Germany achieves high overall compliance with international standards and codes, with a score of 62.5 out of 100 in our Standards Compliance Index. Germany's compliance in all three areas -- macroeconomic fundamentals, market infrastructure and financial supervision -- is high, with just a few exceptions. The formation of the Federal Institution for Supervision of Financial Services as the unified financial supervisor of the banking, securities, and insurance sectors in 2002 has generally strengthened financial supervision in Germany. Nonetheless, its insurance supervision system - which has been assessed highly compliant in the past - has not enough information publicly available to assess its compliance with the revised Insurance Core Principles of 2003. German accounting practices are not yet fully aligned with the International Financial Reporting Standards, but are - just as its Auditing Standards - in the process of meeting them. Germany's corporate law and its Code of Corporate Governance were revised in 2005 and 2006, but evidence of their successful implementation is lacking. German authorities were expected to draft legislation to apply the third European Union Money Laundering Directive by December 2007, requiring it to implement the Financial Action Task Force Recommendations.

Macroeconomic Policy and Data Transparency

Germany has subscribed to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) since 1996, posting its first metadata on the website in 1997. Germany meets or exceeds all SDDS specifications for coverage, periodicity, and timeliness, and avails itself of no flexibility options. It provides advance release calendars and summary methodologies for all relevant datasets. According to information provided on the IMF's SDDS website, Germany also fulfils all the conditions for quality and integrity of data as stipulated by the SDDS requirements. Nonetheless, a 2006 IMF Report on the Observance of Standards and Codes, finds that Germany's data dissemination regime can still improve in certain areas, specifically with regard to government finance statistics. More »

Germany adopted the euro with its launch in January 1999. Thus, its monetary policy is no longer governed by the Bundesbank. Rather, the Governing Council of the European Central Bank (ECB) determines German monetary policy, and the Eurosystem (consisting of the ECB and the central banks of the member states that have adopted the euro) is responsible for its implementation. According to the IMF, the Eurosystem and the ECB maintain high transparency standards and a commitment to openness. The ECB observes the IMF's codes and standards for monetary policy transparency and pursues an active policy of communication with the public. More »

Germany has achieved a high level of fiscal transparency, according to a 2003 assessment by the IMF. The existing laws and regulations governing the fiscal system are strong, with fully transparent standards in place. There are clear guidelines to budgeting, accounting, and reporting at all three levels of the government, Bund (federal government), Länder (states), and Gemeinden (municipalities). Fiscal policy is decentralized among the three layers of the government but operates under a shared legal framework. The regulatory environment around the fiscal system is positive, but it remains difficult to understand due to its complexity. Partially due to this institutional and legal complexity, the IMF found that there were insufficient consultations during budget preparation, a lack of detailed analytical reports, and difficulty in comprehending the fiscal system as a whole. More »

Institutional and market infrastructure

Germany's current insolvency law, in effect since 1999, consolidated the provisions of several older laws, including the Bankruptcy Act, the Composition Act, and the Collective Enforcement Act (which had governed East German insolvency proceedings). The thrust of the new law is to shift the emphasis of the insolvency regime from liquidation to reorganization, according to reports from the World Bank and others. In 2003, the European Commission's Expert Group reported that, of the 41 Principles and Guidelines for Effective Insolvency and Creditor Rights Systems set forth by the World Bank, Germany has fully adopted 21, almost fully adopted 10, partially adopted 8, and not adopted 2. The cost, in time and money, to complete business closing proceedings in Germany approximates the average experienced in member states of the Organization for Economic Cooperation and Development (OECD). It takes an average of 1.2 years to finalize the proceedings in Germany, compared to 1.3 years for the OECD, and costs average 8% of the debtor estate, compared to 7.5% for the OECD. However, returns to creditors are significantly lower, averaging 53.4 cents on the dollar in Germany versus 74.1 for the OECD average. More »

In line with European Commission (EC) Regulation No. 1606/2002, listed companies in Germany are required to use International Financial Reporting Standards (IFRSs) in their consolidated accounts. The EC's 2006 publication on the implementation of IFRSs in EU member states points out that Germany permits IFRSs in the annual and consolidated accounts of all types of companies for information purposes only, and these entities are required to prepare financial statements in accordance w ith national accounting law for purposes of profit distribution, taxation, and financial services supervision. According to a number of publications on the subject, German accounting requirements, which are primarily contained in the German Commercial Code (HGB), differ from IFRSs. However, per the December 2007 update available from the Deloitte & Touche IAS Plus website, the German Ministry of Justice issued a draft of the German Accounting Law Modernization Act in November 2007 with the goal of modernizing the HGB, reduce the regulatory burden on companies, and in general to achieve closer alignment with IFRSs. More »

