Capital adequacy and supervisory intervention

The authorities have concluded that fewer than 10% of banks, comprising mainly smaller
institutions such as savings and cooperative banks, will face problems in meeting the new
risk-based capital requirements. The authorities are actively monitoring the banks’ progress
in meeting these requirements and are confident that they will meet them by the
agreed commencement date.

The FSAP recommended that BaFin further develop its supervisory guidance with respect to
imposing capital add-ons so as to avoid forbearance and ensure consistent application of its
legal powers to impose higher capital requirements. At the time of the FSAP, BaFin had
developed two internal guidelines regarding the application of higher capital requirements for
addressing interest rate risks in the banking book and organisational deficiencies.

Although no further guidelines were developed subsequently, the transposition of the CRD IV in the
German Banking Act (effective 1 January 2014) includes a list of circumstances that would
require capital add-ons and thereby restrict supervisory discretion in the decision to impose
higher capital requirements; in most cases the only discretion left to BaFin is the decision
on the amount/rate of the capital add-on. BaFin has stated that it intends to develop further
guidance for supervisors on how to determine the appropriate amount/rate of capital add-on
under different circumstances set out in the Banking Act and taking into consideration the
severity of the problem.