FRSGlobal : Risk Analysis and Regulatory Reporting

Regulators in Germany

The German financial sector is supervised by two bodies:

• Federal Financial Supervisory Authority, Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin)
• The Deutsche Bundesbank

FRSGlobal in Germany

The German banking sector emerged from the recent financial crisis as a more visible global leader, and is now playing a major role in proactively dealing with the bail-out of troubled EU member countries. German financial market issues identified early in the financial crisis with the Landesbanken have largely been sorted out. The strengthening of financial firms is due to a more positive economic outlook, substantial policy efforts, and government-backed restructuring. Currently, risk to the financial system exists around the possibility of an EU-wide economic recession and remaining issues around sovereign debt defaults, particularly in Greece.

The German government took a number of initiatives to improve the financial stability framework, based on lessons learned during the crisis. Reform of prudential banking supervision and consolidation into German’s national central bank, the Bundesbank, parallels regulatory reforms initiated in other major financial centers like the UK. Currently these responsibilities are split between the Bundesbank and BaFin.

The government is also planning to introduce a permanent resolution regime for systemically important banks. Coordination with the new European financial supervisory authorities has been challenging at the start, as Germany both tries to balance participation with national needs to remain competitive as a global financial services leader.

Regulatory Compliance in Germany This document provides an introduction to FRSGlobal and its regulatory compliance solution for the German financial services market Download in English » Download in German »

As leaders in the field of risk and regulatory solutions FRSGlobal understands your business needs, our heritage in and in-depth knowledge of the financial market enables the development of our solutions to be so flexible that they meets the needs of ALL firms whatever the size or complexity.

Regulatory Environment — Germany

Statutory

Monthly balance sheet statistics
Domestic banks (MFIs) have to report at month-end, asset and liability positions in the form of a balance sheet with a supplementary breakdown of the balance sheet items by category, maturity and sector of the corresponding creditors and debtors.

Prudential

The prudential framework of a regulator is centred around risk reporting. This includes capital adequacy reporting (solvency risk), liquidity risk, market risk and interest rate risk, as well as concentration risk like large exposure reporting. All of which are supported by the FRSGlobal solution.

Capital adequacy reporting (SolvV)
Capital adequacy in Germany is based on the Basel II framework. These reports cover information on calculation of capital adequacy (solvency risk), credit risk, market risk and operational risk. The capital requirements apply to single entities as well as groups of institutions and financial holding groups on a consolidated basis.

Liquidity reporting (LiqV)
The current liquidity regulation is applicable to individual entities. Credit institutions are required to submit monthly returns to the Deutsche Bundesbank (Forms LV 1 and LV 2). The reporting requirements cover calculation of liquid assets, liabilities and ratios. The reporting requirements are imposed by the BaFin on a case-by-case basis for institutions that use their own internal procedures. Such reports are to be submitted electronically only.

Large exposures reporting (GroMiKV)
Financial institutions are required to submit reports on exposures to an individual borrower or a single borrower unit which amount to or exceed at least 10% of the liable capital or own funds. In addition, banks are also required to submit the information on loans exceeding € 1.5 million or more to the Deutsche Bundesbank on a quarterly basis.

Statistical

Borrower statistics
These reports cover detailed information on loans that are outstanding to domestic enterprises and households, which include non-profit institutions at the end of the quarter and are broken down by borrower category, loan type and maturity.

External position of banks (MFIs)
Statistical reports on external assets and liabilities of domestic banks, their foreign branches and foreign subsidiaries broken down by country and currency as well as by category, maturity and sector of the respective creditors and debtors are required to be reported monthly. The foreign currency positions concerning residents (supplementary form FW) of domestic banks are also required to be reported at month-end.

MFI interest rate statistics
Domestic banks (MFIs with the exception of money market funds) are required to report the interest rates applied and the related volumes of euro-denominated deposits and loans related to households and non-financial corporation’s domiciled in euro-area countries. The interest rate statistical data is collected for outstanding amounts and new business for the instrument categories are defined in the reporting templates.

Securities deposits statistics
These statistics are concerned with securities deposits which are operated for domestic and foreign depositors ("B safe custody business") by the institutions required to report. Additionally, domestic banks also have to report their own securities portfolios ("A safe custody business") irrespective of where the securities are being kept in safe custody.

The statistics are collected at the end of the quarter based on a security-by-security reporting system. The reports comprise negotiable bonds and debt securities, negotiable money market paper, shares, participating certificates and investment fund certificates - broken down by economic sector and the customers’ country of origin. Furthermore, the number of customer safe-custody accounts is recorded and broken down by economic sector.

Securities issuance statistics
These are Statistical reports related to debt securities both in terms of volume and information. Detailed information regarding the volume and issuance of debt securities intermediated by domestic banks, domestic non-MFIs, and foreign issuers (as long as domestic banks are involved), are included in the reports.

Transactional

Payment Statistics
Payment statistics cover reporting requirements that exist on transactional level and are derived from data about payments which form the basis for the publication of the Euro system’s “Blue Book” and the Bank for International Settlements’ “Red Book”.

