The German Financial Market Stabilisation Act (FMStG) | Practical Law

The German Financial Market Stabilisation Act (FMStG) | Practical Law

The German Financial Market Stabilisation Act (FMStG)

The German Financial Market Stabilisation Act (FMStG)

Practical Law Legal Update 7-384-8676 (Approx. 3 pages)

The German Financial Market Stabilisation Act (FMStG)

by Freshfields Bruckhaus Deringer LLP
Published on 05 Feb 2009Germany


The German legislator passed the Financial Market Stabilisation Act in response to the financial crisis. The Act provides for a fund to assist financial institutions and boost liquidity, further measures to compliment the fund and ensure its effectiveness, and temporary amendments to German banking, insurance and insolvency laws.
The German legislator passed the Act on the Implementation of a Package of Measures to Stabilise the Financial Market (Financial Market Stabilisation Act (FMStG)) in response to the global turmoil caused by the financial market crisis.
The FMStG introduces measures to overcome the existing liquidity shortages and to stabilise the German financial market. It was enacted through the legislative procedure in less than a week. After consent was given by the German Federal Parliament (Bundestag) and the German Federal Council (Bundesrat), it was published in the Federal Gazette (BGBl. I, No. 46, p. 1982) on 17 October 2008 and entered into force on 18 October 2008.
The FMStG has three main parts:
  • Article 1 provides for the establishment of a Financial Market Stabilisation Fund (Fund).
  • Article 2 contains provisions designed to facilitate the measures to be undertaken by the Fund.
  • Articles 3 to 6 contain temporary amendments to the German Banking Act (KWG), the German Insurance Supervision Act (VAG) and the German Insolvency Code (InsO).

Article 1 of the FMStG

Article 1 of the FMStG contains the Act on the Establishment of a Financial Market Stabilisation Fund (Financial Market Stabilisation Fund Act (FMStFG)) (Fund Act). The Fund Act is complemented by the Regulation on the Implementation of the Financial Market Stabilisation Fund Act (Financial Market Stabilisation Fund Regulation (FMStFV)), dated 20 October 2008.
The Fund is called Sonderfonds Finanzmarktstabilisierung (SoFFin) (Financial Market Stabilisation Special Fund) and is a special trust belonging to the Federal Republic of Germany. It is designed to create the basic conditions to overcome the liquidity shortage and to strengthen the capital base of financial market participants (for more details, see the SoFFin website). Financial sector enterprises (credit institutions, investment firms, investment companies, insurance companies, pension funds, operators of stock or derivatives exchanges, and certain financial holding companies) can benefit from the Fund's measures.
The Fund is generally subject to the Federal Ministry of Finance (BMF). However, the BMF transferred, under public law, the management of the Fund to an agency established by the Fund Act (Financial Market Stabilisation Agency). This agency has been set up as a dependent agency at the German Federal Bank (Deutsche Bundesbank). An inter-ministerial committee (Steering Committee) decides on the general principles, substantial obligations and matters of particular importance. The Federal Republic of Germany is directly liable for the Fund's liabilities.
There are three types of stabilisation measures in the Fund Act:
  • Guarantees (guarantees for debt instruments and other liabilities of financial sector enterprises that have a maturity of up to 36 months).
  • Recapitalisation (the Fund's participation in enterprises' recapitalisation measures).
  • Assumption of risks (acquisition of risk positions acquired before 13 October 2008, including the corresponding collateral).
The latter two measures are only to be granted in cases in which guarantees would not be sufficient. The remuneration to the Fund for all stabilisation measures must be adequate and in line with market conditions. The beneficiary financial sector enterprises are subject to requirements to ensure a sound and prudent business policy. In the case of a recapitalisation or an assumption of risk, these requirements include:
  • The limitation of the remuneration for board members and managing directors (a total remuneration of more than EUR500,000 per annum is, as a rule, considered excessive).
  • The suspension of dividend distributions to shareholders other than the Fund.

Article 2 of the FMStG

Article 2 of the FMStG contains the Act on the Acceleration and Simplification of the Acquisition of Shares and Risk Positions of Financial Sector Enterprises by the Fund (Acceleration Act). This generally provides for the waiver of certain provisions in corporate and capital markets law in favour of the Fund's stabilisation measures.
In corporate law, for example, the Acceleration Act establishes a statutory authorised capital of up to 50% of the company's share capital. Such authorised capital may be used by the management board, subject to the approval of the supervisory board, for a recapitalisation through the Fund without a shareholders' resolution. The procedures for capital increases, including the participation of a shareholders' meeting, are facilitated. Ordinary shares or preference shares may be issued to the Fund (non-voting preference shares, whose preferred dividend is not payable in arrears, may also be issued by derogating from the Stock Corporation Act).
Furthermore, the Acceleration Act provides for procedural simplifications for the issue of profit participation rights and for silent participations in addition to several waivers regarding provisions of capital markets law, such as the Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)) releasing the Fund from the obligation to make and publish a mandatory takeover offer (section 35, Securities Acquisition and Takeover Act (WpÜG)).
Also, the transfer of assets to the Fund is privileged. The Acceleration Act provides, among other things, that transfers of risk positions and collateral to the Fund are not subject to appeal under insolvency law and that barriers to cession and transfer under civil law do not preclude the effectiveness of transfers to the Fund.

Articles 3 to 6 of the FMStG

Articles 3 to 6 of the FMStG provide for amendments to the German Banking Act (KWG) and the German Insurance Supervision Act (VAG) regarding the special commissioner's liability for damages, as well as to the German Insolvency Code (InsO) regarding the definition of "over-indebtedness". These amendments expire at the end of the year 2010.

Further reading

To read more about the German Financial Market Stabilisation Act, click here.