F.For private investors, access to special bank bonds has been significantly restricted. This applies to securities that not only serve the ongoing financing of credit institutions, but can also be used as liability for their losses. This regulation is highlighted in a current article from the monthly report of the Deutsche Bundesbank for December published on Monday.
The regulation is intended to protect investors from incalculable risks. According to this, large banks can only issue subordinated bonds in denominations of at least 50,000 euros. For smaller and less complex financial institutions, a slightly less restrictive minimum denomination of 25,000 euros applies. The Bundesbank writes: “The introduction of a minimum denomination is intended to ensure that private customers and especially small investors do not invest their assets excessively in instruments that can primarily be used for a bail-in.” The term bail-in is liability the creditor – i.e. the investor – meant for losses by financial institutions.
At first glance, trying to reduce engagement by increasing the portions sounds contradictory. However, the high minimum denominations are obviously intended to effectively exclude small investors who simply cannot afford the big tickets. As the Bundesbank writes, private investors should not be in the first line of defense when it comes to absorbing losses in the event of bankruptcy or liquidation.
The rules come into force at the end of the year under the so-called Risk Reduction Act. With this, the Federal Government is implementing the extensive banking package of the European Union published in June 2019 into German law. Basically, the European banking rules introduced after the financial crisis aim to make the private sector more liable for losses by financial institutions. This is to prevent billions in tax money from having to be mobilized to rescue ailing banks, as was the case after the financial and national debt crisis. Instead, professional investors should be held more accountable if necessary.
Private investors, on the other hand, shouldn’t even be tempted to invest excessively in risky bank bonds. However, there are no such restrictions on the risky stocks of credit institutions.