On 15 June 2009, the European Commission launched a public consultation on "Responsible lending and borrowing in the EU". This initiative should be viewed in the context of the Commission's 4 March 2009 Communication "Driving European Recovery", where it undertook to propose measures at EU level on responsible lending and borrowing, especially in the consumer mortgage credit sector.

The consultation covered, among other things, the advertising and marketing of credit products, the information to be provided to borrowers prior to entry into of any loan agreement, ways to assess product suitability and borrower creditworthiness, advice standards, responsible borrowing and issues relating to the framework for credit intermediaries (for example, disclosures, registration, licensing and supervision). The main conclusions of the consultation are summarised below.

The general election on 27 September 2009 marked a change in the composition of the German Government. After the Social Democratic Party (SPD) – who have so far been part of the governing coalition in Germany – lost a considerable share of votes, Chancellor Angela Merkel's Christian Democratic Party (CDU) is likely to enter into a coalition with the Free Democratic Party (FDP) instead.

Both the CDU and FDP have set out their suggestions for future bank regulation in their manifestos. At the first glance, their positions seem to be based on different assumptions:

However, when it comes to substantial ideas, both parties agree on basic points that are therefore likely to become part of the next Government's programme.

Both parties agree that bank supervision, be it on the national, EU or international level, needs to be concentrated in one institution per level. Both parties consider the European Central Bank the most appropriate institution for bank supervision in the EU. On the national level, the German Central Bank (Bundeszentralbank), as opposed to the Federal Financial Supervisory Authority (BaFin), will be solely responsible for bank supervision. Both parties have made their intention to improve the effectiveness of European and international bank supervision subject to international consent.

Both parties are also critical of the role played by rating agencies in the financial and banking crisis. Both demand a separation of the actual rating function from the advisory function often exercised by rating agencies where both parties see a conflict of interest. Both CDU and FDP also mention the possibility of setting up a European rating agency, with CDU furthermore favouring international supervision over rating agencies that should introduce rating standards and supervise their application.

Another point where both parties' manifestos agree is that securities should be more transparent to allow for a more informed assessment of their risk. Moreover, both parties are considering implementing an obligation on institutions that securitise loans to retain a certain share of the loans to stop the institutions from hiding and selling on risks while keeping the profits.

The manifesto of the FDP additionally addresses the issue of insolvency procedures and banks. In the aftershock of the Lehman insolvency, governments struggled to save banks rather than risking even more serious damage to the financial system by letting more banks go into insolvency. The FDP criticises this approach arguing that it fails to punish risky behaviour. Therefore, the FDP is pushing for ways to allow for insolvency proceedings while safeguarding the functioning of the market. The CDU manifesto does not address this issue. However, it has been widely discussed in the recent months and there is little doubt that both parties will attempt to come to a solution on this point as well.

The "bad bank" concept set out in the so-called Bad Bank Act (Gesetz zur Fortentwicklung der Finanzmarktstabilisierung) (Act) (enacted on 23 July 2009)), allows credit institutions and financial holding companies (transferring entity) to transfer specific "toxic" assets to "bad bank" special purpose vehicle (SPV) subsidiaries. In consideration for the transfer of those assets, the bad banks will issue bonds to the transferring entity which will be backed by those assets and which are eligible for guarantees from the German Financial Market Stabilization Fund (SoFFin) if certain criteria are satisfied.

The transferring entities will be obligated to make annual compensation payments to the bad bank during the term of the SoFFin guarantee. Those payments will be calculated as the difference between the transfer value of the toxic assets and the underlying value determined by SoFFin, divided by the number of years making up the term of the guarantee and may only be made from future distributable profits.

If, after complete realisation of the toxic assets, the returns exceed the sum of the annual compensation payments, that positive balance must be paid to the transferring entity for distribution to its shareholders. This procedure triggers several tax implications.

For the shareholders it is now clarified that the annual compensation payments qualify as a "negative dividend" and are not subject to taxation at the shareholder level.

Withholding tax (Kapitalertragsteuer) is only to be deducted as actual distributions are made to the shareholders. On the other hand, a positive balance paid by the SPV to the transferring entity is treated as a dividend payment to the shareholders. It is neither provided by statute nor explained in the reasoning of the law, whether the SPV or the transferring entity are obliged to deduct withholding tax. Currently the German Federal Ministry of Finance is dealing with this question, and according to initial statements in this regard it may be assumed that the transferring entity will in future be obliged to deduct withholding tax.

The annual compensation payments are tax neutral on the level of the transferring entity. Payments of a positive balance qualify as transit items on the level of the transferring entity and are tax neutral as well.

The SPV must observe that the received compensation payments, as well as the returns after complete realisation, must be shown on a separate account. Whereas the received compensation payments qualify as business income, the returns are treated as business expenses up to the amount of the received compensation payments. Exceeding returns which qualify as positive balances are prospectively subject to taxation on the level of the SPV.

Interest expenses of the SPV in relation to the issued bonds are not subject to the 25% add-back provision of the German Trade Tax Act, which is a relief in comparison to the initial legal situation. However, other tax questions are yet to be resolved. For example, the interest barrier rules may still apply to the SPVs. In addition, due to the chronological divergence between compensation payments (income) and depreciation of the fair market value of the toxic assets, tax inefficiencies may occur and have to be avoided by appropriate structuring.