Opinion of the European Central Bank of 19 April 2013 on protection from risks and separation of banking businesses (CON/2013/28)
Date: 2013-04-19
Institutions: European Central Bank
Subjects: Germany, banking supervision, company in difficulties, economic stabilisation, financial institution, financial stability, national law

EN 

ECB-PUBLIC 

OPINION OF THE EUROPEAN CENTRAL BANK 

of 19 April 2013 

on protection from risks and separation of banking businesses 

(CON/2013/28) 

Introduction and legal basis 

On  25  February  2013,  the  European  Central  Bank  (ECB)  received  a  request  from  the  German  Federal 

Ministry of Finance for an opinion on a draft law on protection from risks and on the planning of recovery 

and resolution of credit institutions and financial groups (hereinafter the ‘draft law’). 

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the 

Functioning  of  the  European  Union  and  the  third  and  sixth  indents  of  Article 2(1)  of  Council 

Decision 98/415/EC  of  29 June  1998  on  the  consultation  of  the  European  Central  Bank  by  national 
authorities regarding draft legislative provisions1, as the draft law relates to the Deutsche Bundesbank and 

contains  rules  applicable  to  banks  which  materially  influence  the  stability  of  financial  institutions  and 

markets. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European 

Central Bank, the Governing Council has adopted this opinion. 

1.  

Purpose of the draft law 

1.1  The  draft  law  contains  rules  on  the  following:  (a)  recovery  plans  to  be  prepared  by  credit 

institutions  (CIs),  and  resolution  powers,  including  the  drawing  up  of  resolution  plans,  for  the 

Federal Financial Supervisory Authority (BaFin), (b) the separation of areas of risk within CIs, and 

(c)  requirements  for  governing  bodies  of  CIs  to  safeguard  sound  risk  management,  including 

administrative  and  criminal  sanctions.  It  supplements  the  Law  on  restructuring  and  the  Law  on 
reorganisation of credit institutions2. 

1.2  With respect to recovery and resolution plans and the BaFin’s powers in this regard, the draft law 

aims  to  require  systemically  relevant  CIs  and  financial  groups  to  plan  recovery  measures  in 

advance  of  a  crisis.  Such  CIs  and  financial  groups  must  provide  for  various  possible  courses  of 

action  that  could  be  taken  in  order  to  stabilise  and  improve  the  economic  situation  of  the  CI  or 

group in question, thereby securing its ability to survive, without needing to have recourse to public 

1  
2  

OJ L 189, 3.7.1998, p. 42. 
With regard to these laws, the ECB adopted opinion CON/2010/83. All ECB opinions are available on the ECB’s website 
at www.ecb.europa.eu. 

1 

 
 
 
 
                                                 
ECB-PUBLIC 

stabilisation measures. Further, the draft law empowers the BaFin to establish an organisationally 

separate  resolution  unit  within  the  BaFin  itself.  Such  unit  will  draw  up  resolution  plans  in 

cooperation with the Bundesbank and the BaFin’s supervisory departments. 

1.3  The  draft  law  prohibits  specific  speculative  transactions  such  as  proprietary  trading  and 

transactions  with  hedge  funds  and  alternative  investment  funds  (highly  leveraged  institutions)  in 

order to separate the areas of risk of CIs or groups with a high level of overall trading activities or 

where  such  trading  activities  account  for  a  relatively  large  proportion  of  a  CI’s  or  the  group’s 
balance-sheet total3. The draft law contains exceptions for transactions carried out in the form of 

services for others. Further, the BaFin has the power to prohibit (a) market making activities within 

the  meaning  of  Regulation  (EU)  No  236/2012  of  the  European  Parliament  and  of  the  Council  of  
14  March  2012  on  short  selling  and  certain  aspects  of  credit  default  swaps4,  and  (b)  other 

transactions entailing a comparable level of risk, if such transactions might endanger the solvency 

of the CI. CIs and financial groups may continue to engage in the above transactions if these have 

been transferred to a financial trading institution which is economically and legally separate. Such 

financial trading institution: (a) must be licensed under the Law on banking to carry out the types 

of transactions in question, (b) will be subject to the supervisory regime under that Law, (c) must 

be  able  to  refinance  itself  independently,  and  (d)  must  fulfil  information  requirements  vis-à-vis 

BaFin. The financial trading institution is not permitted to provide payment services. 

1.4 

In  addition,  the  draft  law  requires  Managing  Directors  of  CIs  to  safeguard  risk  management. 

