Kreditwesengesetz

The Kreditwesengesetz (KWG) is the core German federal law that governs banks and other credit institutions. It provides the legal framework for the authorization, supervision, and conduct of business of banking activities in Germany and is aligned with European banking directives to ensure financial stability and market integrity.

Scope and definitions: The KWG regulates credit institutions (Kreditinstitute), including banks, savings banks, and certain financial service providers engaged in deposit-taking, lending, and payment services. It also covers related activities and institutions that require authorization to operate in the German market.

Authorization and operating requirements: To operate as a credit institution in Germany, authorization must be granted by the Federal Financial Supervisory Authority (BaFin) with the involvement of the Deutsche Bundesbank. The act requires a sound corporate structure, fit and proper management and owners, adequate initial and ongoing capital, effective risk management, robust liquidity planning, internal controls, and organizational stability.

Supervision: The KWG assigns comprehensive supervisory powers to BaFin and the Bundesbank, including ongoing reporting, risk assessment, on-site inspections, and the ability to impose corrective actions, restrictions, or license withdrawal for breaches or threats to financial stability.

Provisions and standards: The act establishes standards for capital adequacy, liquidity, governance, accounting, and disclosure in line with European directives and Basel framework developments. It also prescribes licensing and regulatory treatment for other financial service activities and contains transitional provisions related to regulatory evolution.

History and significance: Since its enactment in 1961, the KWG has been amended to reflect EU harmonization and evolving supervisory practices in Germany, playing a central role in shaping the supervision and resilience of the German banking system.