Applying for a German Banking License/Authorisation

Applying for a German banking licence/authorisation enables an institution to operate as a credit institution (bank) and to offer banking services on the German market. Depending on the scope of the licence applied for, the application process with BaFin and, where applicable, the ECB, can vary in complexity, which may make it advisable to seek external legal counsel. This article is intended to provide an overview of certain requirements and the procedure for obtaining a banking licence.

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German License/Authorisation Requirement

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A German licence/authorisation is generally required for anyone wishing to engage in banking activities on a commercial basis. A license is however not required if your firm is already an EU/EEA credit institution and holds a license under the Capital Requirements Directive (CRD). In such case you can rely on the European passport regime as far as the activities you want to conduct are covered by CRD. Note that the German license requirement not only covers CRD activities but also certain other activities and services. 

 

Also note that BaFin might grant license holiday for non-EU/EEA financial institutions in certain cases. Additionally, prudential reliefs may apply to banks from the US, Japan, and Australia for their German business operations.

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Banking Activities and Financial Services

 

The first step in the licensing/authorisation process is therefore to examine which banking activities, as defined under German law, are affected by the planned business operations. Banking activities as defined under the German Banking Act (KWG) requiring a licence include:

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• Acceptance of third-party funds as deposits or other repayable funds from the public, provided the repayment claim is not secured by bearer or order bonds, regardless of whether interest is paid (deposit business)

• Transactions referred to in Section 1 (1) Sentence 2 of the German Pfandbrief Act (Pfandbrief business)

• Granting of loans and acceptance credits (lending business)

• Purchasing bills of exchange and checks

• Acquisition and sale of financial instruments in the bank's name for the account of others (financial commission business)

• Safekeeping and management of securities for others (custody business)

• Activity as a central depository within the meaning of the Central Securities Depositories Regulation (CSDR)

• Taking the obligation to repurchase loan receivables previously sold before maturity

• Assumption of guarantees, warranties, and other sureties for others (guarantee business)

• Execution of cashless check collection (check collection business), bill collection (bill collection business), and the issuance of traveler's checks (traveler's check business)

• Assumption of financial instruments for the bank's own risk for placement or the assumption of equivalent guarantees (issuance business)

• Activity as a central counterparty within the meaning of the European Market Infrastructure Regulation (EMIR)

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BaFin has published several guidance notes further detailing the above activities.

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If your firm intends to provide financial services in addition to banking activities, your licence/authorisation application must also cover these. Financial services are:

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• Intermediation of transactions concerning the acquisition and disposal of financial instruments (investment brokerage)

• Provision of personal recommendations to clients or their representatives relating to transactions with specific financial instruments, provided the recommendation is based on an assessment of the personal circumstances of the investor or is represented as suitable for them, and is not solely disclosed via information dissemination channels or publicly announced (investment advice)

• Operation of a multilateral system that brings together the interests of multiple persons regarding the purchase and sale of financial instruments within the system and according to defined provisions, resulting in a contract for the purchase of those financial instruments (operation of a multilateral trading system)

• Placement of financial instruments without a firm commitment (placement business)

• Operation of a multilateral system, which is neither an organised market nor a multilateral trading system, and brings together the interests of various third parties regarding the purchase and sale of bonds, structured financial products, emission certificates, or derivatives within the system in a way that leads to a contract for the purchase of these financial instruments (operation of an organised trading system)

• Acquisition and disposal of financial instruments in another’s name for their account (execution brokerage)

• Management of individual assets invested in financial instruments for others with discretionary power (portfolio management)

• Proprietary trading through: a) Continuously offering to buy and sell financial instruments at self-set prices for own account using own capital, b) frequently organising and systematically conducting trading for own account on a significant scale outside an organised market or a multilateral or organised trading system when customer orders are executed outside a regulated market or a multilateral or organised trading system, without operating a multilateral trading system (systematic internalisation), c) acquiring or disposing of financial instruments for own account as a service for others, or d) buying or selling financial instruments for own account as a direct or indirect participant in a domestic organised market or multilateral or organised trading system using high-frequency algorithmic trading techniques