What’s Coming Up — Germany

CRD III

Discussion Paper on market risk standard approach (17/2011 Consultation)
Addressing the shortcomings of the standardised measurement methods for market risk, the Basel Committee of Banking Supervision (BCBS) announced adjustments to its market risk framework (a fundamental review of trading activities). The Bafin published a discussion paper ‘A regulatory algorithm for determining capital requirements as a stressed value-at-risk’ relating to future design of a revised standardised approach for market risk.

Review of the trading book positions (16/2011 Consultation)
In addition, the BaFin with agreement from the Deutsch Bundesbank published a draft circular on implementation of Article 1, paragraph 6 and Annex II, point 4 of the Directive 2010/76/EU (CRD III) for consultation. This circular highlights the proposals related to evaluation of selected trading book positions.

The predominant parts of the CRD III induced changes mentioned in this circular applicable from December 31, 2011 are expected to be implemented through an amendment to the Solvency Regulation.

SolvV – Solvency reporting (12/2011 Consultation)

Based on the Directive 2010/76/EU (CRD III amendments) the BaFin published a draft regulation suggesting changes to be integrated into national law, applicable from December 31, 2012.

Modernisation of German regulatory reporting (Consultation 6/2011)

The BaFin recently released a consultation paper on changes in the German regulatory reporting regime (Consultation 6 / 2011). With emphasis on risk based supervision, it includes proposals regarding time frames and legal requirements before the final implementation expected to come into effect at the end of 2011.

Although details of changes in liquidity have not been discussed in the consultation paper it has been announced that liquidity reporting will be further integrated into the COREP framework.

The Modernisation concept is modular and major changes are expected in the following areas :

Module A – FINREP
The FINREP module will depend on the reporting obligations of the financial institution. The timeline for implementation of Module A is expected to be end of 2011.

Module B – Large exposures

As a preventive measure for early identification of risks and to get a detailed insight into the extent, nature and quality of lending, regulations governing large exposures and loans (GroMiKV) are expected to change from end of 2012 and gradually continue till 2015.

Module C – COREP (EU - defined reporting on solvency reporting)

Solvency reporting (SolvV) in Germany is based on the Common Reporting framework (COREP) of the EBA. Solvency reporting will be migrated into COREP based on the (Basel III/CRD) requirements at the end of 2012.

Large exposures reports and liquidity reports will later be integrated into COREP.

The reporting frequency (quarterly or semi-annually) is expected to be modified at the European Union level and will depend on the information to be notified and the type of institution.

The report filling deadlines are currently under review. The relevant German regulations are already more stringent than the COREP requirements.

Module D – ICAAP (Internal Capital Adequacy Assessment Process)

From the end of third quarter of 2011, a standard report on the risk bearing ability to assess the internal capital adequacy and risk bearing capacity will be required to be submitted. All financial institutions are required to submit this report on individual and consolidated basis.

The reports include qualitative risk bearing data with details on internal risk management system, risk scenarios, risk types, stress tests, risk strategy for mitigation etc. used by financial institutions for risk management.

Monthly reporting is mandatory for FINREP plus users (fully or partially) and annually for all other institutions.

Basel III

The recent financial crisis brought risk and regulatory issues into sharper focus, highlighting serious loopholes. Regulators around the world are attempting to introduce stringent banking reforms to prevent a reoccurrence.

In a bid to strengthen the regulation, the Basel Committee on Banking Supervision (BCBS) introduced a third Basel Accord – Basel III with new capital adequacy, liquidity and disclosure requirements. Basel III represents a significant tightening of the regulatory rules and will impact almost every business model throughout the financial sector.

The main proposals of Basel III are:

• Raise quality of capital base (2013): Capital structure undergoes significant reform- the constituents of Tier 1 and Tier 2 capital have been redefined to enhance its loss absorbing properties as well as the abolition of Tier 3, the amount of capital that needs to be held has increased and there are notable new deductions from capital
• Liquidity standards (LCR – 2015 and NSFR– 2018) – In addition to the 2008 paper on Principles for Sound Liquidity Risk Management and Supervision, Basel III aims to establish a single global framework to measure and monitor liquidity including the new Liquidity Coverage Ratio (LCR) and Net Stable Funding Ration (NSFR)
• Countercyclical buffers – Conservation buffers are to be held by institutions to protect against future severe shocks. Firms also need to hold a capital buffer to make them more resilient to a possible collapse of the banking sector
• New 3% Leverage ratio (2015) - The new Leverage Ratio is a supplement to risk based capital requirements to achieve a globally comparable measure and safeguard against model risk and measurement error. A 3% ratio was considered during the calibration period.
• Risk coverage – There is a major overhaul for risk coverage in the following areas: capital requirements for trading book and complex securitisation, counterparty credit risk and raised Pillar 2 and 3 standards.

The countdown to compliance has begun as Basel III will be incorporated into national law from January 1, 2013.

Over last few years the BCBS has introduced several packages of measures (informally referred to as Basel II plus or Basel 2.5) for securitisations and market risk. These improvements were adopted as CRD III amendments at EU level. Germany has already implemented the changes related to pillar 2 as an amendment to Minimum Requirements for Risk Management (MaRisk) regulation. Further the CRD III will be incorporated into national law by the end of 2011.

