BASEL II: PROBLEMS AND USAGE

4.1. Development of Banking Regulation in Germany
Banking regulation and supervision in Germany was firstly established
as a response to the banking crisis of 1929-1930. Prior to 1931, there
was no general regulation of the German banking industry. Only some particular
banking groups, namely savings banks and mortgage banks were
subject to regulation by state governments and federal government, respectively.
The Emergency Decree of 1931 was primarily targeted at overcoming
the crisis at that time and preventing future crises. Savings banks
were excluded from this decree and were under the old regulatory rules. 12
Only in 1935, with the enforcement of the German Banking Act all
banks were incorporated. The Supervisory Agency set up at the German
Central Bank served as a regulatory authority until 1939, when it was dissolved
and its functions were transferred to the Ministry of Economics.
From 1949 and until the enactment of the Banking Act 13 in 1962, banking
supervision had a decentralized character and was exercised by the respective
state governments. In 1962, a new supervisory institution was created,
the Federal Banking Supervisory Office (FBSO). It was an independent authority
reporting to the Federal Minister of Economics (since 1972 to the
Federal Minister of Finance). 14
With the extension of banking business activities, the necessity of
regulatory adjustments has become apparent. While the first amendment
to the Banking Act did not introduce significant changes, the second amendment
of 1976 fairly strengthened the power of the FBSO via the permission
to perform inspections without any special reasons. Additionally, the
amount of losses which led to a closure of a bank by the FBSO was determined.
The second amendment of the Banking Act was a response to the
failure of Bankhaus Herstatt in 1974, which revealed gaps in the existing
regulation. 15
According to the third amendment, which came into force in 1985,
supervision was allowed on the basis of a consolidated balance sheet of a
group of banks. This regulation targeted at the prevention of building up
credit pyramids, which were formed by banks through their subsidiaries
without any increase in the capital base of the mother institution. There
were five further revisions of the Banking Act, which were primarily devoted
to the incorporation of EU directives. Thus, legal conditions for the
freedom of banking operations were created. This facilitated the intensification
and harmonization of banking regulation within the EU.
12 See Hackethal/Schmidt (2005).
13 Banking Act is a legal basis for the supervision of the banking business and financial
services in Germany.
14 See Neus (2007).
15 See Bundesanstalt für Finanzdienstleistungsaufsicht (2009).
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