Bank Regulatory Structure: The Federal Republic of Germany (Briefing
Report, 05/09/94, GAO/GGD-94-134BR).

Proposals to consolidate U.S. banking regulatory agencies have raised
questions about how other countries structure and carry out their
various bank regulation and central bank activities.  This report
provides information on the structure and operations of regulatory
activities in The Federal Republic of Germany. Specifically, GAO
describes (1) the German bank regulatory structure and its key
participants, (2) how that structure functions, and (3) central bank
responsibilities that affect the banking industry.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-134BR
     TITLE:  Bank Regulatory Structure: The Federal Republic of Germany
      DATE:  05/09/94
   SUBJECT:  Banking regulation
             Banking law
             Bank management
             Bank failures
             Foreign governments
             Reporting requirements
             Foreign currency
             Bank examination
             Deposit funds
             Insured commercial banks
IDENTIFIER:  Germany
             
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Cover
================================================================ COVER


Briefing Report to the
Honorable Charles E.  Schumer,
House of Representatives

May 1994

BANK REGULATORY STRUCTURE - THE
FEDERAL REPUBLIC OF GERMANY

GAO/GGD-94-134BR

German Bank Regulatory Structure


Abbreviations
=============================================================== ABBREV

  BCCI - Bank of Credit and Commerce International
  FBSO - Federal Bank Supervisory Office
  LIKO - Liquidity Consortium Bank
  SMH - Schroeder, Muenchmeyer, Hengst and Co. 

Letter
=============================================================== LETTER


B-257089

May 9, 1994

The Honorable Charles E.  Schumer
House of Representatives

Dear Mr.  Schumer: 

Proposals to consolidate U.S.  banking regulatory agencies have
raised questions about how other countries structure and carry out
their various bank regulation and central bank activities.  You have
asked us to provide you with information about the structure and
operations of regulatory activities in The Federal Republic of
Germany (Germany), the United Kingdom, Canada, and France.  This
report presents the information you requested for Germany, which was
presented to your staff in an April 29, 1994, briefing.  Our
objectives were to describe (1) the German bank regulatory structure
and its key participants, (2) how that structure functions, and (3)
central bank responsibilities that affect the banking industry. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The German bank regulatory and supervisory structure consists of both
public and private participants--with two federal agencies sharing
certain responsibilities with external auditors and private banking
associations. 

The two federal agencies are the Federal Bank Supervisory Office
(FBSO), and the Deutsche Bundesbank (Bundesbank), the independent
German central bank.  There is a sharp contrast between the legal
responsibilities assigned to these agencies individually and the de
facto sharing of regulatory responsibilities. 

De jure, the FBSO is the primary German bank regulatory and
supervisory authority.  For example, only the FBSO may issue banking
regulations with few exceptions, issue or revoke bank licenses, and
take enforcement actions against banks.  As a government agency
reporting directly to the Ministry of Finance, the FBSO is held
accountable for its actions to the German parliament. 

Despite the difference in their legal responsibilities, the FBSO and
the Bundesbank work closely together and are considered partners in
the formulation of regulatory and supervisory policies.  The
influence of the Bundesbank on bank regulation arises from its
detailed knowledge about banks in Germany, certain legal requirements
that it be consulted before enforcement action is taken by the FBSO,
and the general perception that the monetary policy and other basic
functions of the central bank and those of banking supervision are
interconnected.  For example: 

  The Bundesbank is involved with the FBSO in developing regulations. 
     German banking law states that the Bundesbank must approve
     regulations involving liquidity and capital requirements and
     changes to banks' monthly reporting requirements.  It must also
     be consulted about all other regulations.  We were told by
     officials from both agencies that the FBSO has never issued
     regulations with which the Bundesbank strongly disagreed. 

  The Bundesbank through its district offices, the Land Central
     Banks, is the central clearing, data collection and analysis
     point for most of the information used in bank supervision.  The
     Bundesbank Land Central Banks forward to the FBSO monthly report
     information that they receive directly from banks as well as
     their analyses of the reported information. 

  The Bundesbank Land Central Banks have the most active role in
     day-to-day bank supervision.  They hold a key supervisory
     position with respect to operational and reporting issues
     affecting banks.  In fact, representatives of the Bundesbank
     also said that, because the Bundesbank does not have legal
     enforcement authority, it is easier for banks experiencing
     problems to approach the Bundesbank rather than the FBSO. 

  The Bundesbank Land Central Banks are very influential in
     determining the enforcement action that is taken by the FBSO
     because of their detailed knowledge of the banks they supervise. 
     The more important the case, the less likely that the FBSO would
     take action without Bundesbank agreement. 

  Generally, the FBSO and Bundesbank are both represented in
     international regulatory or advisory organizations and share the
     responsibility for developing German positions in these forums. 

  The Bundesbank and FBSO also work together in managing individual
     bank crises, with the Bundesbank tending to take the lead role
     to divert possible systemic consequences. 

In addition to its role in bank regulatory matters, the Bundesbank
has responsibilities in other bank-related activities --such as
liquidity provision, payments clearance, and currency delivery--that
it does not share with the FBSO. 

External auditors play a supporting but clearly important role in the
German regulatory structure because they carry the primary
responsibility for conducting bank examinations.  German banking law
requires annual audits.  These audits are done by accounting firms of
the banks' choice and at the banks' expense with the reports sent
directly to both the FBSO and Bundesbank.  Accounting firms are also
tasked with conducting special examinations of banks, at the bank's
expense, when requested by the FBSO.  Detailed audit requirements are
set in laws and regulations, which require accounting firms to
examine and assess critical aspects of bank operations and condition,
such as capital, asset quality, management, earnings and liquidity. 
If, during the course of their audits, auditors discover serious
problems within a bank they must immediately report them to both the
FBSO and Bundesbank.  While the auditors have extensive
responsibilities, their legal liability is limited to $300,000 for
each audit. 

In Germany, deposit insurance is not a federal government
responsibility; instead, it is provided by the private banking
associations, which also have a role in developing laws and
regulations and resolving failed banks.  The lender of last resort
function is also privately provided by the Liquidity Consortium Bank
(LIKO). 

The top officials of the two regulatory agencies, bank associations
and external audit organizations told us they are satisfied with the
regulatory system and how it operates.  Both also said they consider
the relationship between the Bundesbank and FBSO to be excellent,
characterized by cooperation and collegiality.  They attribute the
quality of cooperation to the fact that each agency understands its
role, that the legal responsibility for taking action is clearly
defined and that a united front helps contain outside criticism. 
Finally, they said that communication is fluid, personality conflicts
are rare, and turf battles virtually nonexistent. 

