On May 29, 2018, the Hessian Ministry of the Interior informed on investments and deposit protection in the State of Hesse, Germany. In the wake of the Greensill scandal, this legal framework is being given new life in many communities. The following article will therefore first explain the legal framework created in 2018 before examples of implementation are given in further articles on RATING©REPAIR.
Section 108 (2) of the Hessian Municipal Code (Hessische Gemeindeordnung, HGO) obliges the municipality to ensure sufficient security in the context of the careful and economical management of its assets when making investments, whereby investments should bring a reasonable yield.
In doing so, the municipality has to minimize financial risks; speculative financial transactions are prohibited (section 92 (2) sentences 2 and 3 HGO). What appears to be a clear term for laypeople, turns out to be a difficult theoretical problem here. There is no general legal definition of what is speculative. Speculation is often accepted when there is only an asymmetrical distribution of information, i.e. an investment and achievable investment success appear certain to some investors, but other investors do not have this information to recognize the security of the investment.
Deposits are compatible with Section 92 (2) HGO and Section 108 (2) HGO if the municipalities ensure that the security takes precedence over the possible return. This principle must also be observed in times of low and negative interest rates. Since even the concept of risk is not clearly defined, these formulations are also associated with a number of uncertainties
As of October 1, 2017, municipal deposits will no longer be protected by the voluntary deposit protection fund at private banks. Deposits existing as of October 1, 2017 are grandfathered. These changes should also play a role in the Greensill scandal of 2021. Later deposits at the Greensill Bank remained unprotected.
The deposit protection instruments of the Savings Banks Finance Group and the cooperative banks also do not offer any protection for public sector deposits. Nevertheless, there is a lower risk here due to the institutional security. Both banking groups have very good ratings from all leading recognized credit rating agencies.
With the abolition of grandfathering, deposits at private banks have become less secure. However, they are not to be described as speculative.
Against this background, the following information of the Hessian Ministry of the Interior was provided for the investment of liquid funds by municipalities (municipalities, towns and districts):
Subscribe to get access
Read more of this content when you subscribe today.
Leave a Reply