Dr. Holger Schelling
Partner, Co-Head of Financial Institutions Regulatory Europe

Dr. Holger Schelling is a partner in Dentons’ Frankfurt office, Co-Head Financial Institutions Regulatory Europe and a member of the German Banking & Finance practice. He advises banks, investment firms, fintechs and other financial institutions on financial regulation, including banking regulation, securities regulation and payment services regulation.

He has successfully advised domestic and international clients on the implementation of regulatory changes, such as MiFID II, BMR and the reform of EURIBOR and LIBOR, PSD2 and EMIR. He provides commercially minded advice on innovative technology such as online payment services, robo advice and blockchain technology. A further focus of his practice is on legal and commercial aspects of sustainable finance. Holger also has extensive experience regarding structured products and OTC derivatives. He represents clients in regulatory enforcement proceedings instituted by financial supervisory authorities and in civil proceedings.

International Banking Review Germany 2024/25

1.Impact of rising interest rates on German banks

In an outlook on the major risks for the banking sector published in January 2023, the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, “BaFin”) mentioned, inter alia, risks resulting from the decline of real estate prices (see paragraph 2 below), risks of defaults on loans to German companies due to the overall deterioration of the German economy and risks from cyberattacks. However, the rise in interest rates was identified as one of the greatest and most fundamental risks. The abrupt rise in interest rates began to constitute a challenge for the profitability of many banks which has led to losses in their securities and fixed rate loan portfolios. The BaFin forecasted that a further sudden and sharp rise in interest rates would place a heavy burden on some institutions.

2.Substantial decline in real estate prices

For many years prices of both residential and commercial real estate in Germany increased steadilyr, despite the warning from supervisors against an “overheating” of the market. This development was supported by a booming real estate finance market that provided for relatively cheap financing, due to low interest rates. The volume of real estate loans in the books of German banks constantly increased. 2023 marked the end of this long-term boom. Driven by an increase in interest rates and by fears of a recession of the German economy, real estate prices declined sharply, and so did the volume of real estate finance. While some commentators welcomed this as an end of the “overheating” of the market, others saw parallels to the beginning of the 2008 financial crisis. Not surprisingly, the BaFin became concerned about the risks that this development posed for banks. In 2022, the BaFin had already introduced an countercyclical capital buffer of 0.75% and a systemic risk buffer of 2% for residential real estate risks. This requirement had to be implemented by 1 February 2023.

In addition, real estate related credit and market risks have become one of the top priorities in the supervisory practice of BaFin and Bundesbank. On 29 June 2023, the BaFin published a revised version of its guidance on minimum requirements for risk management (Mindestanforderungen an das Risikomanagement, “MaRisk”). This revised version contains a new section on the management of real estate related risks. Inter alia, it contains detailed rules on the approval process for real estate financing, the role of external experts in the valuation of real estate, risks that have to be taken into account and ongoing valuation.

3.Regulatory enforcement

Like in the years before, the trend towards a stricter regulatory enforcement practice by the BaFin has continued in 2023 and is likely to continue in 2024. Almost on a daily basis, the BaFin announces new enforcement actions. One of the focuses of BaFin’s enforcement practice is on prohibiting unregulated entities from conducting banking business or from offering financial services to German clients. This includes unregulated entities from jurisdictions outside the EU that offer financial services (often related to crypto assets) clients in Germany via the internet.

However, the BaFin also took actions against regulated entities, mainly because of alleged deficiencies in their business organisation (such as their anti-money laundering infrastructure). The amount of fines imposed continues to be much higher than in comparable cases in the past.

4.ESG and Sustainable finance

Sustainable finance continues to be one of the regulatory

priorities of the BaFin. On 26 July 2023, the BaFin published a “Sustainable Finance Strategy” which sets out BaFin’s supervisory priorities relating to sustainable finance. These priorities are summarised in 5 points:

1. Risk-oriented and practicable regulation: The BaFin re-emphasised its opposition against introducing amendments to capital requirements that would support “green” assets and penalise “brown” assets for the mere reason of being “green” or “brown”, because such amendments would not be consistent with the risk related to the relevant assets.
2. More reliable data on financial climate risks: The BaFin highlighted the importance of reliable data for managing ESG-related risks. As disclosure of such risks at company level is essential for collecting the relevant data, the BaFin announced that it would closely supervise such disclosure and increase its capacity for enforcement of the disclosure requirements.
3. Appropriate management of climate-related financial risks: Due to the uncertainties involved in ESG-related risks, the BaFin expects supervised entities to consistently review how they assess and manage such risks.
4. Preventing greenwashing: The BaFin announced that it would use all available supervisory powers to combat both, the use of wrong, incomplete or misleading information about financial products, as well as inadequate disclosure by companies of their ESGrelated risks.
5. Generating and sharing knowledge in an open dialogue: BaFin is committed to participating in further expert discussions in order to exchange information and share experience.

Following the publication of its Sustainable Finance Strategy, bank, funds, investment firms and other market participants have increased their efforts to be transparent with respect to the reasons why they market a financial product as “sustainable” or “green”. However, the BaFin acknowledged that market participants face a lack of clear and binding criteria, as well as empirical data, for assessing whether a financial product fulfills what it promises. Distributors of financial products have also continued to explicitly ask clients about their sustainability preferences in order to be able to recommend them a financial product that meets these preferences.

From a banking regulatory perspective, ESG-related risks for financial institutions (such as losses suffered as a consequence of natural disasters) have been a significant concern for regulators.  This resulted in BaFin’s calls for scenario analyses and stress tests that banks have to conduct to assess their ESG-related risks. The BaFin has announced that in 2024, it will perform special audits on some banks in order to assess whether their management of ESG-related risks is adequate. In addition, the aforementioned guidance on minimum requirements for risk management (MaRisk) was amended by two separate sections on ESG-related risks.  To the extent possible and reasonable, the BaFin requires banks to perform quantitative assessments of ESG-related risks.

