Regulation Governing the Capital Adequacy of Institutions, Groups of Institutions and Financial Holding Groups (Solvency Regulation (Solvabilitätsverordnung))
The Regulation governing the capital adequacy of institutions, groups of institutions and financial holding groups (Solvency Regulation) of 14 December 2006 was published in the Federal Law Gazette (Bundesgesetzblatt) 2006, part I, No 61, p 2926 ff on 20 December 2006 and came into force on 1 January 2007. It transposes the European minimum capital standards prescribed in the Banking Directive (2006/48/EC) and the Capital Adequacy Directive (2006/49/EC), which together are also referred to as the "Capital Requirements Directive" or "CRD", and the corresponding equivalent requirements of the Basel Capital Accord ("Basel II") into national law. It spells out the details of the adequacy of institutions’ own funds required by section 10 (1) sentence 1 of the Banking Act (Kreditwesengesetz). The definition, the requirements for recognition and the limits for regulatory capital are set out in section 10 of the Banking Act.
The capital requirements apply to single entities as well as, under section 10a of the Banking Act, to groups of institutions and financial holding groups on a consolidated basis.
The prudential own funds requirements are a form of risk-oriented supervision which, depending on the bank’s individual risk positions, is designed to ensure a capital backing that is as risk-sensitive as possible.
Pursuant to the provisions of the Solvency Regulation, institutions must quantify their counterparty credit risk, which are made up of default risk and settlement risk, their operational risk and their market risk and back them with own funds. Market risk is composed of interest rate risk and equity price risk in the trading book, foreign exchange risk, commodity risk and other market risk positions. Only tier 1 and tier 2 capital can be used to back counterparty credit risk and operational risk. Additionally, tier 3 capital may be used to back market risk. The required minimum overall capital ratio of 8% must be maintained.
Institutions must be in compliance with the minimum capital requirements at the close of business on each business day, and they have to make their calculations and submit reports to supervisors on a quarterly basis. These reports are to be submitted electronically only.
Besides rules on minimum capital requirements, disclosure provisions have been incorporated into the Solvency Regulation. The aim of these provisions is to utilise market mechanisms for prudential supervisory purposes and to ensure transparency as well as the possibility of public accountability, in particular regarding the prudential recognition of internal methods.