How can international banks operate in your jurisdiction?

Generally, the provision of activities regulated under the German Banking Act (Kreditwesensgesetz - KWG) is subject to a banking license issued by the German Federal Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) or by the European Central Bank under the Single Supervisory Mechanism, where applicable.

An international bank wishing to establish a presence in the German market and provide banking or financial services on a systematic basis may set up a subsidiary for this purpose. A subsidiary will be a separate legal entity and will require a BaFin license as a credit or financial institution, while whilst also being subject to the full banking supervisory regime in the future.

Credit institutions and financial services institutions within the meaning of Article 4 para. (1) number 1 of Regulation (EU) No. 575/2013 which are domiciled in the EEA may profit from the so-called European passport and forego the requirement of obtaining a BaFin license when providing harmonised regulated activities. Provided that the institution is regulated in its home state and its license covers the harmonised activities which it intends to provide in Germany, the KWG entitles it to invoke the passport relief. The institution has the option of carrying out its activities either through a German branch or on a cross-border basis without establishing a physical presence in Germany.

Banks which are domiciled in a country outside of the EEA do not have the option of the passporting regime. German branches of such institutions are treated by the KWG as credit or financial services institutions in their own right. The establishment and operation of a third-country branch is therefore subject to a licensing procedure by the BaFin and must, with very few exceptions, comply with the obligations and supervision regime for domestic credit and financial services institutions.

Within narrow limits, the BaFin may consider the provision of banking services from abroad and/or at the initiative of clients to be outside the scope of German regulation. Where the cross-border regulated activities are subject to German licensing requirements, a foreign bank may also take recourse in applying for exemptions, including the license requirement. The BaFin has full discretion to determine on a case-by-case basis whether the type of services provided by the institution justifies the exemption from supervision. However this is only granted in exceptional cases.

Another possibility is establishing a representative office, which is very lightly regulated in Germany. The scope of permissible activities is, however, limited to general promotional measures, the collection of financial data and similar ancillary steps.

What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

To the extent that a CRR credit institution or EEA financial services institution is passported into Germany, the BaFin has no discretionary powers to reject the establishment of a branch. The institution will continue to be supervised in its home state, notwithstanding, a number of provisions of the KWG that remain applicable to the German branch´s activities. The BaFin will also retain some residual supervision, including the right to take measures to ensure compliance with applicable German law, which may go as far as suspending the operations of the branch.

The branches of banks from third countries (i.e. outside the EEA) which may not invoke the passport relief must undergo the full BaFin licensing process. The BaFin will inter alia take into account whether the branch will be supplied with adequate financial means, have a sustainable business plan and whether the managing directors are reliable and sufficiently qualified as well as examining the holdings structure.

Going forward, branches of third-country institutions will essentially be subject to the same prudential requirements as German credit institutions, including with regard to capital requirements, liquidity, solvability and integrity of business operations.

Based on the principle of reciprocity, banks domiciled in the US, Japan and Australia are entitled to certain exemptions. The German Ministry of Finance has waived some prudential requirements with regards to inter alia own capital, qualified holdings and large exposures, based on equivalent supervision and the reciprocity principle between Germany and their home state.

Is resolution an important factor in your supervisor’s determination of a branch?

Germany has transposed the Bank Recovery and Resolution Directive (No. 2014/59/EU - BRRD) into German law (which is inter alia applicable to local branches with the exception of passported branches of EEA credit and financial services institutions). One of the key requirements is that the institutions draw up recovery plans, including (where applicable) on a consolidated level. The BaFin, the Federal Agency for Financial Market Stabilisation (Bundesamt für Finanzmarktstabilisierung – FMSA) and the Deutsche Bundesbank are granted extensive authority to review the recovery plans and take steps to verify that recovery plans meet the expected standards.

Furthermore, the BaFin may de lege lata take extraordinary measures in the event that a branch may be at risk of defaulting on its obligations or endangering the client assets entrusted to it. In such instances, the BaFin is likely to consider the existing recovery and resolution plans of the branch when deciding whether a default is likely and which measures are necessary to avert the failure of the institution. Please note that considerable debate is ongoing in Germany on the exact extent of the residual supervision which the BaFin is entitled to exercise over German branches of foreign institutions.

The BaFin has issued a circular setting out its interpretation of the requirements to be met by the recovery plans of credit institutions which may potentially endanger the stability of the German financial system. This circular contains provisos for group structures and generally applies to branches. Seeing as the circular predates the transposition of the BRRD into German law, the BaFin´s administrative practice shall be seen in the light of this legislative development.

Lastly, in exceptional cases when the BaFin is compelled to take direct action against non-compliant branches of EEA institutions, it will consider whether the home-state regulator may have initiated recovery measures with regard to the institution. Where this is found to be the case, the BaFin may not impose its own measures on the branch.

What are the regulatory reporting requirements placed on branches?

If EEA branches are operating under the European passport, the branch is obliged to submit annual reports to the BaFin and the Federal Bank of Germany (Deutsche Bundesbank) and quarterly financial statements, as well as ad hoc notifications in the event of important structural or financial changes. In addition, large credit exposures as well as important structural changes or the onset of events of insolvency or over-indebtedness must be reported.

In principle, third-country branches are obliged to uphold the full reporting requirements prescribed for domestic credit institutions.

On a separate note, suspicious transaction reports must be submitted by both EEA and third-country branches in the event of possible connections to money laundering or the financing of terrorism.

Additionally, all branches must notify the competent authorities in the relevant federal state upon commencement of business activities in accordance with the German Trade, Commerce and Industry Regulation Act (Gewerbeordnung), as well as meeting the statutory publication obligations with regard to their annual statements etc.

Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

There are no provisions in German banking supervisory law prohibiting a group from offering services in Germany through both a local branch and a subsidiary as two separate entities.

As noted under section 1 above, the subsidiary would constitute a legal entity separate to the parent institution. A branch, on the other hand, would still form part of the foreign institution, although branches of non-EEA institutions are treated as a credit or financial institution in their own right under the KWG for the purposes of banking supervision. In the event of several German branches of the same non-EEA institution, these are treated as one German institution.

In consequence, the scenario of operating on the German market through both a subsidiary and a branch does not amount to a dual-licence situation under German law. One licence would be held by the German branch as part of the foreign, parent institution; separately, another licence would be held by the subsidiary as a distinct legal entity. Thus, a foreign credit or financial institution may set up a branch and/or establish a German subsidiary, and in either order.

The licensing procedure follows the same rules for non-EEA branches and subsidiaries of foreign credit or financial institutions (regardless of their domicile), and the same standards must be met. BaFin will inter alia examine the shareholder structure of all applicants and review the consolidated financial statements for the group, where applicable. An additional requirement for subsidiaries is that the financial supervisor in the home state of the parent institution must approve the establishment of the German subsidiary; absent such approval, BaFin must reject the licence application.

As set out above, credit and financial services institutions domiciled in the EEA may be passported into Germany and thus establish a German branch without having to obtain a BaFin license. Naturally, an EEA credit or financial institution may, parallel to a passported branch, establish a separate subsidiary in possession of a licence.

Seeing as branches and subsidiaries of foreign credit or financial institutions are two separate entities under German law and the institutions do not hold dual licenses, we are not aware of regulatory developments which might hint that BaFin is looking to restrict that practice. Several market participants operate on this basis.

Where can I find further information?