The recent economic crisis demonstrated the cope of consequences that the unregulated accumulation of risks and vulnerabilities in the banking industry can have for the whole financial system. Hence, the primary purpose of banking supervision in Germany is to guarantee that banking is effective, secure, and doesn’t face any risks.
Overview of German banking regulation
In Germany, the remit of banking oversight is divided between BaFin and the German central bank. Banking oversight doesn’t directly interfere in payment operations conducted by banking entities, however, establishes the regulative and legal rules that must be followed. The German Banking Act sets the legal ground for the regulation of banking businesses and their offers, while the Payment Services Oversight Act is the legal foundation for the oversight of Fintech businesses: payment and e-money institutions.
The German central bank is mandated to monitor more than 1,680 credit institutions, 1,300 financial services institutions, and 100 PIs and EMIs active within Germany, particularly in terms of their solvency and liquidity. Along with the balance sheet guidelines, banking businesses must meet a plethora of obligations in the respect of their organizational structure and administration. While conducting on-site audits, central bank is eligible to review the business operations of the entities and their risk-based approach as a separate point of the audit.
Given the constant amendments to the structure and products in the domain of finances, the demands on banking oversight and the regulative mechanism alter too. Due to this factor, the central bank is engaged at a national and an international level in the current design of prudential regulations. For instance, it contributed to the Revised Framework introduced by the Basel Committee on Banking Supervision adopted in 2004 and to its adjustments agreed upon in 2010 and 2017.
As of now, the Bundesbank plays an active role in effecting these regulatory mechanisms at the EU and national levels. Recognizing erroneous incentives arising from new regulations at an early stage and coping with them with efficient measures will remain to be one of central bank’s main duties in the coming years.
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