The New German Bank Reorganization Act

28-Jul-2011  |  Banking & Finance, Restructuring & Corporate Recovery


Or "no more too big to fail"

In the aftermath of the financial crisis the New German Bank Reorganization Act came into force on 1 January 2011. Such new law anticipates / tries to anticipate the planned new EU framework for crisis management in the financial sector. While the stricter equity and liquidity requirements of Basel III shall generally avoid a financial crisis of a bank, the New German Bank Reorganization Act focuses (further down the road) on what to do, if banks nevertheless become financially distressed in future. The new law takes into account the experience of the last financial crisis which proved that the old law did not provide sufficient means to restructure / liquidate banks that were thought to be “too big to fail” (Commerzbank) or “too connected too fail” (Hypo Real Estate). The New German Bank Reorganization Act aims at providing a tool-set that in future will allow the restructure / liquidation of banks regardless of their size or connections within the financial world. The new law can therefore be viewed as an attempt to shift financial risk of failure from the tax payer to the individual owners and creditors of the respective distressed bank.

The new tools offered by the New German Bank Reorganization Act aim at

  • creating means to avoid insolvencies ofsystem-relevant banks,
  • creating instruments for the separation of a bank’s system-relevant business from its non-system- relevant business where insolvency is unavoidable, and
  • creating a special fund to be raised by contributions from the banking sector which shall finance future restructuring measures regarding system-relevant banks in crisis (the "Restructuring Fund").

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Lawyers Dr. Hendrik Boss, Nick Moser, Claire Martin-Royle, Neil Smyth, Harald Bechteler, Ingo Gerdes, Dr. Matthias Kampshoff, Dr. Michael Malitz, Dr. Andreas Schrettl