Compliance  therewith  will  be  monitored  by  the  BaFin.  The  BaFin  is  also  competent  to  issue 

instructions.  Non-compliance  with  such  instructions  may  result  in  administrative  fines  of  up  to 
EUR 200 000 and prosecution under criminal law5 if, as a consequence, the assets of a company in 

the financial sector, and thereby financial stability, are endangered. 

2. 

Instruments for recovery and resolution planning 

2.1  The ECB welcomes the draft law as it strengthens the tools and procedures available to the national 

authorities  for  planning  the  recovery  and  resolution  of  CIs.  In  line  with  the  Financial  Stability 
Board’s (FSB) Key Attributes of Effective Resolution Regimes for Financial Institutions6 and the 

European  Commission’s  proposal  for  a  Directive  on  the  recovery  and  resolution  of  credit 

3  

4  
5  
6  

The  draft  law  considers  this  to  be  fulfilled  if  items  in  the  trading  book  or  available  for  sale  within  the  meaning  of 
Article 1 of the Annex to Commission Regulation (EC) No 1126/2008 of 3 November 2008 adopting certain international 
accounting standards in accordance with Regulation (EC) No 1606/2002 of the European Parliament and of the Council, 
or  items  arising  from  these  transactions  allocated  to  the  trading  stocks  and  liquidity  reserve  exceed  the  value  of 
EUR 100 billion or twenty per cent of the total balance sheet of the CI or group. The twenty per cent value only applies if 
the  balance-sheet  of  the  CI  or  group  reached  a  minimum  of  EUR 90 billion  on  the  date  of  closing  of  accounts  in  the 
preceding three financial years. 
OJ L 86, 24.3.2012, p. 1. 

  A maximum fine on conviction of EUR 10.8 million or a term of imprisonment of up to five years. 

Available at FSB’s website at www.financialatabilityboard.org. 

2 

 
 
                                                 
ECB-PUBLIC 

institutions  and  investment  firms  dated  6  June  2012  (hereinafter  the  ‘BRRD’)7,  recovery  and 

resolution plans are a key element of preparation for possible crisis scenarios and for taking swift 

and effective remedial action. The ECB notes that the draft law restricts the requirement to draw up 

recovery and resolution plans to those institutions which are assessed as ‘potentially systemic’. The 

ECB is of the view that it is possible to extend this requirement to all CIs, which would have the 

merit  that  all  CIs  would  benefit  from  a  clear  plan  of  remedial  action  to  be  taken  in  the  event  of 

emerging difficulties and clarity would be provided regarding their resolvability. The existence of 

such  plans  for  all  CIs  would  also  address  potential  concerns  as  regards  ensuring  a  level  playing 

field.  The  ECB  understands  that  the  consulting  authority  may  have  concerns  relating  to  the 

proportionality of placing such requirements on CIs which are not systemically important. In this 

respect,  it  is  important  to  rigorously  assess  why  no  potential  threat  to  the  system  is  expected  to 

derive  from  an  institution’s  failure,  thus  thoroughly  demonstrating  why  recovery  and  resolution 

planning is deemed dispensable. 

2.2  The  draft  law  empowers  the  BaFin  to  assess  the  recovery  and  resolution  plans  and  to  address 
eventual  shortcomings.  The  ECB,  in  line  with  its  general  stance8,  welcomes  the  proposed 

provisions  involving  Deutsche  Bundesbank  in  such  assessments  while  it  considers  that  certain 

clarifications  should  be  introduced  in  this  respect.  It  should  be  clarified  that  assessments  of 
recovery plans are conducted by the BaFin in agreement with the Deutsche Bundesbank9 acting in 
its capacity as a competent authority performing on-going monitoring of banks10. Furthermore, it 

should  be  clarified  that  consultation  and  information  sharing  with  the  Deutsche  Bundesbank  to 
which  BaFin  is  obliged  in  connection  with  its  assessments  of  resolution  plans11  aims  at  utilising 

Deutsche  Bundesbank’s  expertise  in  the  areas  of  banking  supervision  and  financial  stability  and 

that this task is not part of the Deutsche Bundesbank’s competence to perform on-going monitoring 

of banks.  

