The New German Bank
Reorganization Act or
“no more too big to fail”
In the aftermath of the financial crisis the New
German Bank Reorganization Act came into force
on 1 January 2011. Such new law anticipates
/ tries to anticipate the planned new EU
framework for crisis management in the financial
sector. While the stricter equity and liquidity
requirements of Basel III shall generally avoid
a financial crisis of a bank, the New German
Bank Reorganization Act focuses (further down
the road) on what to do, if banks nevertheless
become financially distressed in future. The new
law takes into account the experience of the
last financial crisis which proved that the old law
did not provide sufficient means to restructure
/ liquidate banks that were thought to be “too
big to fail” (Commerzbank) or “too connected
too fail” (Hypo Real Estate). The New German
Bank Reorganization Act aims at providing a
tool-set that in future will allow the restructure
/ liquidation of banks regardless of their size or
connections within the financial world. The new
law can therefore be viewed as an attempt to
shift financial risk of failure from the tax payer
to the individual owners and creditors of the
respective distressed bank.
The new tools offered by the New German Bank
Reorganization Act aim at
„„
„„
„„
creating means to avoid insolvencies of
system-relevant banks,
creating instruments for the separation of a
bank’s system-relevant business from its nonsystem-relevant business where insolvency is
unavoidable, and
creating a special fund to be raised by
contributions from the banking sector which
shall finance future restructuring measures
regarding system-relevant banks in crisis (the
“Restructuring Fund”).
The New German Bank Reorganization Act
makes available its new restructuring tools by
means of a three-step concept:
1. Restructuring Proceeding,
2. Reorganization Proceeding, and
3. Transfer Order by the German Financial
Services Supervisory Authority (“BaFin”).
1. Restructuring Proceeding –
applies for all banks
The Restructuring Proceeding can only be
initiated by the bank itself and requires that the
bank does not comply with legal requirements
regarding own funds or liquidity. It is designed
to induce banks to attempt a restructuring
at a very early stage of their crisis, in which
a restructuring may still be achieved by mere
management actions. It does not allow to curtail
rights of the bank’s shareholders and generally
does also not provide for means to curtail rights
of the creditors with the exception that new
loans granted for a restructuring of the bank will
rank senior to other creditors’ claims in future
insolvency proceedings, provided (i) insolvency
proceedings are commenced within the next
three years and (ii) the total amount of such
loans does not exceed 10% of the bank’s own
funds (Tier 1 and Tier 2 capital).
2. Reorganization Proceeding – applies
only for system-relevant banks
The Reorganization Proceeding is initiated by the
bank and requires that the bank is in severe crisis
which results in a significant danger for (i) the
financial markets or (ii) the participants trust in
the functioning of the financial markets. It can be
compared to the insolvency plan under German
law or the reorganization plan in the US Chapter
11 proceeding. It allows to curtail rights of
creditors and shareholders. The Reorganization
Proceeding is only available to system-relevant
banks.
3. Transfer Order and other measures
available to BaFin – applies only for
system-relevant banks
The German legislator considerably extends
BaFin’s authority and means to intervene and
take the measures BaFin deems appropriate
to stabilize system-relevant banks, if such
intervention is required to defend the stability of
the financial markets. The most drastic of such
measures is the (partial) transfer of the bank’s
system-relevant assets and liabilities to another
private bank or a “bridge bank” established for
this purpose by the Restructuring Fund.
Key Contact
The purpose of such transfer is to secure the
bank’s system-relevant business in a financial
stable (new) entity and to allow the liquidation
by way of regular insolvency proceedings of the
bank und its remaining non-system-relevant
business. This concept differs quite significantly
from the possibility under the UK Banking Act
2009 to transfer the shares in the bank to a
trustee while leaving the bank’s business in the
same legal entity. It is quite evident that the
German concept of a business split into an entity
to be continued and an entity to be liquidated
increases the bankruptcy risk for those investors
whose claims are likely to remain in the entity to
be liquidated.
Dr. Hendrik Boss
Partner, Munich
+49 (0) 89 210 38 0
[email protected]
Resumé re bankruptcy risks for
creditors of German banks
The principal aim of the New German
Reorganization Act is to destroy the implied state
guarantee for system-relevant banks on the
expense of the German tax payer. In particular,
the Transfer Order and to a lesser degree also
the Reorganization Proceedings increase the
overall risk of creditors and shareholders in case
of financial distress of German banks regardless
whether such bank is system-relevant or not.
Especially with a view to a potential Transfer
Order, investors in German banks should try
to anticipate whether their claims would be
transferred to the surviving entity or would
remain with the distressed bank in order to be
liquidated in regular insolvency proceedings.
Depending on the outcome of such evaluation,
the risk assessment made under the impression
of the previous financial crisis may have to be
adjusted with regard to claims whose debtor is
likely to remain the distressed bank and therefore
are likely to receive only very low recovery (if
any) in case of an insolvency of such bank.
www.taylorwessing.com
Brussels
© Taylor Wessing 2011
Cambridge
Dubai
Düsseldorf
Frankfurt
Hamburg
London
Munich
Paris
Ω
This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice.
Taylor Wessing’s international offices operate as one firm but are established as distinct legal entities.
For further information about our offices and the regulatory regimes that apply to them, please refer to: www.taylorwessing.com/regulatory.html
BeijingΩ
Representative offices
ShanghaiΩ
WarsawΔ
Associated office
Δ
NB_000599_07.11
Berlin