Bundesbank and German Federal Financial Supervisory Authority (BaFin)
The Bundesbank's involvement in banking supervision is due not just to historical evolution but also to the nature of its duties. Although the Bundesbank's objectives and tasks as a central bank are not identical to those of banking supervisors, monetary policy and prudential supervisory aims and activities often overlap or complement one another in the financial sector. This remains true irrespective of the fact that responsibility for monetary policy decision-making was transferred to the Eurosystem on 1 January 1999.
The Banking Act of 1961 assigned responsibility for supervising credit institutions and the subsequent new category of financial services institutions to the Federal Banking Supervisory Office, which was set up as an independent superior Federal authority reporting to the Federal Minister of Economics (since end-1972 to the Federal Minister of Finance) and commenced operations on 1 January 1962.
With the entry into force of the Act concerning the integrated supervision of financial services on 1 May 2002, the Federal Banking Supervisory Office, the Federal Supervisory Office for Insurance Enterprises and the Federal Supervisory Office for Securities Trading were amalgamated together with their respective activities to form the German Federal Financial Supervisory.
Owing to its business relationships with credit institutions, its local presence and its general proximity to the market, the Bundesbank has deep insights into the financial sector and knowledgeable staff qualified to deal with issues relating to the financial market and its stability. It is thus with good reason that Parliament ordained the Bundesbank's involvement in banking supervision in section 7 of the Banking Act and in section 3 of The Payment Services Oversight Act, which refers to section 7 of the Banking Act.
The Deutsche Bundesbank and the new Federal Financial Supervisory Authority (FFSA) have spelled out the details of their respective roles in day-to-day supervision, as laid down by Parliament, in an agreement. This has laid the basis for supplementing the organisational structure within the Central Office Department of Banking and Financial Supervision as well as for the activities of the banking supervisors based at the Bundesbank's Regional Offices. The agreement is designed to avoid duplication of work and boost cost-effectiveness.
Under the agreement the Bundesbank is assigned most of the operational tasks in banking supervision. The functional effectiveness of the supervisory system is optimally supported, in particular, by the Bundesbank's many years of experience in the field of financial markets and payment operations. In the ongoing monitoring process the Bundesbank's responsibilities notably include evaluating the documents, reports, annual accounts and auditors' reports submitted by the institutions as well as regular audits of banking operations. It holds both routine and ad hoc prudential discussions with the institutions. The Federal Financial Supervisory Authority, as the successor to the Federal Banking Supervisory Office, is responsible for all sovereign measures. Only in exceptional cases will the FFSA carry out audits of banking operations, either together with the Bundesbank or on its own.
Through this involvement in supervising individual institutions, the Bundesbank also acquires knowledge about the solvency of its own borrowers which it needs for its central bank functions. This in turn contributes to the stability of the financial system - also in the context of the European System of Central Banks (ESCB). In fact, a marked shift in emphasis has been apparent during the past few years towards strengthening the stability of the financial system. The Bundesbank plays an important role in virtually all areas of banking supervision.
- the issuing of general rules (such as principles and regulations)
- the process of ongoing supervision, with the exception of (sovereign) individual regulatory measures vis-à-vis institutions, which are reserved for the Federal Agency
- prudential audits and
- international cooperation/coordination in the prudential field.
In addition, the Bundesbank plays an important role in crisis management.
The tasks of the Federal Authority are not limited to licensing, monitoring and - if necessary - closing individual institutions. It can also issue general instructions which lay down rules for carrying out banking business and providing financial services and for limiting risks. It can do this by issuing principles and regulations.
The Federal Authority's duties also include solving problems in the banking and financial services sector that could jeopardise the safety of the assets entrusted to institutions, impair the orderly conduct of banking business or the orderly provision of financial services or bring about considerable disadvantages for the economy as a whole.