Figure 1 illustrates the bank regulatory functions served by the
major players in the German bank regulatory structure. 

   Figure 1:  Responsibility for
   Bank Regulatory and Related
   Functions in Germany

   (See figure in printed
   edition.)

Source:  GAO analysis. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :2

To accomplish our objectives, we reviewed laws, documents and
statistics provided by officials of the FBSO located in Berlin, and
the Bundesbank at both the Frankfurt headquarters and two Bundesbank
Land Central Bank locations in Frankfurt and Berlin.  We also
interviewed several senior executives of German banks and accounting
firms and obtained information from the Federal Association of German
Banks, the association's accounting firm, and the German Institute of
Certified Public Accountants.  (App.  IV has more detailed
information about our objectives, scope, and methodology.)


---------------------------------------------------------- Letter :2.1

We are sending copies of this briefing report to interested
congressional committees, the President of the FBSO, and the
President of the Bundesbank.  Copies will also be made available to
others on request. 

Maja Wessels, Evaluator-in-Charge, and Mark Gillen, Assistant
Director, were the major contributors to this briefing report.  If
you have any questions about the material in this briefing report,
please contact me at (202) 512-8678. 

Sincerely yours,

James L.  Bothwell,
Director, Financial Institutions
 and Markets Issues


GERMAN BANK REGULATORY STRUCTURE
=========================================================== Appendix I

Figure I.1:  Evolution of German Bank Regulatory
Structure


   EVOLUTION OF THE GERMAN BANK
   REGULATORY STRUCTURE
--------------------------------------------------------- Appendix I:1

The German bank regulatory structure, which consists primarily of two
federal agencies, the Federal Bank Supervisory Office (FBSO), located
in Berlin, and the Deutsche Bundesbank (Bundesbank), domiciled in
Frankfurt, was created in the late 1950s and early 1960s.  Before
1961, bank supervision was carried out at the state (Laender) level. 
And until 1957, the central banking system, which was modeled after
the U.S.  Federal Reserve System, was divided into two tiers:  (1) 10
independent Land Central Banks operating as central banks in each of
the 10 states of the occupied western zone and the West Berlin
Central Bank and (2) the Bank Deutsche Laender, a joint subsidiary of
the Land Central Banks responsible for issuing bank notes, policy
coordination, and certain other central functions. 

In 1957, the two-tier central bank was abolished and replaced by a
unified independent central bank, the Bundesbank; the 10 Land Central
Banks along with the Berlin Central Bank lost their structural
independence and became main offices of the Bundesbank but retained
their designation as Land Central Banks.  On July 10, 1961, the
German Banking Act was passed, creating a federal bank regulatory
agency, the Bundesaufsichtsamt fuer das Kreditwesen or FBSO.  Because
of concerns at the time about creating a large federal regulatory
bureaucracy and duplicating expertise already developed in the
accounting profession and at the central bank, the FBSO was initially
provided with only 70 staff to oversee all German banks.  To assist
the FBSO and to take advantage of information already being collected
by the Bundesbank for monetary policy and liquidity lending purposes,
the Banking Act gave the Bundesbank certain supervisory
responsibilities that it could carry out through its nationwide
branch system of over 250 offices (183 as of April 1, 1994).  The act
also required external accounting firms to provide bank audit
information to the FBSO and Bundesbank--thus relieving those two
agencies of most examination responsibilities--and required audit
reports for all banking organizations in Germany.  The number of
Bundesbank Land Central Banks was reduced to 9 in 1992 after German
reunification.  As a result, several of these banks are now
responsible for more than 1 of the 16 German states (11 old states
and 5 new states). 

Banks in Germany are regulated and supervised almost exclusively to
ensure the safety and soundness of individual banks and of the system
as a whole.  The FBSO may address issues such as bank clearance
practices to ensure that credits and debits are being cleared without
lags in crediting accounts for payments received.  However, the
German banking laws do not deal with issues such as fair lending
practices or community reinvestment records. 

Figure I.2:  Bank Activities


   BANK ACTIVITIES
--------------------------------------------------------- Appendix I:2

Any bank licensed in Germany may conduct a universal banking business
that can include deposit, lending, discount, securities, safe
custody, guarantee, and checking activities.  For example, U.S. 
securities firms operating in Germany are considered banks and may
conduct a universal banking business.  Savings banks, which are owned
mostly by municipal governments, are similarly unrestricted.  Major
categories of banks include commercial banks, savings banks, mortgage
banks, and credit cooperatives. 

As of December 31, 1993, there were 3,860 financial institutions in
Germany reporting to the Bundesbank (of which 146 were foreign
branches or subsidiaries) with total assets of approximately $3.5
trillion.  Commercial banks made up 28 percent of bank assets, with
the largest three banks in Germany sharing 11 percent of the total. 

Table I.1 provides information on German credit institutions by type. 



                          Table I.1
           
           German Credit Institutions, by Type, as
                     of December 31, 1993

                    (Dollars in millions)

                                                     Percent
                            Number of                     of
                           institutio                  total
Type of institution                ns   Assets\a      assets
-------------------------  ----------  ---------  ----------
Commercial banks                  328   $981,277         28%
Regional giro\b and                17    833,062          24
 cooperative\c banks
Cooperatives                    2,778    463,697          13
Savings banks                     704    806,570          23
Mortgage banks                     33    459,234          13
============================================================
Total                           3,860  $3,543,84         100
                                               0
Three largest banks\d               3   $374,558          11
Foreign subsidiaries              146   $179,082           5
 and branches\e
------------------------------------------------------------
\a DM 1.65= $1.00. 

\b Serve as central banks for the savings institutions in their
respective regions. 

\c Serve as central banks for the cooperative banks in their
respective regions. 

\d Also included in commercial bank category

\e Foreign subsidiaries and branches are also included in other bank
categories.  This number does not include institutions, such as U.S. 
or U.K.  investment banks, which are counted as banks in Germany but
not in their home countries. 

Source:  Deutsche Bundesbank data (excludes credit institutions with
special functions, such as the Post Office Bank). 

