German banking reform threat to private equity

Carmen Reichman
20 March 2013

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The German government's draft proposals for banking reform, based on the Liikanen Report, are seen by many in the private equity industry as yet another threat from legislators, despite the unclear effect it may have on the asset class. Carmen Reichman reports

Similarly to the UK, the German government is currently contemplating ways to protect its retail banks from the speculative activities of investment banking. Last month, the government approved a draft bank-separation law and a new set of criminal-law provisions for the financial sector, originally proposed by finance minister Wolfgang Schaeuble.

The announcement of a reform came soon after the controversy surrounding the government's implementation of the AIFMD had finally been smoothed, and ignited yet another debate in the industry.

SJ Berwin partner Christian Schatz (pictured) says: "To restrict bank lending to private equity funds is simply silly and creates yet another hurdle for banks trying to stay in business. The measure will not guarantee that customers' deposits are safe but will instead shift business to other banks abroad. It's simply cattle chasing and will lead to the demise of the banking financing model. Then banks may stop lending to businesses altogether."

The government's draft sets out provisions to make reorganisation and wind-ups of financial institutions easier should the worst occur. It also introduces clearer rules for the criminal liability of executives at banks and insurance companies should they be found to have violated the rules. Most relevant to private equity, the draft proposes the separation of deposit-taking banking activities from risky investment activities and implements an agreement with France to drive forward Europe-wide arrangements to separate banking businesses.

BVK managing director Ulrike Hinrichs says: "The draft mistakenly assumes that there is good and bad credit. We welcome measures to make deposits safer. But this must not happen at the expense of venture capital and the financing of the German Mittelstand. We think the draft law has yet to see substantial rectification."

The Finance Ministry based its proposals on last year's Liikanen Report, albeit ignoring Liikanen's proposal to test his findings in a study prior to implementation. The relatively high thresholds proposed, however, mean that in practice only three banks should be affected by the law in Germany: Deutsche Bank, LBBW and Commerzbank. Most other banks have reduced their proprietary trading activities after the crisis and don't currently have trading-related assets worth more than 20% of their balance sheets. However, the larger banks are common lenders on private equity deals.

It is currently unclear to what extent the private equity industry will be affected by Europe-wide banking reforms, especially as the asset class is not seen to have caused the crisis underpinning the reforms. Some industry figures even believe the proposed reforms in Germany are simply another attempt by the government to paint an anti-finance image before the upcoming election in the summer.