According to a 2003 Financial System Stability Assessment by the IMF, Germany has taken steps to improve corporate governance in line with international best practices. Germany is often viewed as a "stakeholder" model of corporate governance, as opposed to the "shareholder-oriented" structures that prevail in Anglo-American corporate governance systems. In 2002, the Government Commission of the German Corporate Governance Code (Cromme Commission) established a Corporate Governance Code for listed companies based on the comply-or-explain principle. On July 26 of the same year, the government enacted the Transparency and Disclosure Law, including new Article 161 of the Stock Corporation Act requiring a Declaration of Conformity with the Corporate Governance Code. Since the promulgation of the Code, according to a 2005 report by Heidrick & Struggles, there have been continuous improvements regarding the transparency and independence of most German boards, as well as the use of external auditors. The disclosure of management compensation is still of great concern, however. Also, per the Heidrick & Struggles report, Germany's two-tier company structure, which clearly divides the management board and the supervisory board, falls behind international best practices. The Corporate Governance Code was revised in June 2006 to incorporate provisions of the 2005 Law on the Disclosure of Management Compensation, as well as the 2005 Law on Corporate Integrity and Modernization of the Right of Avoidance. More »

Auditing requirements in Germany are primarily contained in the German Commercial Code and non-binding auditing standards issued by the German Institute of Auditors (IDW). According to a 2005 self-assessment by the IDW these requirements are to be applied by both listed and unlisted companies, the latter subject to certain size criteria. A subsequent 2006 IDW self-assessment indicated that International Standards on Auditing (ISAs) are adopted as German Auditing Standards (AuS), modified to conform to local legal requirements. On May 17, 2006, Directive 2006/43/EC of the European Parliament and the Council came into force, requiring all statutory audits of annual and consolidated accounts be carried out on the basis of ISAs as adopted by the European Commission. European Union (EU) member states must adopt and publish the provisions necessary to comply with this Directive before June 29, 2008. Member states may impose additional requirements relating to the statuary audits of annual and consolidated accounts for periods expiring on June 29, 2010. The IDW has expressed its support for the adoption of ISAs in the EU and, per its 2006 self-assessment, is involved in the translation of the international standards in accordance with International Federation of Accountants translation policies. More »

In 2004, the IMF released its assessment on Germany's compliance with the Financial Action Task Force (FATF) Recommendations on Anti-Money Laundering and Combating the Financing of Terrorism. Accordingly, German legislation meets the general obligations of the FATF's recommendations. This assessment was based on the 2002 methodology for assessing compliance with the FATF recommendations. However, in 2004, the FATF released its revised methodology for assessing compliance with FATF recommendations. Since then, there has been no comprehensive assessment publicly available of Germany's compliance with FATF requirements. A 2007 report by the Institute of International Bankers does indicate that the German authorities were expected to draft legislation to implement the third European Union (EU) Money Laundering Directive by December 2007. According to the 2007 report by the U.S. Department of State, this Directive requires all EU member states to implement the FATF's recommendations. However, there is little subsequent information publicly available as to whether Germany adopted the third EU Money Laundering Directive into legislation. The 2002 Money Laundering Act criminalizes activities related to money laundering. Germany's Financial Intelligence Unit, the Central Office for Suspicious Transaction Reports, was established within the Federal Criminal Police Office (BKA) in 2002. The BKA and Customs authorities are also responsible for investigating money laundering and terrorist financing activities. More »

In 2003 and 2004, the IMF and the ECB each assessed Germany's real-time gross settlement system (RTGSplus). At the time of both these assessments, the RTGSplus was designated as the systemically important payment system in Germany. RTGSplus was Germany's large-value interbank payment system and a component of the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) system, the Euro area payment system. The 2003 IMF report concluded that the system observed the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). The 2004 ECB assessment arrived at a similar conclusion, with the exception of downgrading one principle to "largely observed." However, in November 2007, the RTGSplus was replaced by TARGET2, the successor to TARGET, which harmonized payment services under a single shared platform (SSP) across its member countries. In its 2002 report on TARGET2, the ECB indicated that the system was expected to fully comply with the CPSIPS. Further, per a 2005 report by the Bundesbank, TARGET2 is expected to maintain and improve upon the functioning of the TARGET and RTGSplus systems. However apart from these statements, there is little information assessing TARGET2's compliance with the CPSIPS. Despite the SSP, national legislation and national central banks will still maintain primary supervision for their national components of TARGET2. Despite the lack of information on TARGET2, it is generally believed that TARGET2 is an improvement over its predecessor and its component systems. Therefore the level of compliance assigned to Germany's payment system by past assessments is maintained until TARGET2 is fully implemented in all its member countries and assessed against the CPSIPS. More »