Figure I.3:  Participants in Bank Regulation,
Supervision, and Examination


   KEY PARTICIPANTS IN BANK
   REGULATION, SUPERVISION, AND
   EXAMINATION
--------------------------------------------------------- Appendix I:3

The German bank regulatory and supervisory structure consists of both
public and private participants with two federal agencies sharing
certain responsibilities with external auditors and private banking
associations.  The two federal agencies are the FBSO and the
Bundesbank, the independent German central bank. 

The Bundesbank is an independent federal corporation whose profits
flow to, and whose $170 million in capital is held by, the federal
government.  Nevertheless, the Bundesbank has full control over its
own budget.  It is headed by a Central Bank Council that includes all
nine Land Central Bank presidents and seven other members, including
the Bundesbank President, who are nominated by the federal government
to 8-year terms and appointed by the federal President.  The
Directorate of the Council excludes the Land Central Bank presidents
and is responsible for implementing the decisions made by the Council
in its biweekly meetings.  Of the Bundesbank's almost 18,000 staff,
approximately 350 to 400 are directly involved in bank regulation and
supervision.  Approximately four-fifths of Bundesbank staff are
employed outside of its Frankfurt headquarters in its nationwide
network of offices. 

The FBSO is a federal agency whose President is nominated by the
federal government and, after consultation with the Bundesbank,
appointed by the federal President.  The President of the FBSO
reports directly to the Ministry of Finance.  As a result, the FBSO
is accountable to the German Parliament.  Unlike the Bundesbank, the
FBSO is subject to the federal budgetary process, even though it
receives only 10 percent of its funding from the federal coffers.  By
law, the banking industry must refund 90 percent of the FBSO's
expenses, which is done through annual assessments based on a bank's
size and through special billings.  The FBSO has no substructure of
branch offices, so its regulatory staff of 252 plus 166 support staff
is located entirely in Berlin. 

Although there are several thousand accounting firms in Germany, only
a fraction conduct bank audits.  These include about 500 small and
medium firms and about 10 large accounting firms.  The large firms,
which encompass affiliates of the "big six",\1

generally audit the larger commercial banks.  In addition, the
savings and cooperative banking associations conduct bank audits
through their audit offices, as does the deposit protection system of
the Federal Association of German Banks. 

German banks are represented by 14 banking associations; the 3
largest are those for commercial banks, (Federal Association of
German Banks), savings banks (German Savings Bank and Giro
Association), and cooperative banks (Federal Association of German
Cooperative Banks). 

Figure I.4:  Regulation, Supervision, and Examination Are
Shared


--------------------
\1 The big six international accounting firms are Ernst & Young,
Arthur Andersen & Company, Deloitte & Touche, KPMG Peat Marwick,
Coopers & Lybrand, and Price Waterhouse. 


   BANK REGULATION, SUPERVISION,
   AND EXAMINATION ARE SHARED
   RESPONSIBILITIES
--------------------------------------------------------- Appendix I:4

The responsibilities for bank regulation and supervision are shared
between the FBSO and the Bundesbank.\2 External auditors have an
important support role because they are primarily responsible for
conducting bank examinations.  Bank associations also play a support
role because of their deposit insurance responsibilities. 

The FBSO has the responsibility for taking all formal actions
involved in bank regulation and supervision and for obtaining the
information necessary to take those actions, including issuing
regulations, issuing bank licenses, and taking enforcement actions. 

The Bundesbank has no responsibilities for such legal actions, but in
practice it is an equal partner in the formulation of important FBSO
regulatory and supervisory activities.  Furthermore, the Bundesbank
has a more active role in day-to-day bank supervision than the FBSO. 

External accounting firms have no regulatory or supervisory
decisionmaking responsibilities, but they are the key to the
examination function which they carry out through various audits. 
The audit information these firms are required to submit to the FBSO
and Bundesbank is essential to the regulatory and supervisory
decisionmaking processes. 

Banking associations are solely responsible for deposit insurance. 
As part of that function, they may help in assisting troubled banks
or resolving failed banks.  In addition, banking associations must be
consulted by banking regulators on banking laws and regulations and
before bank licenses are issued. 

Figure I.5:  FBSO Has Primary Regulatory and Enforcement
Responsibility


--------------------
\2 Banking Act of the Federal Republic of Germany ï¿½ï¿½ 10,10a, 11, 24
and 25.  Deutsche Bundesbank Special Series No.  2, 4th edition, July
1993. 


   FBSO HAS PRIMARY REGULATORY AND
   ENFORCEMENT RESPONSIBILITY
--------------------------------------------------------- Appendix I:5

Under the Banking Act of 1961, the FBSO, with few exceptions, is
given sole responsibility for issuing orders, regulations, and
written opinions on banking issues.  And only the FBSO can issue or
repeal bank licenses or take any direct supervisory actions against a
bank such as to (1) stop the conduct of unlawful business, (2)
rectify cases of inadequate capital or liquidity, or (3) protect
creditors and the safety of a bank's assets.\3

The FBSO is also required to

     "counteract undesirable developments in banking which may
     endanger the safety of the assets entrusted to credit
     institutions, adversely affect the orderly conduct of banking
     business or result in serious disadvantages for the national
     economy."\4

Such action could include (1) preventing banks from entering a new
line of business that is deemed to be dangerous or may have unknown
consequences or (2) ordering all banks to change certain operating
procedures. 

To carry out these responsibilities, the FBSO receives and assesses
information and reports provided by banking institutions, their
external auditors, and the Bundesbank.  Included are monthly reports
with very specific data on a bank's assets and liabilities, annual
and special external audit reports, audit reports conducted by
deposit insurance funds, and bank reports on such issues as changes
in management, commercial or financial acquisitions, excessive
losses, office relocations, changes in branch offices, intentions to
merge, or the appointment of auditors.  The FBSO is also authorized
to request certain additional reports, such as a list of large loans
or loans to managers, from specific institutions.  Generally, the
Banking Act also specifies that this information be provided
concurrently to the Bundesbank, which then provides analyses of the
reports to the FBSO. 

If questions are raised by any of these reports, the FBSO may follow
up with written or oral requests for more information from the bank
or its auditor and request meetings with the bank's management or
auditor.  The FBSO is also given the authority by the Banking Act to
use its own staff or staff from other institutions such as external
accounting firms or the Bundesbank to conduct audits of financial
institutions, even if there is no special reason for them. 
Information gained through such channels must be shared with the
Bundesbank. 

