As a general rule, staff employed in the internal audit function should not be entrusted with tasks which are unrelated to auditing (BT 2.2, item 2 of the MaRisk) – due to the independence of the internal audit function. Similarly, under AT 4.3.1, item 1 of the MaRisk, it must be ensured that activities that are not compatible with each other are performed by different staff members and that conflicts of interest are avoided when staff members change posts. However, under BT 2.2, item 2 of the MaRisk, provided its independence is ensured, the internal audit function may, as part of its tasks, provide advisory services to the other organisational units of the institution. In this context, the expertise and experience of the internal audit function can be used, for example through its involvement in projects in accordance with BT 2.1, item 2 of the MaRisk. If staff of the internal audit function are to be deployed in other organisational units and their tasks in this area are to exceed mere involvement or advisory services then, in order to avoid conflicts of interest in line with AT 4.3.1, item 1 of the MaRisk, it must be insured that, for example, an internal auditor who was previously predominantly active in the credit area is deployed in a different area. In order to ensure that these temporary measures are clear to the supervisor in future, the institution should keep a corresponding record, for example containing information about which staff were deployed in which areas over what period of time and which processes they supported.

As a matter of principle, the institutions themselves are responsible for specifying (and where applicable adjusting) the criteria governing when a credit relationship is to be subjected to intensified loan management under BTO 1.2.4. In doing so, institutions must consider the purpose of such intensified loan management, which consists in mitigating to the extent possible the further risk development of exposures with (potentially) higher risks.

Considering this primary objective, the distinction between normal loans and those subject to intensified management also serves to categorise loans according to the intensity of observation required and thus facilitates more focussed management of resource usage. This is all the more important in the current crisis given that resources are currently under particular pressure, which is expected to increase as the crisis progresses.

Regardless of this, the criteria developed and implemented by the institutions for identifying risks are of particular importance in crisis situations. Changing the criteria governing when a loan is moved into intensified loan management therefore would not be expedient. Nonetheless, the principles-based requirements of the MaRisk allow for implementation that is adapted to the relevant situation; it is therefore possible to achieve the desired simplifications through suitable adjustments to the credit processes. For example, institutions could adopt the following approach:

• Firstly, allocate all cases to intensified loan management if, based on an initial assessment, the financial difficulties can be attributed exclusively to, for example, the strained liquidity situation as a result of the COVID-19 pandemic. At this point, it is not necessary to perform the usual case review.
• Maintain the previous responsibilities and credit processes from normal loan management for these cases in order to preserve operational capacity without delays.

This would allow institutions to accommodate all legitimate concerns whilst having only a minor impact on operational capacity. In particular, this approach would facilitate a later case analysis. This is all the more important since it is not currently possible to determine whether the problems initially identified in fact have a substantial background or whether they may, as the crisis progresses, result in substantial risk situations. For such cases and for (time deleyed) monitoring based on this it would therefore be ensured that a transition to the “real” intensified loan management, or recovery/resolution, could be initiated as early as possible.

Under BTO 1.1, item 2 of the MaRisk, depending on the nature, scale, complexity and riskiness of the exposure in question, a credit decision requires two positive votes by the front office and back office. In accordance with BTO 1.1, item 4 of the MaRisk, for credit decisions with regard to transactions that are considered immaterial in terms of risk, the institution may determine that only one vote is necessary and that the organisational segregation of the front office and back office need not be adhered to. In spite of the challenges posed by the current crisis and the expected staffing shortages in individual departments within institutions, it does not appear acceptable to omit entirely the two votes in the front office and back office, since this segregation of functions is of crucial importance in order to prevent institutions from taking on unmanageable credit risks.

In the face of the current economic developments affecting borrowers, institutions and BaFin are expecting a high number of loan applications, particularly within the context of state-backed support programmes. As a result, the units involved in credit decisions and processing in particular may be faced with an unmanageably high workload. In individual cases arising in specific institutions as a result of the crisis (significant staff shortages in the back office, a backlog of applications that cannot be approved and processed within a period of time that is appropriate given the crisis situation, communication problems due to staff working outside the business premises), BaFin considers it appropriate for loans to first only be subject to voting by the front office in order to facilitate the prompt granting of loans. For this, the following conditions must be met:

• The loan application is from an existing client of the institution.
• The loan request is made on the basis of difficulties experienced by the borrower as a result of the crisis.
• The loans granted form part of state-backed support programmes.
• Subsequent voting by the back office is performed promptly (within three months, similar to the rule under BTR 1, item 4 in conjunction with BTO 1.1, item 3 of the MaRisk, which provides for a corresponding time period for the second vote by the back office in the context of setting issuer limits for trading). If the result of this second vote is negative, the institution must implement measures to limit risk.