 2.3  The  organisationally  separate  resolution  unit  created  within  the  BaFin  will  ensure  functional 

separation and independence vis-à-vis the BaFin’s supervisory tasks. The ECB welcomes that this 

resolution  unit  will  be  responsible  for  drawing  up  the  resolution  plans  and  conducting  a 

resolvability  assessment.  For  the  practical  functioning  of  any  resolution,  it  will  be  important  that 

the  resolution  authority  has  clear  ownership  of  the  resolution  planning  and,  in  addition,  has  the 

power to address impediments to the resolvability, as is the case in the draft law. In particular, the 

power  to  reduce  the  complexity  of  an  institution  or  group  by  changing  its  legal  or  operational 

7  

Proposal for a Directive of the European Parliament and of the Council establishing a framework for the recovery and 
resolution  of  credit  institutions  and  investment  firms  and  amending  Council  Directives  77/91/EEC  and  82/891/EC, 
Directives  2001/24/EC,  2002/47/EC,  2004/25/EC,  2005/56/EC,  2007/36/EC  and  2011/35/EC  and  Regulation  (EU) 
No 1093/2010, COM (2012) 280 final. 

Opinion CON/2010/83, paragraph 4.2, Opinion CON/2010/7, paragraph 2.1.1, Opinion CON/2007/33, paragraph 2.1. 
See Article 47b(2) of the Law on banking, inserted by Article 1(6) of the draft law. 

8 
9  
10     See Section 7 of the Law on banking. 
11  

See Article 47e(1),(2) and (5), Article 47f(6) and Article 47g(1) of the Law on banking inserted by Article 1(6) of the 
draft law. 

3 

 
                                                 
 
ECB-PUBLIC 

structure  is  a  key  tool  for  achieving  resolvability,  in  line  with  the  FSB  Key  Attributes  and  the 

BRRD. 

2.4  The  ECB  understands  that  the  draft  law  ensures  mutual  support  and  the  free  exchange  of 

information  between  the  supervisory  authority,  the  new  resolution  unit,  and  the  Deutsche 
Bundesbank12.  Such  close  cooperation  and  information  exchange  will  be  vitally  important  for 
effective supervision as well as resolution13. 

2.5  The ECB notes that the draft law includes aspects of the recovery and resolution planning provided 

for in the BRRD. In this context, the ECB understands that the legislator will review the draft law 

once the BRRD is adopted, in order to ensure full consistency with developments at Union level. In 

this  respect,  the  ECB  also  refers  to  the  Recommendations  of  the  European  Banking  Authority 

(EBA) on the development of recovery plans (EBA/REC/2013/02) dated 23 January 2013, and to 
the recent consultation initiated by the EBA on proposed technical standards in this respect14. 

3.  Measures relating to the structure of CIs and groups 

3.1  This  draft  law  arises  in  conjunction  with  the  Report  of  the  European  Commission’s  High-level 

Expert Group of 2 October 2012 on reforming the structure of the EU banking sector (hereinafter 
the  ‘Liikanen  report’)15.  The  Commission  will  prepare  a  comprehensive  impact  assessment  of  its 

recommendations  in  the  course  of  2013  and  will  make  corresponding  legislative  proposals  as 

appropriate, to ensure a consistent Union framework. Given that these measures primarily address 

internationally  active  CIs,  the  ECB  considers  coordination  and  consistency  to  be  important  at 

Union level in order to avoid regulatory arbitrage and ensure a level playing field. The ECB also 

notes that, unlike the Liikanen report, the draft law does not provide for the mandatory separation 

of  market  making  activities.  Further,  trading  assets  originated  to  hedge  underlying  exposures  to 

clients  or  used  for  asset-liability  management  purposes  are  permitted  within  the  deposit-taking 

entity.  The  draft  law  further  provides  for  mandatory  separation  of  proprietary  trading,  high-

frequency  trading,  and  credit  and  guarantee  business  with  highly-leveraged  institutions  on  a 

secured  and  unsecured  basis,  including  the  prime  brokerage  business,  from  the  deposit-taking 

institution (above the thresholds set out in footnote 3 above). 

3.2  First, the ECB sees merit in mandatory separation of proprietary trading and other high-risk non-

client  related  activities  as  it  would,  inter  alia,  further  protect  depositors  from  exposure  to  losses 

from  such  high  risk  activities,  reduce  complexity  and  enhance  resolvability.  However,  the  ECB 

12  
13  

14  

15  

See in particular Article 47 c (2) and 47 e (1) of the draft law. 

See also point 3.1 of Opinion CON/2012/99 of 29 November 2012 on a proposal for a directive establishing a framework 
for recovery and resolution of credit institutions and investment firms, OJ C 39, 12.2.2013, p. 1. 