In practice, the FBSO does not have the staff to review and follow up
on all of the information it receives or to conduct bank audits. 
Consequently, the FBSO relies to a great extent on the reports of the
banks' auditors as well as on the Bundesbank to screen and analyze
bank-specific information and to raise issues of importance. 

Figure I.6:  Bundesbank Is Influential in Bank Oversight


--------------------
\3 Regulatory tools available to the FBSO include cease and desist
orders, orders to restrict or eliminate dividend payments, orders to
prohibit the continuation of a bank's ownership in other entities,
and orders to restrict future acquisitions. 

\4 Banking Act of the Federal Republic of Germany,  6.  Deutsche
Bundesbank Special Series No.  2, 4th edition, July 1993. 


   BUNDESBANK IS INFLUENTIAL IN
   BANK SUPERVISION AND REGULATION
--------------------------------------------------------- Appendix I:6

The Bundesbank and its Land Central Banks are very involved in the
day-to-day supervision of banks as well as in the decisionmaking
process that leads to regulatory and supervisory actions taken by the
FBSO.  Consequently, the Bundesbank's role in and influence on the
German bank regulatory and supervisory process are much greater than
might be gleaned from the 1961 Banking Act.  This influence has
developed from the Bundesbank's detailed knowledge about banks in
Germany, its close communication with the FBSO, certain legal
requirements that it be consulted before action is taken, and because
of the general perception that the monetary policy and other
functions of the central bank and those of banking supervision are
interconnected. 

The Bundesbank Land Central Banks are the central collection and
analysis points for most of the information used in bank supervision. 
For instance, the monthly bank statistical reports are first
submitted to and analyzed by the Land Central Banks before they and
the analyst's reports' are sent to the FBSO.  In addition, the
Bundesbank or the Land Central Banks receive other required bank
reports and external audit reports concurrently with the FBSO,
analyze them, and send these analyses to the FBSO.  The Bundesbank
also conducts bank foreign exchange examinations that provide it
firsthand information on some bank operations in at least all of the
larger banks.  It was given this responsibility after the Bankhaus
I.D.  Herstatt failure in 1974\5 --which was caused primarily by
foreign exchange losses--because its staff had an expertise in this
area that could not be matched by the accounting firms that normally
do bank audits.  If, as a result of their analysis, the Land Central
Banks or Bundesbank believe that there are problems in a specific
bank they are to notify the FBSO and recommend the action they think
the FBSO should take to remedy the problems. 

Primarily because of their role in the analysis of monthly and other
reports, the Land Central Banks play the key supervisory role in
Germany with respect to operational and reporting issues.  They
frequently contact banks in their regions--for additional information
or clarification--and consequently have a more detailed knowledge of
these banks than the FBSO.  Furthermore, since the Bundesbank is
located in Frankfurt, the headquarters of most of Germany's major
banks, there are many formal and informal contacts between bank
management and the Bundesbank.  Representatives of the Bundesbank
feel that the Bundesbank's lack of legal authority to take
enforcement action against banks makes it easier for banks to
communicate with the Bundesbank than with the FBSO. 

While the FBSO has sole responsibility for taking any enforcement
actions, the Bundesbank and its Land Central Banks play a significant
role in the decisionmaking process that results in those actions. 
For example, the FBSO gives serious consideration to recommendations
made by the Land Central Banks with respect to supervisory problems,
and basically any enforcement action planned is discussed with the
Land Central Banks before it is taken.  The more important the case
to the stability of the bank or banking system, the more likely the
FBSO would be to get agreement from the Bundesbank. 

Additionally, the Bundesbank is involved with the FBSO in rulemaking,
even though only the FBSO or the Ministry of Finance may adopt
regulations.  Generally, the Ministry of Finance delegates rulemaking
authority to FBSO.  The Bundesbank must approve certain regulations,
such as those that deal with liquidity and capital requirements.\6
Legally, if no agreement can be reached between the FBSO and the
Bundesbank on such issues, the FBSO would be blocked from acting.  To
prevent a stalemate, the Finance Ministry is given the authority to
act in such cases and to adopt a regulation, but such action has
never been necessary.  In most other instances, such as when the FBSO
wants to make certain exemptions to regulations or some reporting
requirements, the FBSO is only required to consult with the
Bundesbank.  In practice, even in these areas, the opinions of the
Bundesbank carry significant weight.  We were told that the FBSO has
never issued regulations with which the Bundesbank strongly
disagreed.  This effort toward consensus can partially be attributed
to a recognition of the importance of a united Bundesbank-FBSO
position if particular regulations were to be challenged by the
banking industry in the strong German administrative court system. 

The Bundesbank is also involved in the development of legislation. 
It testifies before the German legislature and also comments
informally.  Although technically the Finance Ministry is responsible
for developing banking related legislation, it often draws on both
the Bundesbank and the FBSO to help draft legislation. 

Figure I.7:  Relationship of FBSO and Bundesbank Is
Excellent


--------------------
\5 At the time it failed, Herstatt was one of Germany's largest
foreign exchange dealers.  Its closure had a global effect because it
was closed during the middle of the trading day in the United States
and consequently caught many banks with uncompleted foreign exchange
transactions with Herstatt.  The episode caused great disruption to
the Clearing House International Payments System and resulted in
losses for banks and Herstatt creditors. 

\6 Bank Act of the Federal Republic of Germany,  10, 10a, 11 24 and
25.  Deutsche Bundesbank Special Series No.  2, 4th edition, July
1993. 


   WORKING RELATIONSHIP BETWEEN
   FBSO AND THE BUNDESBANK IS
   CONSIDERED EXCELLENT BY BANKS
   AND REGULATORS
--------------------------------------------------------- Appendix I:7

The FBSO and Bundesbank are required, by law, to "communicate to each
other any observations and findings which may be of significance for
the performance of their respective functions."\7 Consequently,
written communications that involve one agency but not the other are
sent to the agency not involved.  Information from meetings and
telephone discussions that are of importance are also generally
shared.  In addition to day-to-day contacts, the senior leadership of
the Bundesbank, its Land Central Banks, and the FBSO meet twice a
year to discuss all important cases. 

Although good relations cannot be legislated and some regulators
acknowledged minor conflicts and turf battles, overall the
relationship and communication between the two agencies were
described as excellent by the top officials of the two regulatory
agencies, bank associations and external audit organizations we
interviewed.  They characterized the relationship as cooperative and
collegial on the part of both agencies.  Regulatory officials told us
that any problems were likely to be short term and were not likely to
seriously affect the quality of bank regulation and supervision. 

