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Germany
Score Rank
Financial Standards Index 62.50 out of 100 10
Business Indicator Index 11.23 out of 12 4

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Overall Standards Summary

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 generally high, with 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 fully aligned with the International Financial Reporting Standards, in contrast to Auditing Standards, where German standard setting bodies are in the in the process of adopting the standard.. Germany's corporate governance system continues to evolve, but as in most other jurisdictions, evidence of its successful implementation is lacking. German authorities have revised key money laundering legislation, and are thus in the process of implementing the Financial Action Task Force Recommendations.

Choose a standard for a detailed compliance report:
12 Key Standards for Sound Financial Systems

Compliance Level
Special Data Dissemination Standard
FC
Code of Good Practices on Transparency in Monetary Policy
FC
Code of Good Practices on Transparency in Fiscal Policy
CP
Effective Insolvency and Creditor Rights Systems
CP
International Financial Reporting Standards
NC
Principles of Corporate Governance
EN
International Standards on Auditing
ID
Anti-Money Laundering/Combating Terrorist Financing Standard
ID
Core Principles for Systemically Important Payment Systems
FC
Core Principles for Effective Banking Supervision
CP
Objectives and Principles of Securities Regulation
CP
Insurance Core Principles
II
II = Insufficient Information | NC = No Compliance | ID = Intent Declared | EN = Enacted | CP = Compliance in Process | FC = Full Compliance

Macroeconomic Policy and Data Transparency

FCSpecial Data Dissemination Standard

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 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. The IMF's 2008 Article IV Consultations report reiterates the possibility of improving certain government data, focusing on the need for better documentation of deviations in certain general government data used administratively from the data as it appears in the European System of Accounts 1995 format.

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FCCode of Good Practices on Transparency in Monetary Policy

Germany adopted the euro at 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. In 2009, the IMF voiced its support for the ECB’s accommodative monetary policy in response to the global financial crisis and recession in the European Union (EU). The Fund urged continued monetary easing in order to prevent a still-possible deflationary spiral, and called for quicker action from the EU in order to repair the financial system.

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CPCode of Good Practices on Transparency in Fiscal Policy

In the 2003 fiscal transparency module of the Report on the Observance of Standards and Codes (ROSC) by the IMF, it is reported that Germany has achieved a high level of fiscal transparency. The legal and regulatory framework is strong, and fully transparent standards are 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 judged 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. The International Budget Partnership's Open Budget Index supports the overall findings of the IMF ROSC, giving Germany's budget regime an overall rating of 64 percent and noting that greater detail, particularly in the mid-year review and year-end report would facilitate public comprehension of the budget process and the larger fiscal system. In order to assure the long-term sustainability of public finances Germany has amended the German Constitution, the Basic Law, in July 2009 to establish a rule that limits the structural budget balance to close to zero from 2011.

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Institutional and Market Infrastructure

CPEffective Insolvency and Creditor Rights Systems

Germany's current insolvency law has been in effect since 1999. This legislation 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 new law shifted the emphasis of the insolvency regime from liquidation to reorganization, according to reports by PricewaterhouseCoopers and others. The new law has provided a single, unified, insolvency code applicable in the country, and includes provisions similar to those embodied in the Chapter 11 procedures of the United States' insolvency law. 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.

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NCInternational Financial Reporting Standards

As a member of the European Union (EU, Germany complies with the European Commission (EC) Regulation No. 1606/2002 which requires listed companies to use International Financial Reporting Standards (IFRSs) as endorsed by the EU in their consolidated accounts. A 2008 EC report on the implementation of Regulation No. 1606/2002 points out that Germany permits IFRSs in the annual and consolidated accounts of all types of companies. However, application of IFRSs in annual accounts is permitted for information purposes only. Therefore, these entities are required to prepare annual financial statements in accordance with national accounting law for purposes of profit distribution, taxation, and financial services supervision. A 2009 Institute of Auditors (IDW) Action Plan states that German accounting requirements, which are primarily contained in the German Commercial Code, differ from IFRSs. In May 2009, the German Ministry of Justice issued the Act on Modernization of Accounting Regulations, which modernizes the HGB, reduces the regulatory burden on companies, and better aligns German accounting requirements with IFRSs, but differences still persist. With respect to the IFRS for small and medium-sized entities (SMEs) issued by the International Accounting Standards Board, the IDW is explicit in not supporting the application of IFRSs for SMEs in Germany as – in the opinion of the IDW - in the case of Germany, the costs will outweigh the benefits. .

