On 25 August 2010 the German government endorsed the Draft Restructuring Act (Restrukturierungsgesetz) aiming to provide special rules to save ailing credit institutions. The draft bill introduces:
- a special two-tier pre-insolvency restructuring & reorganisation regime for credit institutions and
- supervisory powers to transfer assets and liabilities held by a system-relevant (meaning "too big or too connected to fail") credit institution to another bank (incl. special "bridge banks") in order to restructure the business of such bank and in order to prevent insolvency.
The Restructuring Act will also set up a new restructuring fund (Restrukturierungsfonds) to finance the measures under the (draft) Restructuring Act. The restructuring fund shall be financed by a bank levy imposed on German credit institutions (incl. German subsidiaries of foreign banks) and German branches of foreign banks which are domiciled outside the European Economic Area (although the latter is not entirely clear from the drafting of the bill).
The German government contemplates the draft bill to enter into force on 31 December 2010/1 January 2011.
The draft contains the following regulations (which complement each other).
Special regime for the restructuring and reorganisation of banks
The draft provides with its restructuring and reorganisation regime for a two-tier procedure which shall create an effective framework for collective bargaining solutions. The procedure will be launched at the initiative of the bank itself and is supposed to enable the bank to manage its crisis self-responsibly. The first stage envisages a restructuring procedure by which financial problems prior to insolvency can be overcome by early and decisive intervention at the level of the credit institution's management. The restructuring procedure opens a wide range of options which are connected to the already existing measures under the German Banking Act (Kreditwesengesetz). Third party rights are not yet affected at this stage.
The reorganisation procedure on the second level is based on the principles of the insolvency plan under the German Insolvency Code but includes some special features: It provides elements which accelerate the procedure and allows not only for interference with the rights of creditors but also for the shareholders’ participation in the proceedings. Moreover, it is expected that the procedure will not be a procedure in which all claims are reduced but a procedure which is regularly used to involve the major creditors. Also, the implementation of the new procedure will not automatically mean the credit institution’s loss of its disposal rights. The central player in both stages of proceedings will be a court-appointed administrator (restructuring or reorganisation administrator) resembling the special administrator under the Banking Act and the preliminary insolvency administrator. He is responsible for the implementation of the restructuring and the reorganisation plan and shall be liable for any misconduct. If the parties are not willing to participate actively in the credit institution’s reorganisation or a reorganisation of the bank does not appear promising for other reasons, then the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin) may immediately launch regulatory intervention procedures. The powers of BaFin to take other actions under the Banking Act throughout the proceedings remain unaffected.
Regulatory instruments for the early intervention and crisis management
Regarding the regulatory instruments, the draft bill is supposed to be a first step to strengthen crisis prevention and to provide incentives for early self-responsible restructurings prior to any bankruptcy. The draft provides for additional powers of BaFin which shall enable BaFin to require and enforce early restructuring steps. BaFin may appoint a special representative and instruct him with all tasks which are appropriate and necessary in the specific situation.
At a second step, the existing statutory instruments to manage the restructuring and orderly liquidation of a failing institution are expanded. It shall be ensured that banking supervision can intervene at any time if a credit institution gets into trouble. To avert a threat to the financial stability, banks' supervisory authorities shall be given the possibility to take the measures required for the stabilisation of the affected institution even without the consent of the concerned institution. This will be particularly necessary if the owners are not willing or able to supply the necessary funds to the credit institution in order to avert a danger to its existence. The draft therefore provides that the assets or part of the assets of a system-relevant bank can be transferred to a private bank or a special "bridge bank" (incorporated and owned by the new restructuring fund) if it is necessary to avert threats for the financial stability and if there are no other possibilities for remedy.
For cases in which insolvency is inevitable the draft provides for additional rules which improve the co-operation between BaFin as financial supervisory authority on one side and the insolvency administrator and the insolvency court on the other side.
Establishment of a restructuring fund for banks
The draft bill also includes a new Restructuring Funds Act (Restrukturierungsfondsgesetz) pursuant to which a new restructuring fund (Restrukturierungsfonds) will be set up to finance all measures under the new Restructuring Act. The restructuring fund shall be financed by a bank levy comprising annual and special contributions to be paid by German credit institutions licensed under the German Banking Act. This covers credit institutions which are domiciled in Germany (incl. German subsidiaries of foreign banks) and German branches of foreign banks which are domiciled outside the European Economic Area (although the latter is not entirely clear from the drafting of the bill). The draft bill exempts German branches under the European Passport in the scope of the Banking Directive (§ 53b of the German Banking Act).
However, there are still discussions going on with regard to the question of which entities should be subject to the bank levy and how the basis of calculation for the bank levy should be structured. Since the bank levy have been suggested as a consequence of a Commission statement of 26 May 2010 no uniform rules apply. This can lead to a double contribution depending on the question which local basis of calculation is relevant for each entity. With regard to the eligible market participants, certain market players take the view that also Investment Firms and Insurance Companies should contribute to the funding; with regard to the basis of calculation, the first proposals, issued by the Federal Ministry of Finance refer to deposits as a benchmark for the calculation. It seems questionable if the current basis is feasible to manage the systemic risks and therefore achieve the lawmaker's aim. Further, those market participants who will be obligated to contribute to the fund will most certainly test this under German constitutional law in fiscal court proceedings.