• Intermediation of deposit business with companies domiciled outside the European Economic Area (third-country deposit intermediation)

• Qualified cryptocurrency custody business through: a) custody and management of cryptographic instruments for others, or b) safeguarding of private cryptographic keys for others, which are used to store or manage cryptographic instruments, cryptocurrency securities, crypto-fund shares, or both domestic and foreign securities that can be transferred and stored using distributed ledger technology or similar technology

• Trading in foreign currencies (currency business)

• Management of a cryptocurrency securities register as per Section 16 of the German Electronic Securities Act (cryptocurrency securities register management)

• Ongoing purchase of receivables based on framework agreements with or without recourse (factoring)

• Conclusion of financing lease contracts as a lessor and the management of special purpose vehicles as per Section 2, Paragraph 6, Sentence 1, Number 17, outside the management of investment assets as per Section 1, Paragraph 1, of the Investment Act (financing leasing)

• Acquisition and disposal of financial instruments outside the management of investment assets under Section 1, Paragraph 1 of the German Capital Investment Act (KAGB) for a community of investors who are natural persons, with discretionary power in selecting the financial instruments, provided this is a focus of the offered product and is carried out for the purpose of enabling these investors to participate in the performance of the acquired financial instruments (asset management)

• Custody and management of securities exclusively for alternative investment funds (AIFs) under Section 1, Paragraph 3 of the German Capital Investment Act (KAGB) (restricted custody business)

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Competitive Classifications

 

Particularly the following classifications for credit institutions (banks) should be observed:

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• CRR credit institutions:
  Credit institutions engaged in deposit-taking and lending business are CRR credit institutions. Although the application is submitted to BaFin and coordinated with them, the final decision rests with the ECB. If the institution is classified as significant, ongoing supervision is also primarily carried out by the ECB. Otherwise, BaFin and the Bundesbank remain responsible for ongoing supervision. CRR credit institution status also entails specific legal consequences.

• MiFID investment firms:
  If the intention is solely to carry out financial commission business as a banking service and only to provide those financial services also defined as investment services under the German Securities Institutions Act (WpIG)—implementing MiFID—no German banking licence is required. A WpIG licence from BaFin suffices in this case.

• Financial services institutions:
  If only financial services are to be provided, and at least one of these is not regulated as an investment service as defined under the WpIG (e.g., factoring or finance leasing), a licence as a financial services institution under the KWG must be applied for. A German banking licence is not required in this case.

• Payment institutions:
  A credit institution is generally not authorised to provide payment services within the meaning of the German Payment Services Act (ZAG) unless it is a CRR credit institution. If a credit institution intends to provide payment services, BaFin will advise pursuing authorisation as a CRR credit institution.

• Crypto-asset service providers:
  Since the entry into force of MiCAR, financial services relating to crypto-assets no longer fall under the licensing requirements of the KWG or WpIG, as crypto-assets have been removed from the catalogue of financial and investment services. Consequently, they are no longer considered units of account. Crypto-asset services now generally require authorisation from BaFin under MiCAR. However, holders of a CRR credit institution licence may provide crypto-asset services if they follow the notification procedure under MiCAR.

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Exemptions

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Banking activities and financial services are not subject to licensing requirements under the KWG if one of the exemptions listed in § 2 KWG applies. Notable exemptions include:

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• Capital management companies in the context of collective asset management, possibly including the granting of loans, as well as in the context of services and ancillary services as defined by the KAGB

• Insurance undertakings

• Recognised private equity companies

• Companies conducting banking activities exclusively with their parent, subsidiary, or sister companies

• Companies engaging solely in deposit-taking or lending business via an approved crowdfunding service provider

• Companies covered by the ancillary activities exemption

 

Additionally, while the KWG does not grant full exemption in certain cases, it does provide for limited applicability—for example, when only providing financial services such as factoring or finance leasing.

