Landeskreditbank Baden-Württemberg - L-Bank

REGULATION AND SUPERVISION OF L-BANK
IN THE FEDERAL REPUBLIC OF GERMANY
Introduction to the German Banking System
The German banking system comprises a variety of public sector and private sector banks of two general
types: universal banks and specialized banks. We are a specialized state development bank (Förderbank) that is
subject to the same regulation, in particular the German Banking Act (Kreditwesengesetz – KWG), as all other
German banks.
The German Banking Act and Regulation by the Federal Supervisory Authority for Financial Services
On May 1, 2002, the three former separate supervisory authorities for the financial sector, — the Federal
Banking Supervisory Office (Bundesaufsichtsamt für das Kreditwesen), the Federal Securities Supervisory
Office (Bundesaufsichtsamt für den Wertpapierhandel) and the Federal Insurance Supervisory Office
(Bundesaufsichtsamt für das Versicherungswesen) — were combined into a single comprehensive financial
services supervisory authority, the Federal Supervisory Authority for Financial Services (Bundesanstalt für
Finanzdienstleistungsaufsicht, the “BaFin”). The BaFin supervises banks, insurance companies and financial
services institutions.
All banks in Germany, including us, are subject to comprehensive governmental supervision and regulation
on a consolidated basis by the BaFin in accordance with the German Banking Act. The BaFin is authorized to
issue regulations and guidelines implementing the provisions of the German Banking Act and other laws
affecting German banks. Its main purpose is to protect the soundness of the German banking system. The
German Banking Act and the regulations issued thereunder have been amended over time in order to keep them
in line with internationally accepted principles. In doing so, Germany has implemented the recommendations on
banking supervision issued by the Basle Committee on Banking Supervision (the “Basle Committee”) at the
Bank for International Settlements and transformed the relevant European Council Directives into German law.
In April 2003, the Basle Committee on Banking Supervision issued its third Consultative Paper for a New
Basle Capital Accord (“Basle II”) that will replace the current Basle Capital Standards. On June 25, 2004, the
Basle Committee on Banking Supervision approved, and one day later the central bank governors and the heads
of bank supervisory authorities in the Group of Ten (G10) countries endorsed, the publication of the
International Convergence of Capital Measurement and Capital Standards: a Revised Framework. The goal of
the Basle Committee is that implementation by the member states shall take place by year-end 2006. Basle II
focuses on three key elements, or pillars: (i) minimum capital requirements, which enhance the measurement
framework of Basle I, the first pillar; (ii) supervisory review of bank’s capital adequacy, the second pillar; and
(iii) market discipline through effective public disclosure to provide for sound banking practices, the third pillar.
In addition to this capital regulation, Basle II has the goal to increase substantially the risk sensitivity of the
minimum capital requirements by closely aligning banks’ capital requirements with prevailing modern risk
management practices.
Under the German Banking Act, all German banking and financial services institutions are required to have
a license from the BaFin to carry on business. The BaFin supervises the operations of all banks, including us, to
ensure that they conduct their business in accordance with the provisions of the German Banking Act and other
applicable German laws and regulations. Particular emphasis is placed on compliance with capital adequacy and
liquidity requirements, lending limits and prudential standards governing lending imposed by the German
Banking Act and the regulations promulgated thereunder.
Cooperation by the BaFin and the Bundesbank
The BaFin carries out its banking supervisory role in cooperation with the Federal Central Bank (Deutsche
Bundesbank, the “Bundesbank”), as required under the German Banking Act. The BaFin has the sole authority to
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