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Federal Government considers introduction of levy for banks (Bankenabgabe)
Practical Law UK Legal Update 5-502-2023 (Approx. 3 pages)
Federal Government considers introduction of levy for banks (Bankenabgabe)
by Ingrid Kalisch, Simmons & Simmons
| Published on 04 May 2010 • Germany |
This article is part of the PLC Global Finance April 2010 e-mail update for Germany.
Speedread
On 31 March 2010, the German Federal Government adopted basic cornerstones for restructuring banks and regulating financial markets (Cornerstones). The Cornerstones include, among other things, provisions for the introduction of restructuring and reorganisation procedures for systemically relevant banks in case of a crisis, and for a banking levy (Bankenabgabe) which has been extensively discussed recently. The banking levy will provide the funding for a stability fund to cover risks, particularly in connection with the restructuring, liquidation or insolvency of banks.
The German Government aims for an international consensus on steps to be taken as a result of the financial markets crisis and a sharing of the banks in covering future risks. In this context the intended levy to finance coverage of such risks has received most public attention. While it remains uncertain whether an international consensus can be achieved, the German government appears prepared to go it alone if necessary. The Cornerstones are the basis for a stand-alone German solution.
According to the German government the financial markets crisis has demonstrated that failure of system relevant banks can have an impact on the overall financial markets system. As a result of lessons learned from the crisis, it is intended to develop procedures which allow for self-administered restructuring or orderly proceedings for the liquidation of financial institutions. The aim is to avoid unstructured insolvencies (as in the case of Lehman Brothers) and to ensure that the "good part" of a bank in trouble can permanently survive and the financial system is not jeopardised.
In a market economy, primarily the shareholders and management are responsible for the restructuring of their enterprises. The new reorganisation proceedings would provide the framework for collective negotiations and avoid the blocking power of individual shareholders.
The levy that is intended to be imposed would ensure that the costs rescuing system relevant banks is not only borne by the taxpayers, but rather by the banks according to their systemic risk.
All German credit institutions would pay the levy. (The Cornerstones suggest that financial service institutions and EEA branches of foreign banks are outside the scope of the levy; however, the respective wording of the draft act has not yet been determined.)
Systemic risk would be determined by the amount of liabilities of a given credit institution and how it is linked with and integrated in the financial markets, as well as other relevant indicators.
These parameters would also determine the burden to be shared by foreign banks operating a subsidiary credit institution in Germany.
It is expected that the German Ministry of Finance will deliver further details in due course.
The intended levy is highly disputed and also gives rise to constitutional concerns. The levy is to be considered as a special levy with a financing function (Sonderabgabe mit Finanzierungsfunktion). Under German constitutional law, such levies are only permissible within certain quite narrow parameters:
- The levy must serve a purpose which goes beyond the mere provision of financing for a certain purpose.
- The levy must be imposed on a homogenous group.
- Such group must be connected or be close to the purpose served by the levy and as a consequence have a certain financing responsibility in relation to the purpose.
Critics of the Cornerstones argue that:
- The levy is not suitable to provide the intended risk cover – over a period of 25 years the fund's capital would amount to only EUR27.5 billion, a sum which in the present crisis has been invested in the rescue of only two banks.
- The level of funds suitable to cover a systemic crisis could not be covered by the levy since it would then burden banks such that they would no longer be in a position to provide funding and financial services to market participants at acceptable conditions.
- German banks do not constitute a homogenous group; and nor are they the appropriate group to cover the risk, because, for example, at present it is not contemplated to impose the levy on insurance companies or other financial markets participants.