Financial Regulation and Supervision

Germany's banking supervision practices were assessed against the 1997 Basel Core Principles (BCPs) by the IMF in its 2003 Financial System Stability Assessment. The report concluded that Germany has a strong banking supervision framework, legal and institutional, in place, and implementation of the respective laws is appropriate. Furthermore, the legal framework is comprehensive and up to date, and the judicial system is efficient. In a 2005 report on BCP implementation in selected countries, the Austrian Central Bank cited an IMF assertion that Germany had a generally high level of BCP compliance. The 2003 IMF report noted, however, that shortcomings remain regarding consolidated supervision, connected lending, loan evaluation, and guidelines on risky acquisitions and investments. Furthermore, market discipline could benefit from increased transparency and disclosure. The IMF added that banking supervision relies heavily on the use of external auditors for on-site supervision. The legal framework for banking supervision in Germany is mainly based on the 1998 Banking Act, which was last amended in 2002. The Financial Supervisory Authority (BaFin) was established within the Ministry of Finance on May 1, 2002, as an integrated financial supervisory authority for the banking, securities, and insurance sector. The 2003 IMF report noted that the BaFin cooperated closely with the German central bank in conducting banking supervision. More »

Germany's Financial Supervisory Authority, BaFin, was established within the Federal Ministry of Finance (MoF) on May 1, 2002, as an integrated financial supervisory authority for the securities, banking, and insurance sectors. According to a 2003 Financial System Stability Assessment by the International Monetary Fund, in which securities regulation practices in Germany were benchmarked against the International Organization of Securities Commissions Objectives and Principles of Securities Regulation, the standard of securities regulation in Germany was very high. Moreover, the MoF maintained a high standard in identifying and eliminating substantial shortcomings in securities markets regulation. Nonetheless, shortcomings were identified in the resources, staffing, and supervisory powers of the regulatory bodies of the German states, as well as in the reliance placed on collective investment scheme operators. The IMF also noted that Germany relied heavily on the use of external auditors for on-site supervision. As of 2006, several EU Directives were transposed into German law, including the EU Takeover Directive, the EU Transparency Directive, and the EU Directive on Markets in Financial Instruments. Germany's Investment Act also underwent an important revision in 2007. More »

In the IMF's 2003 Financial System Stability Assessment, insurance supervisory practices in Germany were benchmarked against the Insurance Core Principles (ICPs) and Methodology developed by the International Association of Insurance Supervisors (IAIS) in 2000. The IMF concluded that Germany had a high level of observance with ICPs, in line with international best practices. However, the insurance industry has continued to suffer from both increased claims and historically low returns on investments, which has put pressure on capital ratios and risk-bearing capacity. Furthermore, the supervision of reinsurers was less stringent than in the case of insurance companies. In its 2003 assessment, the IMF recommended using a more sophisticated risk-based assessment of capital adequacy in the conduct of insurance supervision. It also advised transposing the EU Reinsurance Directive into German legislation. The supervisory regime for the insurance industry in Germany is mainly based on the 1992 Insurance Supervision Act (VAG) and EU Directives. As a follow-up to the IMF's 2003 report, the EU Reinsurance Directive was transposed into German law through the 2006 amendment to the VAG. Furthermore, the Insurance Mediation Act, which was enacted in 2007, transposed the EU Insurance Mediation Directive into German law. Draft legislation to reform the Insurance Contract Act was adopted in October 2006 and entered into force on January 1, 2008. However, given the revision in October 2003 by the IAIS of the ICPs and Methodology and the above-mentioned developments, there is insufficient information publicly available regarding Germany's compliance with the new, more stringent principles. More »

Legend:

Credit Ratings

Moody's Aaa/Stable

Fitch AAA/Stable

Standard & Poor's AAA/Stable

Macroeconomic Data

2007 GDP (Current Prices): 3,322.1 billion USD (IMF)

2007 GDP (Per Capita): 40,415 USD (IMF)

2008 GDP (Growth Forecast): 1.4% (IMF)

2008 Inflation (CPI): 2.5% (IMF)

2007 Unemployment: 9.1% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 42.9 billion USD (UNCTAD)

FDI (Outward): 79.4 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): 10435 million USD (OECD)