Berlin: Germany has approved new measures to rein in high-risk financial business of banks and to decouple them from retail banking as part of a comprehensive reform to prevent a repeat of the financial crisis five years ago and to minimise the costs for taxpayers if banks were to be bailed out in the future.
The Bundestag, the lower house of parliament, on Friday voted with the majority of the ruling conservative-liberal coalition a legislation, which will require banks with assets exceeding 100 billion euros (130 billion USD), or 20 per cent of their balance sheet, to separate their risky trading activities from the traditional client banking and to put them in independent subsidiaries until 2016.
The new rues, which are scheduled to come into force in early 2015, will bar direct lending and provision of guarantees to hedge funds and private equity funds by retail banks through the use of clients' capital deposits.
The new rues will bar direct lending and provision of guarantees to hedge funds and private equity funds by retail banks through the use of clients' capital deposits.
Banks will have to finance highly speculative businesses with their own resources and to transfer high frequency trading as well as lending to hedge funds and other holding companies to the proposed subsidiaries, the legislation said.
Banks have been asked to identify by mid-2015 their risky trading activities which made them vulnerable and thereby raised the need to separate them from traditional banking and to work out concrete plans to bailout or restructure the lender in the event of an insolvency.
Those measures are intended to make sure that chaotic rescue efforts for the so-called "system relevant" banks, which had cost billions of euros to the taxpayers in the past years, will not be repeated. Bank managers who deliberately violate the new rules and endanger the stability of their financial institutions could face jail terms up to five years, according to the
Hailed by the government as a milestone in reforming the banking sector, the legislation was rejected en masse by the opposition parties, which criticised it as "insufficient".
During a debate a debate in the Bundestag before the vote, leaders of the opposition Social Democratic Party (SPD), the Green party and the Left party argued that the threshold of 100 billion euros assets is "too high" and only the largest banks such as the Deutsche Bank, the Commerzbank and the Landesbank Baden Wuerttemberg will be affected by the new rules.
They also expressed fears that "greedy" business practices of banks will be kept by the parent institutions. The new legislation comes a day after the Bundestag endorsed the new rules of the European Union to cap bankers' bonuses and the amount of capital banks must hold as a buffer to further reduce the risks for the financial sector.
The EU rules on more stringent basic capital requirement for all banks in Europe are based on the Basel Committee on Banking Supervision's regulations known as Basel III, which is part of the union's Capital Requirements Directive (CRD).
The G-20 nations had agreed at the end of 2010 to implement Basel III regulations step by step as one of the main initiatives to reduce the risks of another financial crisis from the banking sector by strengthening their capital base.
However, differences over the details of Basel III, US demands for special treatment of foreign banks and doubts in Europe whether the US would stick to its commitments delayed its implementation, which was originally scheduled for the beginning of this year.
The EU finance ministers decided in March to cap bankers' bonuses to their annual basic salary and to double that amount if a majority of a bank's shareholders approved it. Public outrage over excessive bonuses and executive salaries in the financial sector has been growing in Europe after a number of banks were bailed out since the outbreak of the financial crisis in 2008.
Many political leaders and economists have argued that excessive bonuses encouraged enormous risk-taking by bankers, which was one of the main causes of the financial crisis. The EU rules on bankers' bonuses and on more stringent basic capital requirement for all banks in Europe under the Basel III agreement will come into force at the beginning of next year.
The German government also tabled before the Bundstag a new legislation to transfer supervision of the banks in Europe to the European Central Bank (ECB), which is regarded as the first pillar of a banking union.
Joint initiatives for rehabilitation and restructuring of troubled financial institutions and a system for protection of bank deposits also are planned as part of the banking union, which is designed to strengthen the stability of the European financial sector.