Figure I.8:  External Auditors Are Responsible for
Examinations


--------------------
\7 Banking Act of the Federal Republic of Germany,  7.  Deutsche
Bundesbank Special Series No.  2, 4th edition, July 1993. 


   EXTERNAL AUDITORS ARE
   RESPONSIBLE FOR BANK
   EXAMINATION FUNCTION
--------------------------------------------------------- Appendix I:8

In Germany, external auditors, not the regulatory agencies, perform
the examination function through various audits.  All banks licensed
in Germany, with the exception of branches of European Union banks
not headquartered in Germany, must be audited annually.  Auditors
were assigned these responsibilities under German law because, when
the 1961 Banking Act was passed and the FBSO established, they
already had expertise in banking.  The auditors' role has evolved
from checking banks' compliance with regulatory requirements to
assessing a bank's operations and controls as well as its financial
state. 

External auditors' legal responsibility consists of providing
regulators with specified information and immediately reporting
information that might result in a qualification of the auditors'
report.  External auditors may qualify their reports if they feel
that the bank has not met some concerns that they may have raised
during the audit.  While qualifications do not occur frequently,
their frequency has risen in tandem with the increased
responsibilities of auditors.  The external auditors' legal
responsibility also involves immediately reporting information that
might "endanger the existence of the credit institution or gravely
impair its development, or which indicate that the managers have
seriously infringed the law, the articles of association or the
partnership agreement\8 ".  Such formal action is relatively rare,
but informal discussions with the regulators are more frequent. 

Although bank auditors carry a heavy legal responsibility, this is
made somewhat easier to bear by legally limited liability for their
work.  Because bank audits are required by law, the auditors are
liable up to only approximately $300,000 for each audit, even if more
than one party sues the accounting firm over the same audit.  While
the annual audit is not made public, the auditor's certificate is
published which presents the auditor's opinion.  Creditors or others
may sue on the basis of that published opinion.  Individual auditors
in an audit firm are not financially liable.  Although lawsuits are
relatively uncommon, they are becoming more frequent as auditor
responsibilities increase and banking becomes more complex.  However,
the FBSO has never sued an accounting firm and would be unlikely to
do so in the future, primarily because it does not suffer monetary
losses from a bank failure because insured losses to depositors are
covered by the private deposit insurance systems. 

Figure I.9:  Regulators Rely on External Auditors'
Reports


--------------------
\8 Banking Act of the Federal Republic of Germany,  25-27. 
Deutsche Bundesbank Special Series No.  2, 4th edition, July 1993. 


   REGULATORS RELY ON EXTERNAL
   AUDITORS' REPORTS
--------------------------------------------------------- Appendix I:9

German regulators rely primarily on three types of audit reports for
qualitative information on the banks they regulate:  (1) annual
audits conducted by the bank's auditor, (2) periodic audits generally
conducted every 3 to 6 years by an auditor chosen by the FBSO, and
(3) audits conducted every 2 to 4 years by the bank deposit insurance
organizations.\9

Annual audits of bank safety and soundness are conducted by a firm
chosen, and paid for, by the bank.  German banking law requires that
these audits include information that is described in detail in about
85 pages of regulatory guidelines.  In general terms, audit firms are
required to examine and assess critical aspects of bank operation
such as capital, asset quality, management, earnings, and liquidity. 
This means that, in addition to conducting financial audits, German
auditors must also check, among other areas, a bank's internal
control and audit functions; its electronic data processing systems;
its compliance with reporting requirements, the quality,
diversification and country-risk of its loan portfolio and its loan
procedures; and its derivatives business and procedures.  More
specifically, an auditor would be expected to check a bank's loan
documentation on its largest loans, insider loans, and a sample of
small loans.  It would also be expected to assess the adequacy of a
bank's loan loss reserves and request that the bank revise these
reserves if necessary.  An auditor might also discuss with bank
management or other employees specific derivatives transactions that
appear extremely complex.  As a result of these detailed
requirements, audit reports for large banks may exceed 500 pages and
require a team of 30 to 50 auditors, many working year-round.  An
audit team for a small bank with an uncomplicated banking business,
on the other hand, may consist of a team of only three or four
auditors and take 3 to 4 weeks to complete. 

Under section 44 of the 1961 Banking Act, the FBSO may request
additional periodic audits of specific banks' operations.  Such
audits are commonly conducted at all banks at 3-to 6-year intervals
and cover specific areas of the bank's operations such as
derivatives, foreign exchange activities, the bank's internal audit
function, or lending activities.  In addition, an audit may be
requested if the regulator suspects a problem at a specific bank. 

Section 44 audits are always done by an audit firm that is not the
bank's regular auditor.  The bank is informed of the audit and the
scope of the audit on very short notice and must pay for the audit. 
The bank normally does not receive a copy of the audit report from
the FBSO until several weeks after the regulators have received it. 
The FBSO and Bundesbank will request that a bank answer questions
about anything that they find unusual about the audit report or about
any other concerns.  In addition to providing information about the
banks, these reports are also a check on the work of the banks'
annual auditors. 

The bank deposit protection systems for commercial, savings, and
cooperative banks also conduct audits of their member banks at 2- to
4-year intervals, or more frequently if necessary, to make certain
that the deposits they insure are safe.  These audits are supplied to
the bank regulators, the bank, and the bank's annual auditor, who
must comment in writing on the audit to the regulators.  In
principle, these audits are similar to year-end audits and use the
same audit procedures.  The audits are likely, however, to focus on
specific areas of a bank that are more complex or about which the
insurance provider may have some concerns.  The deposit insurance
audit reports are considered to be quite rigorous by the bank
regulators and are also a check on the work of the banks' annual
auditors. 

Figure I.10:  FBSO and Bundesbank Satisfied With
External Auditors


--------------------
\9 German banking law also requires annual audits of banks' custody
(securities) businesses.  Banking Act of the Federal Republic of
Germany,  30.  Deutsche Bundesbank Special Series No.  2, 4th
edition, July 1993.  These auditors are appointed by the FBSO but are
generally the banks' annual auditors. 