5.Banking resolution

As a consequence of the financial crisis, regulators all over the world have introduced new tools on how a bank that is in financial distress can either be rescued or resolved without spending taxpayers’ money. On an European level, Directive (EU) No. 2014/59/EU establishing a framework for the recovery and resolution of credit institutions and investment firms and Regulation (EU) No 806/2014 on the Single Resolution Mechanism set out a framework for the recovery and resolution of credit institutions and investment firms. This directive was implemented in German law by the Restructuring and Resolution Act (Sanierungs- und Abwicklungsgesetz, “SAG”). While the SAG was already enacted in 2014, the BaFin continues to offer guidance. On 23 October 2023, the BaFin has published detailed draft guidance on organisational requirements that banks have to meet in order to ensure that they can be resolved, if necessary.

In addition to these legislative developments, the BaFin for the first time recognised resolution measures taken by a non-EU resolution authority. On 10 March 2023, the Department of Financial Protection and Innovation of the State of California closed Silicon Valley Bank (“SVB”) appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver of SVB. A receiver has powers similar to those of a resolution authority under EU banking resolution law. Inter alia, it can transfer assets to a bridge bank and arrange for the sale of such assets. The FDIC transferred all of the deposits and substantially all assets to the newly established Silicon Valley Bridge Bank N.A. Under US resolution law, this transfer also applied to assets of Silicon Valley Bank Germany Branch. The FDIC subsequently sold some of the assets and liabilities of SVB Germany branch to an investor, while the remaining assets were wound-up.  Under section 169 SAG the BaFin can recognise resolution measures taken by a non-European resolution authority.  On 1 August 2023, the BaFin used such power for the first time and  recognised the resolution measures taken by the FDIC, to the extent they related to claims and obligations governed by German law or assets of Silicon Valley Bank Germany Branch located in Germany. The effect of such recognition was that resolution measures taken by the FDIC, became effective under German law, so that, for example liabilities of Silicon Valley Bank Germany Branch were first transferred to the German branch of Silicon Valley Bridge Bank and later to the investor who purchased certain parts of Silicon Valley Bank Germany Branch’s business.

6.Distributed ledger technology and crypto assets

On the European level, the official publication of the Markets in Crypto Assets Regulation (“MiCAR”) on 9 June 2023 set the framework for the regulation of distributed ledger technology (“DLT”) and crypto assets ins Europe.  Albeit MiCAR has entered into force on 29 June 2023, most of its provisions will begin to apply only at a later stage. The requirements relating to the issuers of certain tokens will apply from 29 June 2024, and the remaining provisions, including licenses requirements for entities providing services related to crypto assets, will begin to apply on 30 December 2024.

Germany has already preempted some of the new requirements, for example by introducing a license requirement for crypto custody services and by qualifying crypto assets as financial instruments (1 January 2020).  Thus, entities providing services related to crypto assets already today need to be licensed as investment firms or banks.

For providers of DLT market infrastructure, such as crypto exchanges, Regulation (EU) 2022/858 of 30 May 2022 on a pilot regime for market infrastructures based on distributed ledger technology (“DLT Pilot Regime”) has introduced the possibility of obtaining a temporary license for the offering of DLT market infrastructure. Holders of such license do not have to comply with certain requirements that would otherwise apply. The DLT Pilot Regime therefore constitutes a so-called “regulatory sandbox” that reduces the regulatory burden in order to foster innovation in the DLT market. Licenses under the DLT Pilot Regime have been available since 23 March 2024. The European Securities and Markets Authority (“ESMA”) has issued guidelines on the application process. The BaFin announced on 19 April 2023 that it will fully apply such guidelines in its supervisory practice.

7.Regulation of credit servicing

Directive (EU) 2021/2167 of 24 November 2021 on credit servicers and credit purchasers (“NPL Directive”) introduced regulatory requirements in connection with the provision of certain services for purchasers of non-performing loans that were issued by EU credit institutions (“Credit Services”). Such Credit Services include

1. collecting or recovering from the borrower, in accordance with national law, any payments due related to a creditor’s rights under a credit agreement or to the credit agreement itself;
2. renegotiating with the borrower, in accordance with national law, any terms and conditions related to a creditor’s rights under a credit agreement, or of the credit agreement itself, in line with the instructions given by the credit purchaser;
3. administering any complaints relating to a creditor’s rights under a credit agreement or to the credit agreement itself; and
4. informing the borrower of any changes in interest rates or charges or of any payments due related to a creditor’s rights under a credit agreement or to the credit agreement itself.

The NPL Directive stipulate that EU member states have to require credit servicers to obtain an authorisation. Such authorisation can be “passported” into other member states, which means that credit servicers authorised in one member state can provide their services also in other member states, either on a cross-border basis or by establishing a branch. Credit service providers also have to comply with certain conduct of business rules aimed at protecting the debtors. In addition, the sellers and purchasers of NPLS are subject to certain reporting requirements.

The EU member states had to implement and apply these requirements by 30 December 2023. The German statute that implements the NPL Directive was published on 2 December 2023 (the “German NPL Act”) and entered into force by 30 December 2023.  Credit servicers that had already offered credit services before such date were eligible to a grandfathering rule. If they notified the BaFin no later than 16 February 2024 of their intention to apply for a license under the German NPL Act, they could file an application no later than 5 April 2024 and continue to provide credit services without waiting for the granting of the license.