German Legislation Would Provide Resolution Authority for Failed Systemically Important Banks

Proposed German legislation would provide a restructuring model for the rescue of systemically important banks. Finance Minister Peer Steinbrueck emphasized that the legislation is absolutely necessary in order to provide for the orderly reorganization of systemically relevant financial institutions and prevent a government takeover in the event of a crisis.

The legislation would provide for a significant expansion of the powers of the German Federal Financial Supervisory Authority (BaFin) in order to stabilize a bank early in a crisis. Banks would be offered the opportunity to timely initiate a process for their own recovery. Among other things, BaFin would be authorized to transfer a systemic part of the bank to another company in order to prevent a risk to financial stability.

The legislation envisions a two-stage process. First, there will be an opportunity for remediation in conjunction with a reorganization plan. If reorganization is neither possible nor successful, the process may allow for interference with the rights of creditors and shareholders. The legislation would provide that international contractual solution clauses allowing one party to terminate the contract in the event of insolvency would not be triggered by the reorganization process.

With regard to foreign law and creditors, the Minister emphasized the importance of obtaining an international agreement. This is consistent with the Minister’s belief that international solutions are needed to deal with the global financial crisis and restore the international financial system.

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