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Business

Market regulator scrutinizes German bank board appointments

Germany's market regulator is using new powers to remove "underqualified" or "unreliable" individuals from 10 banks' supervisory boards. With new appointees being audited, state-run banks may face particular problems.

Frankfurt Skyline

Private banks fared better than state-run banks during the financial crisis.

German financial regulator BaFin has launched dismissal processes targeting 10 new appointments to bank supervisory boards, making first use of powers it was granted last year. Supervisory boards at major banks are widely considered to have contributed to the financial crisis by allowing managers to pursue the risky investment strategies.

BaFin's Christoph Cruwell told the Financial Times Deutschland on Monday that one supervisory board under scrutiny lacks sufficient understanding of the banking business, three have too many controlling members, and six face potential conflicts of interest. He did not name the banks or individuals involved.

"There are now legally defined standards which apply to all banks," Cruwell said. "We're assuming that these people will resign of their own free will."

The BaFin headquarters in Bonn

BaFin now monitors all bank supervisory board appointments

German corporate governance is based on a two-pronged system. Supervisory boards represent the interests of shareholders (and often employees) in the face of the management board.

A BaFin spokesman said the organization has been receiving notice of all new appointments to bank supervisory boards since August 1, 2009. Regulators were intervening in 10 instances, and may probe supervisory boards that garner negative attention.

"This is simply part of our daily work from now on," he told Deutsche Welle. "We audit the appointments, and in some cases take action on that basis."

Lack of experience at state-owned banks

Matthias Kohler of the Centre for European Economic Research in Mannheim said the supervisory boards of state-owned banks serve as an example of weakness in the system, as politicians without financial expertise are often appointed to them.

The Bavarnian state owned bank

Politicians often serve on the supervisory boards of state-owned banks

Kohler added that he believes bank supervisory boards have generally served their purpose in the past, in that they represented the interests of shareholders.

"In my opinion they did fulfill their duties, in part because shareholders were interested in very high rates of return, and so they were less critical of the risks taken by management boards," he said.

"In general, I think the state should stay out of such issues," Kohler said. "If a supervisory board fails at its duties, then I think the same principles used to bring it into existence should be applied."

Professionals agree reform needed

A Centre for European Economic Research survey of 200 financial professionals found 90 percent believed bank supervisory boards were partially liable for the financial crisis and should be reformed.

A separate study of 29 German banks found the supervisory boards of state-run banks were significantly less experienced and knowledgeable than those of private banks. Such banks account for roughly half of Germany's banking and were hit harder by the financial crisis than their private sector counterparts.

Author: Gerhard Schneibel
Editor: Sam Edmonds

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