Bafin Paper Tiger’s New Claws May Not Scratch in Rate Scandals

Bafin, the German financial watchdog that’s been called a “Paper Tiger” because it can’t fine for abuses like Libor-rigging, got its claws sharpened this year. It may not help in the next benchmark scandal.

While the watchdog can levy large fines under the new rules for some offenses -- such as not meeting capital requirements, failing to disclose information or not fulfilling duties in granting loans -- manipulating rates isn’t one of them. That means they probably can’t be used in Bafin’s probes into precious metals benchmarks and other rates.

Fines for banking-rule violations had been capped at 500,000 euros ($682,000). As of January 1, the Bonn-based watchdog can impose penalties of as much as 10 percent of annual sales, or twice the profit made through illegal actions, under rules introduced in response to the financial crisis.

Manipulating Libor “is pretty clearly a violation of banking regulations,” said Thomas Koch, a capital markets lawyer at Luther Rechtsanwaltsgesellschaft mbH in Cologne. “But nothing would change under the new fining rules. They don’t cover what we have known as the Libor scandal, or at least not directly.”

Global fines for rate-rigging reached $6 billion in December when the European Union fined Deutsche Bank AG and other companies 1.7 billion euros for manipulating the yen London interbank offered rate and Euribor, the benchmark money-market rate for the euro, to profit on their own derivatives trades. Bafin is still probing Libor-rigging at national lenders, including Deutsche Bank, and hasn’t issued any sanctions any firms in the case.

New Scandal

Banks would only face fines for benchmark manipulation if they repeated an action that the regulator had already reviewed and formally ordered to be stopped, he said.

“Once a bank has such a Bafin order on the table, it’s unlikely to violate it,” Koch said. “You can ask yourself whether the fine threat is necessary here.”

Even if Bafin lags behind its U.K. and U.S. counterparts when it comes to its ability to levy large fines, that doesn’t mean it’s less effective, said Dirk Auerbach, the head of the regulatory services group at KPMG LLP in Germany.

“The efficiency of a banking regulator isn’t dependent on the level of fines you can impose,” said Auerbach. “Bafin has effective measures at its disposal and works very efficiently.”

Conflicts Shunned

Bafin has the power to remove the top leaders of a bank, suspend shareholders’ voting rights or appoint an outside supervisor to oversee management.

The watchdog also reports on lenders’ compliance with its rules. Bafin said yesterday that banks in Germany often used the wrong parameters in rewarding bonuses to top executives and risk-takers after it reviewed the way 15 lenders rewarded employees in 2012, without naming the firms.

The regulator’s enforcement powers are hardly ever used by Bafin, which typically resolves issues discretely with any bank. The threat that Bafin may use any of these powers is often enough to make a bank comply with any demand the regulator may have, Koch said. Banks shun public conflicts with the supervisor, he said.

Deutsche Bank is reviewing whether to sanction senior employees for their roles in the interest-rate rigging scandal after Bafin sent it a report with preliminary findings, a person with knowledge of the case has said. The bank’s supervisory board will discuss penalties later this month, the person said. That includes firing or disciplining employees responsible for how the bank dealt with the scandal.

Bafin is also reviewing how banks participate in gold and silver price setting as part of its review of benchmark administration in the wake of the Libor-rigging scandal.

‘Toothless Tiger’

“In many areas Bafin acts informally without using formal orders,” said Koch. “Bafin’s reputation as a toothless tiger is unjustified.”

Auerbach also says there’s a difference in style with U.S. and U.K. regulators, who have fined UBS AG, Royal Bank of Scotland Group Plc, Rabobank Groep, ICAP Plc and Barclays Plc for trying to manipulate the London interbank offered rate and similar benchmarks. The Libor probe has triggered investigations into benchmarks for swaps to precious metals.

“The Anglo-Saxons are more publicity-oriented, they denounce misconduct,” said Auerbach. “From a German perspective this often seems overdone and not in line with our legal principles, it shouldn’t be copied here.”

The new rules encourage Bafin to act more like U.S. and U.K. watchdogs. A “name-and-shame” section allows the regulators to publish any fines it imposes or any individual order it issues, Koch said. These new powers are a change from the strict confidentiality Bafin has had to adhere to previously, he said.

“The market is very sensitive to any such communications,” Koch said.

The German regulator is likely to use the name-and-shame rules with caution, in line with its tradition, Auerbach said.

“We expect that action will continue to be taken, preferably in the background to not cause unnecessary turmoil in the markets,” he said.

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