Wirecard Bank Ringfenced by Germany’s Bafin After Insolvency

(Bloomberg) -- Wirecard AG is ceding control of funds at its banking unit after Germany’s financial regulator stepped in to prevent the money from being deployed elsewhere at the company following its decision to start insolvency proceedings.

BaFin -- as the watchdog is known -- is ringfencing the banking unit after the payments provider on Thursday said it’s seeking court protection because of its over-indebtedness. Wirecard Bank AG is not part of that process and BaFin has appointed a special representative for the unit, according to a statement by the company.

“In future, the release processes for all payments of the bank will be located exclusively within the bank and no longer at group level,” Wirecard said in a statement.

Wirecard’s insolvency filing marks the culmination of a stunning accounting scandal that led to the arrest of its former chief executive officer and left the firm unable to find over $2 billion missing from its balance sheet. BaFin, along with auditors and other institutions, has come under intense criticism for its role in failing to prevent one of the biggest scandals at a major German company, including through its decision to ban short-selling of the company.

The regulator must now decide if Wirecard Bank is in financial difficulty. If so, it can freeze deposit withdrawals to win time and assess the bank’s viability. If it has no future, BaFin has to decide whether the bank should be wound down or sent into insolvency proceedings.

The good news for customers of Wirecard Bank is that their money is protected because the unit is part of a group of German lenders who have pledged to insure one another’s depositors should a bank run into trouble. Each depositor has up to 19.7 million euros of funds which are eligible for that guarantee, according to a spokesman for the Association of German Banks. The depositor’s nationality doesn’t matter.

Still, the bank has seen an elevated level of deposit withdrawals since news about its parent’s troubles broke on Thursday last week, people familiar with the matter said. The pace of outflows at the time wasn’t high enough to alarm regulators, the people said before the parent filed for insolvency. They asked not to be named discussing the private information.

To fuel its growth, Wirecard has been paying depositors attractive interest at a time when traditional banks increasingly started to pass on negative rates. This year, it began offering a 0.75% interest rate via its Boon app, betting that more deposits will translate into more payments via its systems and lucrative contracts with stores and online merchants.

A BaFin spokesman declined to comment.

Wirecard’s customer deposits from its banking operations swelled to 1.72 billion euros ($1.94 billion) at the end of September from 1.26 billion euros at the end of 2018. That’s split mainly between Wirecard Bank, Wirecard Card Solutions Ltd. and Wirecard North America, Chief Financial Officer Alexander von Knoop said on a call with analysts in November.

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