GERMANY: An introduction to Banking & Finance: Regulatory
Banking and Finance: Between Regulatory Change, Technological Disruption and Economic Uncertainty
The pace of change in the banking and financial sector in 2025 is probably more intense than ever. A complex interplay of geopolitical tensions, economic headwinds, technological leaps, and far-reaching regulatory reforms is presenting participants in the financial market with certain challenges. The sector is undergoing a structural transformation that not only puts traditional business models to the test, but also opens up new opportunities.
Economic Environment
The global and domestic economic landscape in 2025 is marked by uncertainty, upheaval, and structural disruption. Geopolitical tensions are shaking global markets. At the same time, increasing digitalisation—especially through the deployment of generative AI—requires a fundamental rethinking of operational resilience. Cyber incidents, often associated with hybrid warfare, pose a serious threat to IT infrastructure, which is now being addressed structurally through legal instruments such as the Digital Operational Resilience Act (EU) 2022/2554 (DORA). Climate risks (eg extreme weather events) are growing, and regulatory sustainability requirements also create significant reputational and legal risks—through allegations of greenwashing or uncertainties in ESG classifications, for instance.
These developments directly impact the financial sector: Risk assessments for corporate lending are becoming more complex, demand for financing products is shifting, collateral valuations face new challenges and digital services, and business models continue to rise. Simultaneously, banks must manage rising default risks and refinancing uncertainties.
Technological Developments and Regulatory Oversight: AI and Digital Operational Resilience
By 2025, artificial intelligence (AI) is becoming more and more relevant in areas such as credit scoring, customer interaction, risk management, and fraud detection. The EU Artificial Intelligence Act (EU) 2024/1689 now comprehensively regulates the use of such technologies for the first time. Financial applications like scoring models or algorithm-based investment advice are likely to be classified as high-risk and are subject to strict compliance requirements on transparency, explainability and governance.
At the same time, DORA mandates comprehensive management of ICT risks. Stress testing, incident reporting obligations, and stringent requirements for third-party ICT contracts are setting a new standard for digital resilience. With DORA now in force, financial institutions are currently investing considerable effort in implementing its requirements, particularly in setting up and reporting the information register for all ICT third-party arrangements and aligning their existing contracts with the new regulatory standards. The breadth and depth of required documentation and oversight obligations require especially careful handling in complex ICT supply chains.
These regulatory frameworks reflect a clear trend: The digitalisation of the financial sector has increased vulnerability to cyber risks. Regulators are responding with tightened oversight of digital infrastructure and AI systems—highlighting a tension between innovation and risk control.
Payments: A New Era of Real-Time Transactions
Payments are among the most dynamic areas of financial services. With the adoption of the EU Instant Payments Regulation (EU) 2024/886, real-time credit transfers become mandatory for all payment service providers—from January 2025 for receiving payments, and from October for sending them. This entails significant technical challenges while fundamentally transforming user behaviour and business models.
Furthermore, the revision of the Payment Services Directive (PSD3) will deepen this transformation. Key issues include safeguarding client funds, supervising fintechs, and cross-border harmonization. The EU’s proposal for the Financial Data Access Regulation (FIDA) also aims to open and standardize data access in the financial sector. Open Finance is going to become the mandatory standard—with far-reaching implications for competition, data protection, and innovation.
Capital Markets in Transition: Focus on Transparency, Investor Protection and Standardisation
Capital markets regulation in 2025 centres on private investor protection and market efficiency. The MiFID II review (Directive (EU) 2024/790) and the MiFIR review (Regulation (EU) 2024/791), in force since March 2024, introduce enhanced transparency obligations, stricter suitability assessments, and broader product governance requirements. Furthermore, the proposed Retail Investment Strategy aims to better protect retail investors from opaque or overpriced products. This comes amid a surge in retail investment and the broader democratisation of capital markets.
At the same time, institutional investors demand more standardization and comparability. Therefore, for example, the European Commission is planning a reform of the EU Securitisation Regulation (EU) 2017/2402 to make the STS securitisation market more attractive and efficient. Planned measures include easing capital requirements, simplifying disclosure and due diligence obligations, and introducing greater flexibility in risk retention rules. The goal is to improve access to the securitisation market, particularly for smaller institutions, and to reduce bureaucratic hurdles.
