BaFin
Encyclopedia
The Federal Financial Supervisory Authority better known by its abbreviation BaFin is the financial regulatory
authority for Germany
. It is an independent federal institution with headquarters in Bonn
and Frankfurt
and falls under the supervision of the Federal Ministry of Finance (Germany). BaFin supervises about 2,700 banks, 800 financial services institutions and over 700 insurance undertakings.
BaFin was created by the merger of the three supervisory agencies, the Federal Banking Supervisory Office , the Federal Supervisory Office for the Securities Trading , and the Federal Insurance Supervisory Office
This meant there was uniform national supervision of banks
, credit institutions, insurance companies, financial service companies, brokers and stock exchanges. This model was designed to provide transparency and manageability and to make sure all financial activity was regulated.
In 2003 changes to the Banking Act (KWG) gave BaFin further responsibility to monitor the credit worthiness of financial institutions and to collect detailed information from those institutions. The aim was to increase customer protection and the reputation of the financial system. It shares responsibility here with the Bundesbank
, BaFin banned short selling
on eleven German finance stocks. These were Aareal Bank
, Allianz
, AMB Generali
, Commerzbank AG, Deutsche Bank
, Deutsche Börse
, Deutsche Postbank
, Hannover Re
, Hypo Real Estate
, MLP AG and Munich Re
. The ban expired on the 31 Jan 2010 and was not renewed at that time.
On 19th May 2010, in response to 2010 European sovereign debt crisis
, BaFin banned naked short selling
of credit default swaps
on euro-area government bonds until 31 March 2011. At the same time they re-introduced a ban on naked short selling of the previous 10 banks and insurers companies.
In addition to these divisions, the so-called "operational pillars", there are the a number of departments that have cross-organizational or perform administrative tasks, such as "risk modeling", "money laundering" and "international responsibilities".
BaFin employs roughly 1,700 at its two offices and is fully funded by fees and levies of the supervised institutions and companies and so is independent of the federal budget. The levy amounts depend on the scope and authorization of total assets. An appeal to the Constitutional Court regarding the unconstitutionality of this (forced) levy in 2009 was rejected as unfounded. In the opinion of the court the levy is 'intended to strengthen the investor confidence and the soundness and integrity of these companies. These are a necessary condition for a functioning financial framework'.
As of September 2006, BaFin regulated approximately 2,100 banks
, 700 financial services institutions, 630 insurance companies, 25 pension funds and 80 investment companies with 6,000 funds.
As a financial market-based institution BaFin is responsible to both providers and consumers. On the supply side it pays attention to the solvency of banks, insurance companies and financial institutions. For investors, bank customers and insured it ensures confidence in the financial markets and the companies operating therein.
The establishment of new banks in Germany are subject to a compulsory license subject to law, BaFin, as the competent authority, approves such licenses. It takes into account the management, minimum capital requirements, reliability, solid leadership and the sustainability of business when approving licenses.
Throughout their operation, financial institutions are subject to ongoing supervision by the BaFin. This is to ensure all conditions are met. In particular, the financial condition of solvency
and liquidity, including having appropriate risk control - and management systems (MaRisk).
Financial institutions must provide BaFin with;
All information will be assessed and evaluated in close cooperation with the Deutsche Bundesbank
. In addition, BaFin may order special tests, which are also carried out by members of the Bundesbank on the spot.
The Banking Law provides BaFin an extensive arsenal of sanctions including criminal sanctions, ranging from written warnings of fines to withdrawal of banking license
.
and burial funds), holding companies, security and pension funds. This excludes insurers that operate in only one province. These are subject to supervision by the competent local authority.
The supervisor shall include the monitoring of security assets and solvency to ensure that insurance contracts can be met. BaFin also monitors in general compliance with all laws applicable to the operation of insurance businesses.
As part of this BaFin collects information on all securities traded as well as disclosures from listed companies from all market participants. This information is used to detect insider trading, price and market manipulation. In particular, the buying and selling of shares by company management in the same company is monitored closely (Directors Dealings). BaFin also ensures market transparency by supervising reporting rules and disclosure requirements and makes sure these are followed.
BaFin enforcment powers range from the issuing of subpoenas and questioning people, suspending or prohibition trading in financial instruments up to being able to forward cases to the public prosecutor.
Since 2002, under the Securities Acquisition and Takeover Act , it also deals with monopoly
issues during mergers and acquisitions.
BaFin acts as the central depository for prospectus
, however BaFin only checks basic information and does not check for the accuracy and creditworthiness of the issuer.
, illegal operation of banking, financial fraud, incitement to establish stock exchange speculation to forward them to law enforcement authorities. BaFin is in effect a law enforcement agency and can initiate legal action.
