Preventing Bank Insolvencies in the Financial Crisis: The German Financial Market Stabilisation Acts

Abstract

The Financial Market Stabilisation Act of 2008 and the Supplementary Financial Market Stabilisation Act of 2009 allow the German state to gain unlimited control over banks of systemic importance. The emergency character of both acts is to be understood against the background of the turbulences of the financial crisis and the short time span available for bank rescue. Prior to the Acts, neither German insolvency law nor company law nor capital market law provided the means to safely restructure troubled banks. The content and evaluation of these state interventions in the banking sector under the pressure of the financial market crisis are relevant not only for Germany, but in a broader international context.

The first mechanism to obtain unlimited control over banks of systemic importance, which has been applied in the takeover of Hypo Real Estate in 2009, relies on company and takeover law instruments such as capital increases and squeeze-outs. These instruments have been modified by the two Financial Market Stabilisation Acts as regards state-initiated takeovers of systemically important banks. However, these modifications and additional measures, e.g., for combating shareholder strike suits, raise doubts on their compatibility with EC law and German constitutional law. Indeed, actions at the German Federal Constitutional Court are already pending.

The second mechanism to obtain unlimited control involves expropriating the shareholders of systemically important banks. This comes with advantages such as transactional certainty and compliance with EC law. However, expropriation touches on the fundamental principles of the German economic order and especially on the constitutionally guaranteed right of ownership. The Rescue Takeover Act, which has been introduced by the Supplementary Financial Market Stabilisation Act, does not breach this constitutional guarantee. However, great care has to be taken in the application of the Act in the individual case.