   FBSO AND BUNDESBANK ARE
   GENERALLY SATISFIED WITH
   EXTERNAL AUDITORS
-------------------------------------------------------- Appendix I:10

The FBSO and Bundesbank do not qualify specific audit firms for bank
audit work, but they do require that firms auditing banks be
experienced in such audits.  In addition, the FBSO has the right to
disapprove the bank's choice of auditor.  While such disapproval is
infrequent, the FBSO is more likely to informally tell a bank that
its audit firm selection would not be approved. 

The bank regulators feel that they have a very good appreciation of
the quality of bank auditors on the basis of their familiarity with
the work these auditors do and discussions they have with bank
management.  In general, the FBSO and Bundesbank felt that the
information from annual bank audits was satisfactory.  They
acknowledged that auditors may have a conflict between their
examination responsibilities and their interest in serving their
clients' needs but felt that the quality of audit work was not
materially affected by this conflict.  Since auditors may be barred
from conducting bank audits by the FBSO, it is in their interest to
supply the regulators with high-quality reports. 

If bank regulators are dissatisfied with a specific audit report,
they may react in several ways.  It is common procedure for the
Bundesbank Land Central Banks to fill out audit evaluation forms on
all audits and send them to the FBSO to inform it of any concerns
with the reports.  Minor concerns may be brought to the attention of
the auditors in future meetings.  If the Land Central Bank's
reservations are serious, it may meet with senior management of the
audit firm or send a letter to the auditor--or ask the FBSO to send
one--requesting that an auditor improve its report in the next year
and possibly suggesting that in the absence of such improvement a
reappointment of that auditor by the bank may be discouraged. 
Finally, and more infrequently, the top management of the FBSO and
Land Central Bank may request a meeting with the bank and its audit
firm to express their severe dissatisfaction with the work performed. 
Ultimately, as noted previously, a regulator may block a bank's
selection of an auditor. 

Figure I.11:  Banking Associations Provide Deposit
Insurance


   BANKING ASSOCIATIONS PROVIDE
   DEPOSIT INSURANCE
-------------------------------------------------------- Appendix I:11

The German deposit insurance systems are private and membership is
optional.  There is no federal deposit insurance program and no
federal guarantee of the private systems.  With very few exceptions,
all banks in Germany are members of a deposit insurance system. 
Banks that are not members of a deposit protection system must
provide bank clients with this information. 

Three separate deposit insurance systems are administered by the
banking associations of the three major banking sectors:  commercial
banks, savings banks (owned mostly by municipal governments) and
cooperative banks.  The protection systems operated by the savings
banks and credit cooperatives are aimed at protecting the solvency of
the institutions, thus indirectly guaranteeing deposits.  Savings
banks also enjoy the backing of the municipal governments that own
them.  Only the commercial bank deposit insurance system directly
protects deposits.  None of the protection systems will intervene in
the event of a general crisis in the banking industry.\10

Deposit protection coverage of the commercial bank deposit insurance
system is very high--nonsecuritized liabilities of each nonbank
depositor are protected up to 30 percent of the bank's liable
capital.\11 This means that a depositor in one of Germany's largest
banks could be protected for almost $1 billion.  This high level of
coverage, adopted in 1976 in the wake of bank failures in 1974,
particularly that of Herstatt, was meant to ensure that commercial
banks would be able to compete against banks that were owned by the
public sector and to head off a possible legislated deposit insurance
solution.  The system is funded by an annual assessment based on a
bank's deposit liabilities.  Additional assessments may be made if
necessary to discharge the fund's responsibilities, as has been done
in the past. 

The deposit insurance fund is not simply limited to paying off
depositors when a bank fails.  It also has the power to intervene and
attempt to resolve a member bank's difficulties.  Thus, the banking
industry generally resolves its own problems.  For example, in 1983 a
relatively large bank--Schroeder, Muenchmeyer, Hengst and Co. 
(SMH)--failed as a result of its poor lending practices.\12 During
this crisis, the regulators relied on, and even pressured the banking
associations, to resolve the failed bank.\13

Banking associations can also be quite influential in terms of
affecting proposed banking laws and regulations.  For example,
banking associations, by law, must be consulted when changes to
banking law or regulation are being considered and before banking
licenses are issued. 

Figure I.12:  Other Bundesbank Responsibilities


--------------------
\10 "Deposit Protection Schemes in the Federal Republic of Germany"
monthly report of the Deutsche Bundesbank, July 1992. 

\11 Liable capital is defined as the paid-up endowment capital and
the reserves plus up to 25 percent of tier 2 capital--which includes
undisclosed reserves, asset revaluation reserves, general
provision/general loan loss reserves, hybrid (debt/equity) capital
instruments, and subordinated term debt. 

\12 SMH failed in 1983 primarily as a result of excessive lending to
a building machinery group and its affiliates.  The banking community
agreed to support SMH partially because it was involved in
significant international transactions through a Luxembourg
subsidiary, and German banks were consequently concerned about their
international reputations.  The bank's securities and other
profitable operations were sold to Lloyd's Bank while the rest of the
bank was wound down. 

\13 For additional information about deposit insurance in Germany,
see Deposit Insurance:  Overview of Six Foreign Systems
(GAO/NSIAD-91-104, Feb.  22, 1991)


   LIQUIDITY PROVIDER
-------------------------------------------------------- Appendix I:12

The Bundesbank is very active in providing solvent banks with loans
to help them smooth out short-term liquidity needs through discount
and Lombard lending.  Discounting involves the sale of commercial
bills of exchange to the Bundesbank at a fixed discount rate,
generally lower than interbank rates.  The low rates encourage
borrowing from the Bundesbank up to a rediscount quota that is fixed
by the Bundesbank.  Because banks must provide the Bundesbank with
financial information to obtain these loans, this provides another
important source of information for the Bundesbank in carrying out
its supervisory responsibilities. 

The Bundesbank also provides short-term loans to banks secured by
specified securities held by the bank obtaining the loan.  The
granting of these loans, called Lombard loans, depends on monetary
policy because they are used as tools in determining the money
supply.  Lombard lending has been suspended in restrictive monetary
environments, and the Bundesbank has granted special Lombard loans
that can be discontinued from one day to the next. 

Both discount and Lombard lending are conducted through the Land
Central Banks and are considered normal liquidity borrowing without
any negative market connotations. 