In 2006, the Federal Court
revealed the embezzlement of more than 4 million euro by Michael Raumann, the former head of information technology at BaFin, for which he was indicted and convicted by the Bonn district court. In the sentencing notes the court criticized BaFin for its "nonexistent" internal controls.
In September 2006 a report by PricewaterhouseCoopers
and BaFin internal audit found that the requirements of the federal government to prevent corruption had not been implemented.
Shortly after the publication of the information, BaFin asked the Munich public prosecutor's to raise a criminal complaint against persons unknown on suspicion of breach of statutory duty of confidentiality.
Financial regulation
Financial regulation is a form of regulation or supervision, which subjects financial institutions to certain requirements, restrictions and guidelines, aiming to maintain the integrity of the financial system...
authority for Germany
Germany
Germany , officially the Federal Republic of Germany , is a federal parliamentary republic in Europe. The country consists of 16 states while the capital and largest city is Berlin. Germany covers an area of 357,021 km2 and has a largely temperate seasonal climate...
. It is an independent federal institution with headquarters in Bonn
Bonn
Bonn is the 19th largest city in Germany. Located in the Cologne/Bonn Region, about 25 kilometres south of Cologne on the river Rhine in the State of North Rhine-Westphalia, it was the capital of West Germany from 1949 to 1990 and the official seat of government of united Germany from 1990 to 1999....
and Frankfurt
Frankfurt
Frankfurt am Main , commonly known simply as Frankfurt, is the largest city in the German state of Hesse and the fifth-largest city in Germany, with a 2010 population of 688,249. The urban area had an estimated population of 2,300,000 in 2010...
and falls under the supervision of the Federal Ministry of Finance (Germany). BaFin supervises about 2,700 banks, 800 financial services institutions and over 700 insurance undertakings.
History
BaFin was formed on 1 May 2002 with the passing of the Financial Services and integration Act on 22 April 2002. The aim of this legislation was to create one integrated financial regulator that covered all financial markets.BaFin was created by the merger of the three supervisory agencies, the Federal Banking Supervisory Office , the Federal Supervisory Office for the Securities Trading , and the Federal Insurance Supervisory Office
This meant there was uniform national supervision of banks
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
, credit institutions, insurance companies, financial service companies, brokers and stock exchanges. This model was designed to provide transparency and manageability and to make sure all financial activity was regulated.
In 2003 changes to the Banking Act (KWG) gave BaFin further responsibility to monitor the credit worthiness of financial institutions and to collect detailed information from those institutions. The aim was to increase customer protection and the reputation of the financial system. It shares responsibility here with the Bundesbank
Major events
On 19th September 2008, in response to threats from the global financial crisis and following measures taking by the United StatesUnited States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, BaFin banned short selling
Short selling
In finance, short selling is the practice of selling assets, usually securities, that have been borrowed from a third party with the intention of buying identical assets back at a later date to return to that third party...
on eleven German finance stocks. These were Aareal Bank
Aareal Bank
Aareal Bank AG is a leading international real estate bank with headquarters in Wiesbaden, Germany.Aareal Bank AG operates branches in 17 European countries and in the U.S. and Singapore. Since 2002, Aareal Bank AG has been listed on the Frankfurt Stock Exchange.Shares in Germany are currently in...
, Allianz
Allianz
SE is a global financial services company headquartered in Munich, Germany. Its core business and focus is insurance. As of 2010, it was the world's 12th-largest financial services group and 23rd-largest company according to a composite measure by Forbes magazine.Its Allianz Global Investors...
, AMB Generali
AMB Generali
Generali Deutschland, until 2008: AMB Generali Holding AG is a German holding company consisting of about 20 insurance companies. It is the second largest insurance company in Germany after Allianz. It is headquartered in Cologne. Companies AMB Generali owns include AachenMünchener, CosmosDirekt,...
, Commerzbank AG, Deutsche Bank
Deutsche Bank
Deutsche Bank AG is a global financial service company with its headquarters in Frankfurt, Germany. It employs more than 100,000 people in over 70 countries, and has a large presence in Europe, the Americas, Asia Pacific and the emerging markets...
, Deutsche Börse
Deutsche Börse
Deutsche Börse AG is a marketplace organizer for the trading of shares and other securities. It also is a transaction services provider. It gives companies and investors access to global capital markets. It is a joint stock company and was founded in 1993. The headquarters are in Frankfurt,...
, Deutsche Postbank
Deutsche Postbank
Deutsche Postbank AG is a German retail bank with headquarters in Bonn. Postbank was formed from the demerger of the postal savings division of Deutsche Bundespost in 1990. It became a wholly owned subsidiary of Deutsche Post in 1999, and was partially spun out on the Frankfurt Stock Exchange in 2004...