European Banking Authority, Consultation Paper: Draft Regulatory Technical Standards On the content of recovery plans 
under  the  draft directive  establishing  a  framework  for  the  recovery  and  resolution  of credit institutions  and  investment 
firms, of 11 March 2013, EBA/CP/2013/01. 

Available  on 
level_expert_group/report_en.pdf  

the  European  Commission’s  website 

at:  http://ec.europa.eu/internal_market/bank/docs/high-

4 

 
 
                                                 
ECB-PUBLIC 

notes that, under the draft law, market making will still be permitted in the deposit-taking entity, 

though it would be subject to discretionary intervention by the BaFin if risk stemming from such 

activities was deemed to be too high. As regards the BaFin’s power to prohibit ‘other transactions 
entailing a comparable level of risk’16, the ECB, while welcoming such power which aims to avoid 

possible circumventions of the draft law, recommends qualifying this power. This should be done 

by including, preferably in the law itself, the conditions ensuring compliance with the principles of 
legal  certainty17  and  level  playing  field  or  by  inserting  the  requirement  that  the  BaFin  

(1)  specifically  lists  the  types  of  prohibited  transactions  and  (2)  justifies  this  prohibition  with 

evidence  indicating  the  material  similarity  of  the  economic  nature  of  such  transactions  with  the 

transactions  prohibited  under  the  draft  law.  As  regards  the  scope  of  mandatory  separation, 

consistency should be ensured at Union level and the ECB encourages the German authorities to 

contribute to harmonisation in this respect. 

3.3  Second,  as  regards  high-frequency  trading,  as  previously  highlighted  by  the  ECB18,  the  ECB 

supports the Commission’s proposal to introduce organisational safeguards for trading venues, such 

as  circuit  breakers,  minimum  tick  sizes  and  maximum  ratios  of  unexecuted  orders,  in  line  with 

international  recommendations.  Further,  all  entities  engaged  in  algorithmic  trading  on  a 

professional  basis  should  be  deemed  to  come  within  the  definition  of  investment  firms  and  be 

subject to supervision and monitoring of their activities by competent authorities. In addition, the 

ECB  supports  granting  competent  authorities  the  power  to  temporarily prohibit  or  restrict  certain 

types of financial activity or practices with a view to addressing threats to the orderly functioning 

of financial markets or to the stability of the whole financial system or part thereof. 

3.4  Finally, the ECB notes that the draft law applies to CIs whose trading plus available-for-sale assets 

exceed EUR 100 billion or 20 % of total assets. The latter is subject to a EUR 90 billion de minimis 

threshold  of  total  assets.  The  ECB  understands  that  these  thresholds  are  broadly  in  line  with  the 

proposals under the Liikanen report and are based on accounting concepts for the classification of 

financial  instruments,  such  as  available-for-sale  assets.  The  recognition  and  measurement  of 

financial  instruments  under  International  Financial  Reporting  Standards,  or  alternatively,  the 
German  Commercial  Code19,  should  not  be  the  only  basis  for  separation  as  it  may  provide 

sufficient discretion for CIs to e.g. restructure financial transactions and use the scope provided by 

accounting rules to circumvent separation rules. The ECB recommends to the German authorities 

16  
17  
18  

19  

See new paragraph 3 added in section 3 of the the Law on banking by Article 2(3)(b) of the draft law. 

See Section 54 of the Law on banking pursuant to which breaching the prohibition is subject to criminal sanction. 

See paragraph 10.1 of Opinion CON/2012/21 of 22 March 2012 on (i) a proposal for a directive on markets in financial 
instruments  repealing  Directive  2004/39/EC  of  the  European  Parliament  and  of  the  Council,  (ii)  a  proposal  for  a 
regulation  on  markets  in  financial  instruments  and  amending  Regulation  [EMIR]  on  OTC  derivatives,  central 
counterparties and trade repositories, (iii) a proposal for a directive on criminal sanctions for insider dealing and market 
manipulation and (iv) a proposal for a regulation on insider dealing and market manipulation (market abuse), OJ C 175, 
19.6.2012, p. 11. 

See Article 2, no. 3 (b) of the draft law, amending Section 3 (2) no. 2 of the Law on banking, referring to Section 340e of 
the Commercial Code. 

5 

 
                                                 
ECB-PUBLIC 

inserting in the draft law provisions that will counteract potential circumvention of separation rules 

in that they will grant relevant powers to BaFin or other competent bodies. 

This opinion will be published on the ECB’s website. 

Done at Frankfurt am Main, 19 April 2013. 

[signed] 

The Vice-President of the ECB 

Vítor CONSTÂNCIO 

6