Figure I.13:  Other Bundesbank Responsibilities


   CRISIS MANAGEMENT
-------------------------------------------------------- Appendix I:13

In the past, and as recently as the failure of the Bank of Credit and
Commerce International (BCCI) and the closure of two BCCI branches in
Germany, the Bundesbank has played a significant role in crisis
management involving financial institutions.  The extent of the
Bundesbank's influence in crisis situations is apparent from its
handling of the SMH bank failure in 1983 discussed previously.  SMH
bank had developed serious financial problems as a result of making
large loans to several companies, which the bank did not report to
the regulators as being affiliated.  When one of these companies
defaulted, the whole group failed.  Bank management went to the
Bundesbank when they realized the extent of the problem.  The
Bundesbank then notified the FBSO, and the two agencies called
together the senior management of the bank and the bank's creditor
banks to resolve the problem.  The Bundesbank played a very
influential role in persuading the creditor banks to forgive some of
their debts and to delay repayment on other debts, thereby giving SMH
bank the opportunity to dissolve in an orderly fashion.  The
Bundesbank feels that its independence and lack of legal enforcement
responsibilities in disciplining banks helps it negotiate solutions
to such problems and also makes the communication of problems easier
than to the FBSO. 

Figure I.14:  Other Bundesbank Responsibilities


   PAYMENTS CLEARANCE AND CURRENCY
   DELIVERY
-------------------------------------------------------- Appendix I:14

The Bundesbank Land Central Banks are also heavily involved in
payments clearance and currency delivery at the local level.  Checks,
bills of exchange, foreign currency transactions, and transactions
with foreign banks are all cleared from the individual payment
systems of the commercial, cooperative, and savings banks and the
clearance systems of the three largest German banks.  Each Land
Central Bank clears transactions in the region for which it is
responsible.  In 1991, 3.2 billion credit transfers, checks, and
direct debits passed through Bundesbank facilities--one-third of the
transfers and collection orders handled by German banks. 

Figure I.15:  Other Bundesbank Responsibilities


   PARTICIPATION IN INTERNATIONAL
   ORGANIZATIONS
-------------------------------------------------------- Appendix I:15

The Bundesbank also plays a significant role in international
organizations such as the Organization of Economic Cooperation and
Development, the European Union, the International Organization of
Securities Commissions, and Basle Committee on Bank Supervision, even
though the FBSO has the superior legal regulatory status.  Generally,
the FBSO and Bundesbank are both represented in international forums
and will have worked out joint positions before meetings of such
groups. 

Figure I.16:  LIKO Bank Serves as Lender of Last Resort


   LIKO BANK SERVES AS LENDER OF
   LAST RESORT
-------------------------------------------------------- Appendix I:16

The Bundesbank does not officially function as lender of last resort. 
This function is provided to some extent by the Liquidity Consortium
Bank, or LIKO Bank.  The LIKO Bank is a private bank that was jointly
capitalized by the Bundesbank, which contributed 30 percent of the
capital, and the German banking industry following the Herstatt
failure in 1974.  It is designed exclusively to help sound banks meet
short-term liquidity needs on an emergency basis, rather than to
sustain banks with more substantial financial difficulties. 

Credit decisions are made by a four member committee comprised of
representatives from the Bundesbank, the commercial bank, the savings
bank, and the cooperative bank associations.  Its facilities have
been used by only seven banks since its founding.  The infrequency of
use can be attributed to the fact that most banks suffering a serious
liquidity crisis are also experiencing extensive credit problems and
would not qualify for LIKO Bank lending.  Even though one of the
seven banks failed and others suffered further difficulties, the LIKO
Bank has not lost any money because the banking associations of which
the borrowing banks were members took responsibility for ensuring
that the loans were repaid.  If necessary, the LIKO Bank may call on
the initial capital subscribers for more funds, and it has access to
a Bundesbank rediscount line of credit. 

Banks in serious financial difficulties are either liquidated or
assisted by the banking associations of which they are members. 
Deposits in failed banks are repaid by the private deposit insurance
protection systems administered by the banking associations. 
Officials of the Bundesbank insist that they do not advocate a "too
big to fail" policy.  Indeed, the Bundesbank is prohibited by the
Bundesbank Act from buttressing banks that have become insolvent.  If
a decision to rescue a large bank were made, it would be a political
one.  Nevertheless, the Bundesbank would play a significant role in
advising on such a decision. 

In cases where "there is reason to fear that credit institutions may
encounter financial difficulties which warrant expectations of grave
danger to the national economy," the 1961 Banking Act allows the
Federal government to take action to "grant a credit institution an
extension of time to fulfill its obligations,"\14

and order that credit institutions or the stock market be temporarily
closed.  Before taking such action the Federal government must
consult with the Bundesbank and it is likely that the opinion of the
Bundesbank would carry significant weight in the government
decisionmaking process. 


--------------------
\14 Banking Act of the Federal Republic of Germany, ï¿½ï¿½ 47.  Deutsche
Bundesbank Special Series No.  2, 4th edition, July 1993


SUMMARY OF GERMAN BANK REGULATORY
STRUCTURE
========================================================== Appendix II

-------------------------  -----------------------------------------------------
Federal Bank               De jure the FBSO is the primary German bank
Supervisory                regulatory and supervisory authority. It alone has
Office                     the authority to take legal action involving credit
                           institutions. Such actions include: chartering,
                           closure, the issuance of regulations, ordering
                           special audits, and taking supervisory actions
                           against banks.

                           De facto it shares much of its authority with the
                           Bundesbank (see below). For example, it generally
                           would not take a legal action with which the
                           Bundesbank disagrees and is in communication with the
                           Bundesbank on all important issues and decisions.
                           Usually, it is not as involved in the day-to-day
                           information gathering and supervision as is the
                           Bundesbank. Close collaboration between the FBSO and
                           the Bundesbank is a hallmark of the German regulatory
                           system and carries over into joint memberships in
                           international forums.

Deutsche                   While the Bundesbank possesses none of the legal
Bundesbank                 responsibility for bank regulation and supervision,
                           beyond its authority to veto certain regulations, for
                           all practical purposes it is an equal partner with
                           the FBSO. Its responsibilities include:

                            the collection and analysis of monthly bank data
                           that it then forwards to the FBSO,

                            the analysis of external audits, and

                            for all intents and purposes, equal input as the
                           FBSO in important decisions involving legislation,
                           regulation, and supervisory actions, and veto
                           authority over certain types of regulations.

                           With a larger supervisory staff than the FBSO, it is
                           viewed as more of a day-to-day supervisor. It has
                           also played a major role in crisis management and it
                           is felt that it benefits in this role from its
                           relative lack of legal responsibility in bank
                           regulation and supervision.