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ENPrinciples of Corporate Governance

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. 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. The Code has been continuously revised, with the latest amendment as recent as 2009, to strengthen disclosure and shareholder rights. Previously, other initiatives targeted at strengthening the functioning of the corporate governance structure included the prohibition of insider trading in 1994, the 1998 Law for Reinforcement of Control and Transparency (KonTraG) which aimed to enhance the control of the supervisory board, and the 1998 Antitrust Act. More recently, the German Parliament also adopted the Appropriateness of Management Board Remuneration Act in September 2009 The Act introduces changes with respect to the remuneration of the management board and also introduces “say-on-pay’, a non-binding advisory vote on remuneration for listed company shareholders. Nonetheless, in a 2008 IMF Working Paper, Odenius notes that despite far-reaching reforms of the last decade, concentrated ownership and “insider” control remain distinguishing features of Germany’s corporate governance system. Furthermore, ownership structures remain complex and work against transparency in corporate control. The author points out that improvement is required in internal control mechanisms, particularly with respect to the two-tier board structure.

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IDInternational Standards on Auditing

Auditing requirements in Germany are primarily contained in the German Commercial Code and non-binding auditing standards issued by the 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) issued by the International Auditing and Assurance Standards Board (IAASB) are adopted as German Auditing Standards (AuSs). A 2009 International Federation of Accountants (IFAC) publication on the adoption of ISAs globally confirms that ISAs are adopted as AuSs with changes made to reflect local legal and regulatory environment. The IFAC report explains that German standards are based on a “line-by-line” analysis of ISAs, and the differences between AuSs and ISAs are not clearly indicated in the text of the standards. However, a 2009 IDW Action Plan points out that in preparation of the impending adoption of ISAs by the European Union, Germany is in the process of amending its auditing standards in line with the Clarified ISAs issued by the IAASB in 2009.

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IDAnti-Money Laundering/Combating Terrorist Financing Standard

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, no comprehensive assessment of Germany's compliance with FATF requirements has been released. The German Money Laundering Act criminalizes activities related to money laundering. The latest revision to the Money Laundering Act was in 2008, as a result of the Act amending the Act to Supplement the Fight Against Money Laundering and Terrorist Financing, which came into effect on August 21, 2008. 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. The FATF, in its 2008-2009 Annual Report, named Germany as one of the jurisdictions that have endorsed the FATF's 40+9 recommendations.

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FCCore Principles for Systemically Important Payment Systems

Until recently, Germany's real-time gross settlement system (RTGSplus) was its systemically important payment system. 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. However, in November 2007, TARGET2 replaced TARGET and payment services were harmonized under a single shared platform across its member countries. Germany was among the first wave of countries to join TARGET2. As a result, the RTGSplus system was deactivated. According to a 2009 European Central Bank assessment of TARGET2 against the Core Principles for Systemically Important Payment Systems (CPSIPS) promulgated by the Committee on Payment and Settlement Systems, TARGET2 observes all CPSIPS. Despite the single shared platform nature of the new system, national legislation and national central banks still maintain primary supervision for their national components of TARGET2.

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Financial Regulation and Supervision

CPCore Principles for Effective Banking Supervision

The legal framework for banking supervision in Germany is mainly based on the 1998 Banking Act (as amended). 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. In 2003, Germany's banking supervision practices were assessed against the 1997 Basel Core Principles (BCPs) by the IMF in a Financial System Stability Assessment. The report concluded that Germany has a strong legal and institutional banking supervision framework in place, and implementation of the respective laws is appropriate. Furthermore, the legal framework is comprehensive and the judicial system is efficient. The report noted that the BaFin cooperated closely with the German central bank in conducting banking supervision. 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 compliance with the BCPs. The 2003 IMF report noted, however, that at the time shortcomings remained 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 by the BaFin relied heavily on the use of external auditors for on-site supervision. The 2008 annual report of the BaFin reveals that the EU Acquisition Directive was transposed into German law in August 2008, thereby clarifying the acquisition procedure and making the approval and rejection process more transparent. Also, on-site inspections were expanded and a total of 244 special audits were conducted by the BaFin, of which 163 were initiated by the supervisor to verify off-site findings.