ESG Regulation: Sustainability as a Structural Principle of Financial Regulation
Sustainability has evolved from an ethical aspiration into a key regulatory and competitive factor. In the investment space, the trend is moving away from purely negative screening toward comprehensive ESG integration across the investment process. Impact investing is gaining relevance, particularly in private equity, while ESG criteria are becoming more and more usual in credit underwriting and in liquid investments such as bonds and equities.
On the regulatory side, the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR) and the EU Taxonomy Regulation (EU) 2020/852 remain central. However, overly complex and sometimes contradictory requirements have made product classification and marketing more difficult. Many providers are scaling back or downgrading their offerings. Market participants are calling for clearer product categories to facilitate ESG product marketing. The ongoing revision of the SFDR and the draft Omnibus Package, published in February 2025, may potentially reverse this trend.
In addition, the EU Green Bond Standard Regulation(EU) 2023/2631, available for issuers since December 2024, provides a voluntary EU-wide legal framework for issuers electing to use the “European Green Bond” or “EuGB” label for green use of proceeds bonds in accordance with the EU Taxonomy Regulation, eg corporate bonds or securitisation bonds. There has been a recognisable trend towards green bonds in Europe in recent years. However, the introduction of the new Green Bond Standard is still a challenge for many issuers due to the high requirements. Therefore, it remains to be seen how the Green Bond Standard is used by issuers, also in comparison with existing market standards for green bonds, such as the ICMA Green Bond Principles.
Despite these challenges, the expansion of renewable energy and the broad electrification of infrastructure remain key pillars of Europe’s energy transition. The financial sector plays a key role here and is required to channel financial flows into sustainable projects.
Digital Assets: MiCAR brings Order to a Dynamic Sector
With the Markets in Crypto-Assets Regulation (EU) 2023/1114 (MiCAR), the EU has taken a major step toward regulating digital assets. Since 2024, comprehensive requirements apply to issuers and providers of crypto services in relation to crypto assets not qualifying as securities under the MiFID regime —from whitepaper obligations to capital requirements. In Germany, FinmadiG and the new Crypto Markets Supervision Act (KMAG) complement the European framework.
Beyond MiCAR, the first DLT MTFs are also in the starting blocks, which could also increase the importance of the market for tokenised bonds under the German Electronic Securities Act (eWpG).
Regulatory clarity is boosting confidence in digital assets among institutional and retail investors alike in the EU, for example regarding stablecoins under MiCAR. The opposite trend can be observed in the USA e.g. regarding stablecoins.
Financial Market Supervision: Centralisation and Harmonization at the EU Level
The EU is intensifying its fight against money laundering with the establishment of the Anti-Money Laundering Authority (AMLA) in Frankfurt and new requirements under the EU Funds Transfer Regulation (EU) 2023/1113. AMLA will directly supervise key financial actors from 2028 onward, aiming to create a unified supervisory framework and ensure more effective combat against financial crime. At national level, the German Federal Supervisory Authority (BaFin) has furthermore revised its Interpretative and Application Guidance on the German Anti-Money Laundering Act (GwG), which has been applicable since February 2025. While primarily aimed at preparing for the forthcoming EU anti-money laundering requirements, the amendments already introduce specific clarifications—particularly regarding risk management, customer data updates, and suspicious activity reporting. Depending on the business model, these changes may necessitate immediate adjustments for obligated entities. Particularly in light of the fact that BaFin has recently been focusing more and more on AML-compliance of German banks.
Furthermore, the implementation of the Regulation (EU) 2024/1623 (CRR III) marked the final adoption of the Basel III standards within the EU, introducing new rules on credit risk, capital requirements, and governance structures.
Outlook: Structural Transformation as Challenge and Opportunity
Technological innovation, geopolitical upheaval, economic volatility and regulatory reforms are going to transform the financial sector in the upcoming years. The industry’s ability to remain future-proof will largely depend on how flexibly and strategically market participants react to these developments. Regulation not only reflects current risks but also serves as a catalyst for innovation, sustainability, and digital transformation. Thereby, different business models and financial products are increasingly growing together, in particular in the fintech space, and financing transactions are becoming more and more international. For example, in the case of investment funds and securitisations, transaction structures often relate to multiple jurisdictions.