The Banking Act (KWG) regulates the business activities of banks and financial services companies. The focus is on the regulations governing the amount of lending in relation to equity, reserve requirements, Bafin’s influence on business activities and organizational requirements.
Basis of the KWG
The aim of the KWG is to steer the banking industry in such a way that, on the one hand, the banks are protected against bankruptcy and, on the other hand, that investors’ deposits are not jeopardized. This should generally protect the banking industry. The KWG came into force in 1936. Among other things, the KWG regulates the operating license for a company with the business object banking.
Loans and deposits
For the purposes of the KWG, the analysis of a credit institution does not separate deposits and loans. The notification of large loans and deposits ensures that they are in a healthy relationship. If the lending volume exceeds the permitted amount, Bafin decides whether or not lending is permitted. The companies have a duty to provide information, in which the key figures for the individual loan and deposit volumes must be stated on a monthly basis. For loans, a distinction is made between standardized loans, million credits and large loans. With regard to large loans, the report must be made every three months.
Definition of large loan
Under a large loan, the KWG understands all loans to a borrower in the sum, provided they exceed ten percent or more of the liable equity capital of the bank. As a result, a large loan in the context of credit default risk poses a particular risk for the bank. For monitoring, large loans as well as millions of loans are to be reported to the central bank for evidence of the Deutsche Bundesbank, the department that oversees bank lending. These loans are not just loans to non-banks, but also include cross-institution loan lending.
This pass, implemented in Germany as Solvabilitätsverordnung, regulates the capital requirements for a bank with regard to borrowing. In addition to the risk weighting of the loans granted, Basel II is still based on two other cornerstones. One is the regulatory review process, which provides for ongoing scrutiny by the state bodies. Secondly, market control plays a role. This is made possible by the disclosure of the business activity. This allows market participants to assess how conservative or speculative a company works and reward or sanction it accordingly.
Related topics Credit Equity Equity Debt Bankruptcy Credit intermediary Residual debt waiver Remaining debt insurance Prepayment penalty Usurious interest Interest
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