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CPObjectives and Principles of Securities Regulation

Germany's Financial Supervisory Authority, BaFin, was established within the Federal Ministry of Finance (BMF) 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 (IMF), 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 BMF 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. In addition, a small but significant "grey capital market" exists in Germany with little supervisory oversight. Following the IMF's 2003 report, the Federal Ministry of Justice (BMJ) and the MF jointly established a ten-point plan in 2003 to, inter alia, improve investor protection, increase the liability of boards of directors, and enhance oversight of auditing operations, as noted in a 2009 U.S. Department of Commerce report. Further, laws were issued to improve the securities trading system, deter insider trading, foster greater transparency in the area of acquisitions as well as in the securities sector as a whole, and adopt international accounting standards. Several EU Directives were also transposed into German law, including the EU Takeover Directive, the EU Transparency Directive, the EU Acquisitions Directive, and the EU Markets in Financial Instruments Directive. In 2007, Germany's Investment Act underwent an important revision whereby the supervision of mutual fund by the BaFin was strengthened and the approval of new financial products was streamlined.

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IIInsurance Core Principles

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 of ICPs, in line with international best practices. However, at the time, the insurance industry continued to suffer from both increased claims and historically low returns on investments, which 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 and granting more supervisory powers and resources to the Federal Financial Supervisory Authority (BaFin). These recommendations have been acted upon as the BaFin has increased its supervisory staff, taken several steps to adopt a more risk-oriented approach to supervision in order to implement the European Union’s Solvency II framework, and issued internal control regulations, as mentioned in the supervisor’s 2008 annual report. The IMF also advised transposing the EU Reinsurance Directive into German legislation. 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 Insurance Supervision Act (VAG) and several implementing regulations. Furthermore, the Insurance Mediation Act, which was enacted in 2007, transposed the EU Insurance Mediation Directive into German law. While these changes represent positive developments in German insurance supervision, given the revision in October 2003 by the IAIS of the ICPs and Methodology, there is insufficient information publicly available regarding Germany's compliance with the new, more stringent principles.

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Business Indicators

With an overall score of 10.73/12, Germany is at standard on the economic, legal, and political indicators that make up our Business Index. Although a staunchly market-based economy, government spending is high, reflecting the tradition of a "social market democracy." Germany's economy is highly open, with exports accounting for more than a third of the national output. Germany encourages foreign investment, and German foreign investment law provides equal treatment to both foreign and domestic investors. High tax rates, however, can act as an impediment to investment. With Germany's strong legal tradition, property rights, including intellectual property rights, are secure, as are contractual agreements. Corruption is of no concern to investors, as reflected in Germany’s good rank and score in Transparency International’s Corruption Perceptions Index.

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Global Indices & Quick Facts

Germany is consistently ranked in the 1st quintile in the global indices benchmarking political, economic, business, and human capital climates, as shown below. Germany is a stable and well-developed social market democracy with a high standard of living. Streamlined business regulations, which have been made less cumbersome in recent years, along with strong rule of law and protection of property rights, sound foreign investment laws, and a world-class export industry contribute to Germany's economic strength and competitiveness. Government spending remains high, due to the German tradition of a strong welfare state. Labor market regulations have been gradually loosened under successive governments, adding more flexibility to the economy. This progress appears in jeopardy due to shifting political sentiments, however. Corruption is perceived to be of no concern, as indicated by Germany's ranking on Transparency International's Corruption Perceptions Index.

Name Year Rank Score Quintile
Bertelsmann Transformation Status Index 2010
Heritage Foundation Economic Freedom Index 2010 23/179 71.1% 1
Economic Freedom of the World Index 2009 27/141 7.5/10 1
World Economic Forum Global Competitiveness Index 2009 7/133 5.37/7 1
Milken Institute Capital Access Index 2009 23/122 6.67/10 1
World Bank Ease of Doing Business Index 2009 25/183 N/A 1
UNDP Human Development Index 2009 22/177 0.95/1 1
Transparency International Corruption Perceptions Index 2009 14/180 8/12 1
Freedom House Index 2009 Free 1/7

Credit Ratings

AAA/Stable Fitch

Aaa/Stable Moody's

AAA/Stable Standard & Poor's

Macroeconomic Data

2009 GDP (Current Prices): 3060.3 billion USD (IMF)

2009 GDP (Per Capita): 37307 USD (IMF)

2010 GDP (Growth Forecast): 0.3% (IMF)


2009 Inflation (CPI): 0.2% (IMF)

2008 Unemployment: 7.8% (CIA)


2008 Foreign Direct Investment

FDI (Inward): 24.9 billion USD (UNCTAD)

FDI (Outward): 156.50 billion USD (UNCTAD)


2007 Official Development Assistance

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

ODA (Disbursed): 12,291 million USD (OECD)

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