The Federal Cabinet wants to better protect banks from collapse and has therefore passed a law on better crisis preparedness in the German banking sector. The so-called risk reduction law transposes corresponding EU requirements into national law. Among other things, it stipulates that institutions must maintain at least eight percent of their total assets as a loss buffer for emergencies. The economically strong European countries had already agreed on this in 2010 in the Basel III agreement.
This should help banks process surprising losses better and avoid new government bailouts at the expense of taxpayers. The draft therefore also prescribes binding limits for debt. The leverage ratio, which describes the ratio of core capital to liabilities, must be at least three percent. The lower the ratio, the higher a bank's debt is in terms of core capital. According to the Ministry of Finance, an even higher minimum quota of three and a half to four percent applies to internationally systematic institutions.
Response to 2008 financial crisis
The increase in capital and liquidity requirements decided at the European level last year is a lesson particularly from the global financial crisis of 2008 and 2009. Back then, banks that did business with borrowed money ran into existential difficulties. Commerzbank could only be stabilized through state aid; the German state is still involved in the money house.
The bill is now coming to the Bundestag. In terms of content, it corresponds to the banking package decided at EU level in June 2019. The draft was "another important step to take the consequences of the financial crisis," said Federal Finance Minister Olaf Scholz (SPD). The law protects the interests of taxpayers and investors. The banking sector should become "more crisis-proof", said Scholz.
The draft also contains other points, such as an adaptation of the internationally applicable pension regulations to small and medium-sized institutions that focus on lending to small and medium-sized companies. Banks are also obliged to make their refinancing more long-term.