As a rule, the principle of dual voting in risk-relevant credit business should be observed. To mitigate the impact of staff shortages resulting from the crisis, BaFin considers a more flexible deployment of staff members, i.e. through alternately distributing staff experienced in the granting of loans between the front and back office, acceptable in exceptional circumstances in order to maintain the institution’s operational capacity. Therefore, staff members in the front office could, for example, switch to the back office during the crisis in order to perform the process steps allocated to the back office and vice versa. The organisational segregation of duties eliminates the possibility of conflicts of interest arising when the same staff members processes loans in both the front and back office; nonetheless, during the crisis and in the event of staff shortages, institutions may decide not to maintain this strict segregation of duties. In any case, institutions should appropriately consider and manage the risks that arise when the same staff members perform duties in both the front and back office, even if these duties relate to different loans.

It can be assumed that a loan must generally be classified as a problem loan if the borrower’s debt-servicing capacity cannot be ensured for the foreseeable future and it thus seems impossible to limit counterparty credit risk. If recovery is deemed necessary, an institution must then decide under BTO 1.2.5, item 3 of the MaRisk whether it will pursue the recovery option.

In the light of the national impact of the coronavirus crisis – now becoming evident in this respect – there is no doubt that it would be reasonable and customary for banks to pursue the recovery option with borrowers that demonstrated debt-servicing capacity prior to the crisis. BaFin is currently suspending the applicability of BTO 1.2.5, item 3 of the MaRisk; borrowers can be granted loans even if, due to the crisis, their debt-servicing capacity cannot be ensured at present or will essentially depend on the further course of the crisis. The institution must conduct an internal evaluation and conclude that the entity will be capable of survival (after the crisis), i.e. that it will again generate debt service or would not have become a recovery case without the coronavirus crisis.

This can automatically be assumed for all borrowers that receive funds from the planned KfW support programme or, where applicable, from support programmes of the federal states and the municipalities. These loans are not to be classified as problem loans for the time being; only towards the end of the support period will it have to be decided whether continued pursuit of the recovery option would require restructuring (and thus require the loans to be treated as problem loans and also require the submission of recovery reports).

Institutions that are considering making such payments must ensure compliance with the requirements of section 7 of the Remuneration Regulation for Institutions (Institutsvergütungsverordnung – InstitutsVergV). In view of the current situation, institutions must pay particular attention to the long-term capital situation, taking into consideration both the prolonged period of stress and the recommendations of BaFin, the ECB and the ESRB that institutions exercise utmost prudence with regard to variable remuneration. If the result of a review of the criteria specified in section 7 of the InstitutsVergV is not entirely positive (e.g. if the profit situation is negative or the capital resources are deemed to be insufficient at present or in the medium-term – including in a prolonged period of stress), institutions are expected to notify BaFin and the Deutsche Bundesbank of their intention to grant or pay bonuses (please see the FAQ on how institutions can communicate with supervisors in the current situation). In such cases, institutions should provide relevant documentation demonstrating that a review of the criteria under section 7 of the InstitutsVergV has been carried out and documenting the reasons why the institution considers it appropriate to pay the variable remuneration. Furthermore, if an institution fails to meet the combined buffer requirement, the restrictions on distributions stipulated under section 10i of the KWG must be observed.

As a general rule, institutions must ensure compliance with the requirements of the InstitutsVergV before granting or paying any kind of variable remuneration. The review must be conducted in a formalised, transparent and comprehensible process following the end of the financial year and on the basis of the relevant annual financial statements. If, in exceptional cases, variable remuneration is to be paid before the end of the financial year, appropriate arrangements for repayment must be made. Only modest amounts of variable remuneration (e.g. corresponding to the amount of the tax-free special payment of up to €1,500 in 2020) may be granted or paid on the basis of reviews of the supervisory and internal criteria conducted during the course of a year.