basis

In addition to the KWG, there are other legal bases for the regulation and supervision of banks in Germany. These include:

• the Bundesbank Act (BBankG);
• the German Solvency Regulation (SolvV) as the German implementation of the Basel II requirements;
• the minimum requirements for risk management (BA).

Since credit institutions have to meet special requirements for the establishment of a new company, supervision not only relates to the monitoring of ongoing business operations, but also to compliance with the requirements in the case of a new establishment.

The monitoring of the operational business

In order to monitor ongoing business operations, it is primarily important to check that a bank has sufficient liable equity capital. In order to be able to absorb the credit default risk, at least eight percent of the loans granted must be available as equity. Another point is the monitoring of liquidity. The credit institutions must invest their funds in such a way that they are able to pay at all times. The Bafin also checks whether the bank’s internal risk management works sufficiently so that a bank can identify possible errors at any time and take active countermeasures.

Sources of information

On the one hand, the banking supervisory authority examines the annual financial statements. However, since the one-year period is too long to identify possible dangers in good time, the institutes must present monthly IDs. These contain the most important balance sheet figures and the deviations from the previous control period. The reporting requirement is also subject to large loans, million dollar loans and loans to organs as well as investments with a volume of over ten percent. In addition, banks must notify the supervisor of changes in management or the branch network.

Measures to implement

If a bank violates guidelines or requirements, various sanctions are available. These range from fines to the complete closure of a bank. If the management’s ability to run a bank is deemed to be insufficient, the supervisory authority can demand that it be dismissed and replaced by a special representative.