, Hannover Re
Hannover Re
Hannover Re , with a gross premium of around €11 billion, is one of the leading reinsurance groups in the world...
, Hypo Real Estate
Hypo Real Estate
The Hypo Real Estate Holding AG is a holding company based in Munich, Germany which comprises a number of real estate financing banks. The company's activities span three sectors of the real estate market: commercial property, infrastructure and public finance, and capital markets and asset...
, MLP AG and Munich Re
Munich Re
Munich Re Group is a reinsurance company based in Munich, Germany. It is one of the world’s leading reinsurers. ERGO, a Munich Re subsidiary, is the Group’s primary insurance arm....
. The ban expired on the 31 Jan 2010 and was not renewed at that time.
On 19th May 2010, in response to 2010 European sovereign debt crisis
2010 European sovereign debt crisis
From late 2009, fears of a sovereign debt crisis developed among investors concerning some European states, intensifying in early 2010 and thereafter.....
, BaFin banned naked short selling
Naked short selling
Naked short selling, or naked shorting, is the practice of short-selling a financial instrument without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale. When the seller does not obtain the shares within the required time frame,...
of credit default swaps
Credit default swap
A credit default swap is similar to a traditional insurance policy, in as much as it obliges the seller of the CDS to compensate the buyer in the event of loan default...
on euro-area government bonds until 31 March 2011. At the same time they re-introduced a ban on naked short selling of the previous 10 banks and insurers companies.
Organization
BaFin is run by a Board consisting of the President Jochen Sanio and four executive directors Karl-Burkhard Caspari (securities division), Sabine Lautenschläger Peiter (area supervision), Thomas Steffen (insurance supervision) and Michael Sell (cross-functional areas and internal administration).In addition to these divisions, the so-called "operational pillars", there are the a number of departments that have cross-organizational or perform administrative tasks, such as "risk modeling", "money laundering" and "international responsibilities".
BaFin employs roughly 1,700 at its two offices and is fully funded by fees and levies of the supervised institutions and companies and so is independent of the federal budget. The levy amounts depend on the scope and authorization of total assets. An appeal to the Constitutional Court regarding the unconstitutionality of this (forced) levy in 2009 was rejected as unfounded. In the opinion of the court the levy is 'intended to strengthen the investor confidence and the soundness and integrity of these companies. These are a necessary condition for a functioning financial framework'.
As of September 2006, BaFin regulated approximately 2,100 banks
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
, 700 financial services institutions, 630 insurance companies, 25 pension funds and 80 investment companies with 6,000 funds.
Responsibilities
The main task of BaFin is the supervision of banks, insurance companies and the trading of securities and ensure the viability, integrity and stability of the German financial system.As a financial market-based institution BaFin is responsible to both providers and consumers. On the supply side it pays attention to the solvency of banks, insurance companies and financial institutions. For investors, bank customers and insured it ensures confidence in the financial markets and the companies operating therein.
Accounts Supervision
To maintain the integrity and stability of the financial system and combat money laundering BaFin is obliged, under the Banking Act, to run a centralized computer system that stores information on all accounts and their account holders. This information must be provided to BaFin by all financial institutions in Germany.Banking
The Banking Act (KWG) is the legal basis for banking supervision by BaFin. It monitors compliance with the rules and guidelines of the Banking Act relating to credit and financial institutions.The establishment of new banks in Germany are subject to a compulsory license subject to law, BaFin, as the competent authority, approves such licenses. It takes into account the management, minimum capital requirements, reliability, solid leadership and the sustainability of business when approving licenses.
Throughout their operation, financial institutions are subject to ongoing supervision by the BaFin. This is to ensure all conditions are met. In particular, the financial condition of solvency
Solvency
Solvency, in finance or business, is the degree to which the current assets of an individual or entity exceed the current liabilities of that individual or entity. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term...
and liquidity, including having appropriate risk control - and management systems (MaRisk).
Financial institutions must provide BaFin with;
- the financial statements and audit reports
- the banks and financial service Kurzbilanzen
- monthly reports on wholesale and retail loans
- regularly demonstrations their compliance with the liquidity and solvency regulation
All information will be assessed and evaluated in close cooperation with the Deutsche Bundesbank
Deutsche Bundesbank
The Deutsche Bundesbank is the central bank of the Federal Republic of Germany and as such part of the European System of Central Banks . Due to its strength and former size, the Bundesbank is the most influential member of the ESCB. Both the Deutsche Bundesbank and the European Central Bank are...
. In addition, BaFin may order special tests, which are also carried out by members of the Bundesbank on the spot.
The Banking Law provides BaFin an extensive arsenal of sanctions including criminal sanctions, ranging from written warnings of fines to withdrawal of banking license
Banking license
Under most jurisdictions, a banking license is a prerequisite for a financial institution that wants to provide banking services, such as taking deposits from the general public....
