German ruling aids foreign banks

Author: | Published: 1 May 2005

The German Banking Act says that only licensed credit institutions can carry out banking business in Germany. Banking business includes taking deposits, granting loans, purchasing bills of exchange, purchasing loans before their maturity, granting guarantees, entering into certain derivatives transactions and selling certain financial instruments. This has been of particular relevance for special purpose vehicles (SPVs) originating collateralized debt obligations as well as for ordinary securitization transactions relating to Germany.

Until recently the German Financial Services Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht - BaFin) has maintained that an entity domiciled outside of Germany is considered to pursue banking business in Germany if it targets German clients, even if it does not have an office or personnel in Germany.

This broad view has recently been under court scrutiny and a Court of Appeal's decision casts serious doubts on the justification for the BaFin's far-reaching licence requirement.

The German Banking Act

Under Section 32(1)...