The Basel III proposal is expected to be implemented across the European Union as an amendment to Capital Requirements Directive (CRD IV). As Germany aims to follow EU proposals the Basel III will be implemented once the CRD IV proposals have been finalised. For the industry to understand the recommendations made by the BCBS the Bundesbank has published a guide introducing the most important provisions of Basel III.

With extra capital requirements and further reporting demands amongst other entailments, it is no surprise that Finance, Risk and Treasury departments have started to feel the pressure. Basel III calls for a more holistic approach across global banking industry and means a complete change in risk and regulatory culture but the main question is: when will you be ready?

CEBS change over to EBA

The European Banking Authority (EBA) came into effect from 1 January 2011 and took over the responsibilities of Committee of European Banking Supervisors (CEBS). EBA is responsible for safeguarding public values such as stability of the financial system, transparency of markets and financial products, protection of depositors and investors wealth.

Financial Reporting (FINREP)

The aim of FINREP has always been to harmonise the financial reporting within the member states to improve comparability. However after implementation it has become apparent that the large number of national discretions has prevented to reach this goal. With the announced adjusted guidelines, the member states are obliged to apply at least the balance sheet and P&L statement and can choose out of 23 additional templates to apply. However CEBS insists that on all templates that the national regulator adopts, no changes should be made to its meaning or appearance.

Further it asks the member states for a firm commitment that the FINREP reporting will be the only consolidated financial reporting that an individual banking group has to provide to the regulator. Also the scope of consolidation will need to be aligned with the CRD.

Common Reporting (COREP)

In general the adoption of the COREP templates has been more straightforward between the member states than FINREP. However there have been still numerous differences. Here CEBS intends to align this further medium term with clearer definitions and tuning of the COREP templates.

Large Exposures is included in the COREP framework with the revised guidelines. It will be applicable as of 1st of January 2011, but only move into a binding core reporting framework as of 31st December 2012.

Read our data sheet for more information on the Large Exposure Reporting requirements

Concentration risk

Draft guidelines have been published on a revision of the concentration risk reporting. The most notable change is that reporting on concentration risk within an individual risk type (intra-risk) is considered to be insufficient. It pleas for reporting based on risk interaction (inter-risk) and would be related to credit, market, operational and liquidity risks.

Read the comment piece “CEBS pushes forward with reporting harmonisation agenda” for more information on the new requirements and their impact on financial institutions »

CEBS stress testing

Read the comment piece "CEBS stress testing" which looks at the results of the CEBS EU-wide stress testing exercise of July 2010, compares them with the previous US and UK FSA stress testing results, and looks at what the market can glean from them »

Solvency II

Solvency II is a fundamental and wide-ranging review of the capital adequacy regime for the European insurance industry. It represents both a challenge and an opportunity for European insurers. Globally it is scheduled to come into effect by 31 Dec 2012..

The project initiated by European Commission as an advancement to Solvency I is expected to enhance a revised set of EU-wide capital requirements and risk management standards..

The objective of new system is to introduce more sophisticated solvency requirements for insurers, in order to guarantee that they have sufficient capital to withstand adverse events, such as floods, storms or big car accidents..

Currently, EU solvency requirements covers insurance risks, whereas in future insurers would be required to hold capital also against market risk (e.g. a fall in the value of an insurer's investments), credit risk (e.g. when debt obligations are not met) and operational risk (e.g. malpractice or system failure). This will help to increase their financial soundness with implementation of sound economic risk management practices in insurance industry.

With a demand of more streamlined approach towards supervision, the new system would enable insurance groups to be supervised more efficiently, through a 'group supervisor' in the home country that would have specific responsibilities to be exercised in close cooperation with the relevant national supervisors.

The introduction of group supervisors would ensure that group-wide risks are not overlooked and would enable groups to operate more efficiently, while providing policyholders with a high level of protection. Groups that are sufficiently diversified may also be allowed to lower their capital requirements under certain conditions.

The Directive often referred as Basel II for insurers is based on a three pillar approach which is similar to the banking sector (Basle II) but adapted for insurance.

The new provisions of Solvency II will be adopted under the Lamfalussy process:

Level 1 – Solvency II directive includes overall framework principles developed by European Commission approved by European Parliament and European Council.

Level 2 –Includes introduction to implementation measures developed by European Commission and approved by European Insurance and Occupational Pensions Committee (EIOPC)

Level 3 –Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) will guide European Commission to enhance supervisory standards.

Level 4 –European Commission will finally monitor, Compile and enforce the regulation regime.

Maximum harmonization is assumed with the new Solvency II framework Directive. This means the European rules will be implemented all countries of the European Economic Area (i.e. the EU plus Iceland, Liechtenstein and Norway). The European Union’s Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has recommended to the European Commission that Bermuda, Switzerland and Japan will be the first countries assessed for equivalence with EU insurance regulations under Solvency II.

Thus the new solvency II requirements with challenges and opportunities ahead will be more risk-sensitive and more sophisticated than in the past, thus enabling a better coverage of the real risks run by any particular insurer.