.
Insurance
Similar to bank supervision, the Insurance Supervision Law (VAG) requires insurance companies to receive and maintain their business with approval of BaFin, and the conditions are similar to those of banking supervision. BaFin supervises insurance companies (including pensionPension
In general, a pension is an arrangement to provide people with an income when they are no longer earning a regular income from employment. Pensions should not be confused with severance pay; the former is paid in regular installments, while the latter is paid in one lump sum.The terms retirement...
and burial funds), holding companies, security and pension funds. This excludes insurers that operate in only one province. These are subject to supervision by the competent local authority.
The supervisor shall include the monitoring of security assets and solvency to ensure that insurance contracts can be met. BaFin also monitors in general compliance with all laws applicable to the operation of insurance businesses.
Securities
BaFin is required to ensure the functioning of the German markets for securities and derivatives in accordance with the Securities Trading Act (WpHG). This includes in particular the prevention of insider trading and other market abuses such as price and market manipulation.As part of this BaFin collects information on all securities traded as well as disclosures from listed companies from all market participants. This information is used to detect insider trading, price and market manipulation. In particular, the buying and selling of shares by company management in the same company is monitored closely (Directors Dealings). BaFin also ensures market transparency by supervising reporting rules and disclosure requirements and makes sure these are followed.
BaFin enforcment powers range from the issuing of subpoenas and questioning people, suspending or prohibition trading in financial instruments up to being able to forward cases to the public prosecutor.
Since 2002, under the Securities Acquisition and Takeover Act , it also deals with monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
issues during mergers and acquisitions.
BaFin acts as the central depository for prospectus
Prospectus (finance)
In finance, a prospectus is a document that describes a financial security for potential buyers. A prospectus commonly provides investors with material information about mutual funds, stocks, bonds and other investments, such as a description of the company's business, financial statements,...
, however BaFin only checks basic information and does not check for the accuracy and creditworthiness of the issuer.
The role of the BaFin in law enforcement
The BaFin has the right, when it discovers a crime or even the suspicion of a crime, in particular insider trading, market manipulationMarket manipulation
Market manipulation describes a deliberate attempt to interfere with the free and fair operation of the market and create artificial, false or misleading appearances with respect to the price of, or market for, a security, commodity or currency...
, illegal operation of banking, financial fraud, incitement to establish stock exchange speculation to forward them to law enforcement authorities. BaFin is in effect a law enforcement agency and can initiate legal action.
Criticism
Soon after its establishment there were signs that there were serious shortcomings within the internal structure of BaFin. The Examination by the Federal Koblenz noted in March 2004 that the internal control system of authority is insufficient.In 2006, the Federal Court
Federal court
Federal court may refer to a court of the national government in a country that has a federal system of government. Examples include:* United States federal courts** A particular federal court, such as the United States district courts....
revealed the embezzlement of more than 4 million euro by Michael Raumann, the former head of information technology at BaFin, for which he was indicted and convicted by the Bonn district court. In the sentencing notes the court criticized BaFin for its "nonexistent" internal controls.
In September 2006 a report by PricewaterhouseCoopers
PricewaterhouseCoopers
PricewaterhouseCoopers is a global professional services firm headquartered in London, United Kingdom. It is the world's largest professional services firm measured by revenues and one of the "Big Four" accountancy firms....
and BaFin internal audit found that the requirements of the federal government to prevent corruption had not been implemented.
BaFin list of default risk of German banks
In April 2009 an internal BaFin list containing the volume of loans and securities "from troubled business” and banks was leaked to the newspaper Sueddeutsche Zeitung. The internal paper estimated the volumne of debt to be 816 billion euros. This confidential information was seen as potentially damaging to the creditworthiness of the banks and their sustainability and was seen as a serious breach by BaFin.Shortly after the publication of the information, BaFin asked the Munich public prosecutor's to raise a criminal complaint against persons unknown on suspicion of breach of statutory duty of confidentiality.
See also
- Federal agency (Germany)Federal agency (Germany)Federal agencies in Germany are established to assist the country's executive branch on the federal level according to of the Basic Law for the Federal Republic of Germany...
- Securities CommissionSecurities CommissionSecurities Commission a statutory body entrusted with the responsibility of regulating and systematically developing the capital markets in Malaysia.-History:...
- K1 fundK1 fundThe K1 fund was a British Virgin Islands based hedge fund, initially marketed to and invested in by mainly German-based private investors, and latterly a series of global banks. With an estimated size of $378million/£249million and $1Bn under management, it collapsed in 2008. It is estimated by...
, a German ponzi schemePonzi schemeA Ponzi scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors, rather than from any actual profit earned by the individual or organization running the operation...
that the BaFin tried to shut down