The growing importance of risk in financial regulation



12

Germany

Risk-Based Regulation and Supervision in Germany

The importance of risk-related information as a vital component of companies' annual reports
when performing operating and financial reviews (OFRs) of listed companies was highlighted
in a report aimed at inquiring into the arrangements for financial regulation of public limited
companies in the UK.104 This ensued from the realisation that traditional financial statements,
no matter how well constructed, would not always provide sufficient information for analysts
and investors.105

As part of the implementation of the Financial Conglomerates Directive, section 25 a (1) was
amended in the last quarter of 2004.106 The implementation of the European Financial
Conglomerates Directive into German Law took effect on the 1st Jan 2005 and it requires
clearly for a strategy whereby the institution's ability to manage risks as part of a proper
business organisation is taken into account107.

The adoption of a risk based approach to financial regulation and supervision in Germany has
been prompted by the significance of financial conglomerates.108 Financial conglomerates
have significant influence on financial stability particularly when they have a notable level of
market share in several financial sectors and gain increasing significance in the market as a
result of their size.109 The objectives of the Financial Conglomerates Directive
interalia
includes ensuring the sound supervision of additional risks associated with financial groups
who are involved in cross-sector financial activities.110 It also encourages member states to
develop their standards for limits on risk concentrations or permit their national supervisors to
do so until there is further coordination.111

The implementation of the EU Financial Conglomerates Directive in Germany considers the
growing economic importance of financial conglomerates and for the first time, supervisors
now have a weapon in overcoming risks to the financial system attributed to financial
conglomerates.112 The Bundesbank's significant involvement in financial conglomerates'
reporting enhances its ability to assess risks to enterprises within a conglomerate and the risks
to financial stability attributed to financial conglomerates.113

Despite the Bundesbank's involvement, supervisors are still challenged by the fact that
sectoral supervisory requirements address the relevant risks differently and that there is still
no integrated approach to cross-sector supervision of equivalent risks.114 Supervisors are
therefore still largely confining themselves to a form of monitoring that informs them about

104 See House of Commons - Treasury -Minutes of Evidence , House of Commons Environmental Audit,
Fourth Report 13 March 2007 Session 2006/2007 <

http://www.publications.parliament.uk/pa/cm200607/cmselect/cmenvaud/227/22702.htm> (last visited 22nd

105

106


107

108

109

110

111

112

113

114


August 2007)

ibid

NO Angermueller, M Eichhorn and T Ramke, 'New Standards of Banking Supervision - A Look at the
German Implementation Approach for the Second Pillar of Basel II' 2005 (2) Journal of International
Banking Law and Regulation 52; Section 25 (a) deals with particular organisational duties of institutions
See also Deutsche Bundesbank, 'Supervision of Financial Conglomerates in Germany' Monthly Report
(April 2005) 39

Ibid p 44

Ibid pp 45,46

Ibid p 48

Ibid p 51,52

Ibid p 55

Ibid ; also see Deutsche Bundesbank, 'The Deutsche Bundesbank's Involvement in Banking Supervision'
Monthly Report (September 2000)

See Deutsche Bundesbank, 'Supervision of Financial Conglomerates in Germany' Monthly Report (April
2005) p 55



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