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Structural Considerations

 

Before applying for a banking licence or authorisation, various structural considerations should be taken into account. Depending on the nature of the business activity, group integration, target markets, or other circumstances, significant implications for supervision at both the institution and group level may arise. Some of these considerations include (but are not limited to):

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• Group structures:
  If the future credit institution is part of a group structure, this can have implications for both the institution and the group. For example, if a holding company qualifies as a financial holding under the CRR, it too may be subject to individual supervision, particularly regarding capital requirements, governance, and certain reporting obligations. Consolidated requirements for capital, large exposures, and reporting may also apply to the group. Therefore, possible consequences of the group structure and activities should be carefully assessed before applying for a licence.

• Ring-fencing regulation:
  The German Ring-Fencing Act aims to separate riskier activities from deposit-taking and lending operations of large CRR credit institutions and groups. Affected institutions are prohibited from engaging in proprietary trading, lending and guarantee business with certain alternative investment funds (AIFs), and high-frequency trading (except for market-making purposes).

• Intra-group outsourcing:
  Outsourcing functions (such as IT operations or AML/compliance functions) to other group companies can create synergies. For material outsourcing arrangements, BaFin may require submission of draft outsourcing contracts.

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Required Information and Documentation

 

As part of the banking licence or authorisation application, specific information and documents must be submitted to BaFin. For a banking licence as a CRR credit institution, these are determined by Delegated Regulations (EU) 2022/2580 and 2022/2581 and include:

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• Identity information

• Curriculum vitae

• Programme of operations

• Financial information

• Business plan, organisational structure, internal control systems, and auditors

• Capital at the time of authorisation

• Details of actual management

• Information on shareholders and owners with qualifying holdings, as well as the 20 largest shareholders and owners

 

BaFin's focus during the review depends on the circumstances of the case. However, key points generally include the professional suitability of the management, potential conflicts of interest, financial soundness, risk management, and ongoing compliance with AML and other regulatory obligations. BaFin will also scrutinise the draft compliance manual. Since the introduction of DORA, the implementation of IT requirements has gained greater importance compared to the previous BAIT standards.

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Typically, BaFin and, where applicable, the ECB, will raise specific queries during the application process, requiring additional information or documents. Depending on the nature and scope of the business model, one or two rounds of follow-up submissions can generally be expected. High-quality application documents can help keep additional requests to a minimum.

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Granting of the Banking Licence/Authorisation

 

If a banking licence/authorisation as a CRR credit institution is applied for, the ECB (in coordination with BaFin) is responsible for granting it. In other cases, BaFin alone is the competent authority.

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BaFin or the ECB will issue the requested licence/authorisation if no grounds for refusal under § 33 KWG exist. The law distinguishes between mandatory and discretionary grounds for refusal. Mandatory grounds include, among others:

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• Lack of sufficient financial resources, in particular initial capital

• Applicant, shareholders, or owners are unreliable

• Management lacks the required professional qualifications

• Management does not have sufficient time to fulfil its duties

• Management violates mandate restrictions

• The institution is unwilling or unable to implement the necessary organisational arrangements for proper business conduct

 

The final aforementioned reason for refusal is based on a balancing assessment of the facts. The quality of the submitted information and documents also has a decisive influence in this regard.

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At the end of the procedure, the ECB or BaFin grants the licence/authorisation by means of an official decision. Only from this point onwards may the applied-for banking activities be conducted and financial services provided.

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Duration of the Procedure

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The duration of the procedure depends on various factors, such as the complexity of the business model, the scope of the application, the workload of BaFin and the ECB, and the quality of the submitted documents. As a rule, the ECB and BaFin will have follow-up questions, which will necessitate the submission of additional information. On average, one should expect the process to take between 6 and 18 months.