External                   External auditors perform the examination function in
auditors                   the German supervisory system. Private accounting
                           firms have a legal responsibility under German
                           banking law to submit their annual bank audits to the
                           FBSO and the Bundesbank. These audits must be
                           conducted in accordance with regulations developed
                           jointly by the FBSO and Bundesbank and promulgated by
                           the FBSO. Auditors must inform the FBSO and the
                           Bundesbank immediately of any significant findings.

                           External auditors are also used to perform special
                           examinations ordered by the FBSO in areas such as
                           derivatives activities, internal controls, or the
                           credit portfolio. Most of these audits are routine,
                           although some may be ordered because problems are
                           suspected. Special audits are conducted by auditors
                           other than the bank's normal auditors but are paid
                           for by the bank.


Banking                    Banks in Germany are represented by 14 banking
associations               associations that must be consulted by the Finance
                           Ministry and the bank regulators on the development
                           of banking laws and regulations.

                           The three largest of these associations--the
                           commercial, savings, and cooperative bank
                           associations--also administer three separate deposit
                           insurance systems. In this context, the banking
                           associations also have the power to intervene and
                           attempt to resolve member bank difficulties.

--------------------------------------------------------------------------------

STRUCTURE AND INDEPENDENCE OF THE
DEUTSCHE BUNDESBANK
========================================================= Appendix III


   STRUCTURE
------------------------------------------------------- Appendix III:1

The Bundesbank has a nationwide substructure consisting of 9 Land
Central Banks each responsible for the territory in up to 3 of the
country's 16 states (leander) and, as of April 1, 1994, 183 branches
in larger towns and cities.  In determining the location of the Land
Central Bank offices, particular emphasis was placed on locating the
office in the most important banking center of the area because
direct contacts with the banking industry were deemed important for
implementing monetary policy. 

The territories of the 9 Land Central Banks are divided into (1) the
Land of Baden-Wuerttemberg, (2) the Free State of Bavaria, (3) the
Lands of Berlin and Brandenburg, (4) the Free Hanseatic City of
Bremen and the Lands of Lower Saxony and Saxony-Anhalt, (5) the Free
and Hanseatic City of Hamburg and the Lands of Mecklenburg-Western
Pomerania and Schleswig-Holstein, (6) the Land of Hesse, (7) the Land
of North Rhine-Westphalia, (8) the Lands of Rhineland-Palatinate and
Saarland, and (9) the Free State of Saxony and the Land of Thuringia. 
At year-end 1993, the Bundesbank employed a total staff of 17,632, of
which 2,828 were in its Frankfurt headquarters, 5,074 in Land Central
Banks, and 9,730 in branch offices. 

The governing bodies of the Bundesbank are the Central Bank Council,
the Directorate, and the managing boards of the Land Central Banks. 
The Central Bank Council is composed of the 7-member Directorate
(this may be expanded to 8 members) and the 9 presidents of the Land
Central Banks and is the supreme policymaking body of the Bundesbank. 
It meets every 2 weeks and its decisions are made by simple majority
votes. 

The Directorate of the Council, which consists of the President, the
Deputy President and up to six other members, who must all have
special professional qualifications, is responsible for implementing
these decisions.  The members of the Directorate are nominated by the
federal government and, after consultation with existing members of
the Council, appointed by the federal President, normally for 8
years.  They generally cannot be removed from office before
completing their terms. 

The Presidents of the Land Central Banks are proposed by the
governments of the states over whose territory they have
responsibility and are nominated by the Bundesrat (the Chamber of
Parliament representing the states).  The Central Bank Council is
also consulted on these nominations, but in general they tend to be
political and opposition by the Council is not sufficient to block a
nomination. 

The Land Central Banks are each headed by a managing board, which
include a president, a vice-president and one more member for the
larger Land Central Banks.  The Land Central Banks also have advisory
boards, which consist of representatives of the banking sector,
industry, agriculture and labor.  Their purpose is purely one of
consultation.  The Land Central Banks, themselves, even though they
are part of the Bundesbank, are the equivalent rank as the FBSO, one
step below ministry level. 


   INDEPENDENCE
------------------------------------------------------- Appendix III:2

The primary task of the Deutsche Bundesbank, set forth in the
Bundesbank Act, is not bank regulation and supervision, but the
protection of monetary stability.  To ensure that the Bundesbank
would be able to accomplish this task, the Bundesbank Act made the
central bank independent of instructions from the federal government. 
The basic obligation contained in the act for the Bundesbank to
support the general economic policy of the federal government is
expressly linked to the condition that this does not create insoluble
conflicts with the primary task to be performed by monetary policy
i.e., price stability.  As a result, the Bundesbank is generally
considered to be one of the most, if not the most, independent
central banks in the world. 


OBJECTIVES, SCOPE, AND METHODOLOGY
========================================================== Appendix IV

At the request of Congressman Charles E.  Schumer, we examined
various aspects of the German bank regulatory system.  Specifically,
our objectives were to describe (1) the German bank regulatory system
and its key participants, (2) how that system functions, and (3)
other Deutsche Bundesbank responsibilities that affect the banking
industry. 

Much of the information presented in this report is based on
interviews with and documents and statistics provided by the Senior
Director of Bank Supervision and two other officials of the FBSO, the
Director of Bank Supervision and his deputy of the Deutsche
Bundesbank headquarters, and the Directors of Bank Supervision and
their deputies at the Land Central Banks in Frankfurt and Berlin. 
Documentation included copies and descriptions of the monthly reports
that banks submit to the Bundesbank, the draft audit guidelines that
are expected to be issued by the FBSO in the fall of 1994, reports
that cover recent changes to banking and Bundesbank law, and
statistics on the banking industry. 

In addition to our interviews with the regulatory agencies, we met
with several senior executives at German banks and accounting firms. 
We also obtained information from the Federal Association of German
Banks, and the accounting firm it owns, and from the Institute of
Certified Public Accountants. 

Finally, we reviewed the Banking Act of the Federal Republic of
Germany and the Deutsche Bundesbank Act, the two laws that relate
most directly to bank regulation and supervision and related
documents. 

We conducted our review from January 1994 through April 1994 in
accordance with generally accepted government auditing standards.  We
discussed a draft of this briefing report with senior regulatory
officials of the FBSO and Bundesbank, who generally agreed with the
facts as presented. 

