With the entry into force of the Financial Stability Act on 1 January 2013, the Bundesbank was given the task of macroprudential supervision of the German financial market. This mandate includes analysis of matters relevant to financial stability in order to identify dangers. The legislature thus drew conclusions from the financial crisis that supervision should not just focus on individual players but also on the financial markets as a whole. BaFin continues to be responsible for microprudential supervision.

The Financial Stability Act obliges BaFin and the Bundesbank to inform each other of observations, conclusions and assessments necessary to fulfil their respective oversight duties. Felix Hufeld, BaFin Chief Executive Director of Insurance Supervision and Dr Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank whose responsibilities include financial stability, offered a detailed explanation of what this means for insurance supervision in an interview.

Division of responsibilities in German banking supervision

BaFin and the Bundesbank work closely together in supervising credit and financial services institutions. The Bundesbank performs the duties of ongoing monitoring in accordance with section 7 (1) of the Banking Act (Kreditwesengesetz – KWG). Under the Banking Act, it evaluates reports and notifications that institutions are required to regularly submit and assesses capital adequacy and risk management procedures. As part of its ongoing monitoring, the Bundesbank also takes into account the macroprudential insights from its activity in accordance with the Financial Stability Act, the provisions, warnings and recommendations of the relevant European institutions and the Committee for Financial Stability, and observes BaFin's guidelines.

BaFin conclusively determines whether the institution has sound risk management and sound risk coverage and whether it ensures that its risks are balanced by sufficient liquidity and capital resources. Final assessment and decision-making power on all supervisory measures and questions of interpretation shall rest with BaFin. It normally uses the Bundesbank's evaluations as a basis.

BaFin and the Bundesbank have set out the competences delegated to each of them by legislature, in an agreement. BaFin also issued a Supervision Guideline in consultation with the Bundesbank.

Financial Stability Committee

The Bundesbank's insights are also incorporated into the Committee for Financial Stability's consultations. This committee, a main element of the Financial Stability Act, was established to strengthen cooperation on financial stability issues between the Bundesbank and BaFin. The Committee's main responsibilities are to identify dangers to financial stability and to issue warnings and recommendations to avert danger.

The Financial Stability Committee consists of three representatives from the Federal Ministry of Finance (BMF), three from BaFin, three from the Bundesbank, and one representative (in advisory capacity) from the Federal Agency for Financial Market Stabilisation (FMSA). The BMF is represented by Dr Thomas Steffen, State Secretary at the Federal Ministry of Finance, Dr Levin Holle, Director-General for Financial Market Policy, and Dr Ludger Schuknecht, Director-General for Economic and Fiscal Policy Strategy. BaFin will be represented at the meetings by President Dr Elke König and the Executive Directors of Banking Supervision and Insurance Supervision, Raimund Röseler and Felix Hufeld. The Bundesbank will be represented by Vice President Sabine Lautenschläger, Member of the Executive Board Dr Andreas Dombret and Head of the Financial Stability Department Dr Karlheinz Bischofberger. The FMSA is represented by the Chairman of the Management Committee, Dr Christopher Pleister. The German Federal Minister of Finance and the President of the Bundesbank may attend the committee meetings.

Interview with Dr Andreas Dombret and Felix Hufeld

“The two organisations benefit from each other’s specific expertise”

Dr Dombret, Mr Hufeld, under the Financial Stability Act (Finanzstabilitätsgesetz), the Bundesbank and BaFin will now also cooperate in supervising insurance companies. How will the supervisory tasks be divided up?

Hufeld: I can answer that question quickly: microprudential insurance supervision, ie the su-pervision of individual insurers, insurance groups and pension funds, will remain the sole responsibility of BaFin. The Bundesbank is not involved. That is thus a different situation than in banking supervision.

Dombret: The Financial Stability Act mandates the Bundesbank to help ensure that the finan-cial system remains stable. It is responsible for macroprudential oversight of all sectors of the financial system – which includes insurers. The act assigns analytical tasks, in particular, to the Bundesbank. It is our job to identify potential dangers and assess constellations that could impact financial stability as a whole. These analyses form the basis for the discussions within the Financial Stability Committee, where the Federal Ministry of Finance, BaFin and the Federal Agency for Financial Market Stabilisation add their own input. Building on this risk analysis, the Financial Stability Committee may then issue warnings and recommendations.

That means that BaFin and the Bundesbank exchange more information nowadays than they used to.

Dombret: Yes, the Financial Stability Act clearly stipulates that we share all observations, conclusions and assessments required to fulfil our respective tasks. The two authorities will mutually benefit from the information and the special expertise that they exchange. The ex-press legislative intent underlying the act is for us to work hand in hand and swap notes re-garding relevant data, facts and evaluations. And we will jointly ensure that this is the case.

What does that mean in concrete terms?

Hufeld: We have laid down the details in a joint administrative agreement, which at BaFin applies to all areas of supervision. The need now is to breathe life into that agreement. We have looked at all the data that we or the Bundesbank collect to determine for what prudential perspective they are relevant. Certain data that are collected on a regular basis are ex-changed continuously. BaFin has access to all Bundesbank data and information – and vice versa – to the extent necessary for each institution to fulfil its respective mandate. We will now work out how best to proceed in practice.

Should insurers fear that the exchange of information will be to their disadvantage?

Dombret: On the contrary. It is in their own best interests that we seek to maintain a stable financial system. The experience of recent years has clearly demonstrated the dangers as-sociated with systemic risks and cross-sector contagion.

Hufeld: I agree. And what Mr Dombret just said of course applies equally to microprudential supervision. If the Bundesbank shares valuable macroprudential insights with us, insurers and their policyholders will be the first to benefit. Another advantage for insurers is that they will not need to establish a separate regular reporting channel to the Bundesbank as we forward the data that we receive to the Bundesbank. It goes without saying that the forwarded data will be treated confidentially since the Bundesbank, just like BaFin, is sworn to secrecy.

What do the Bundesbank and BaFin do with the information?

Dombret: That is laid down in the legal provisions: we use the information to fulfil our respec-tive mandates. For us, that means that we use the data provided by BaFin to assess the sta-bility of the financial system as a whole from a macroprudential view. BaFin, in turn, uses our data and insights to effectively supervise insurers and thus ensure that they can honour their contracts on a long-term basis. As I mentioned earlier, the insights gained also feed into the consultations of the Financial Stability Committee.

Hufeld: There are many ways in which the Bundesbank’s macroeconomic and macropruden-tial expertise will be valuable to us. Take the issue of the current low-interest rate phase. The Bundesbank analyses and evaluates the information that we provide. We, in turn, can use the results for our microprudential supervision. The exchange of information is not, therefore, a one-way street; it results in a beneficial symbiosis of macroprudential and microprudential knowhow, which will strengthen Germany as a financial centre.

Regarding the low-interest rate setting: how will you collaborate specifically on this issue?

Hufeld: This issue demonstrates the importance of our cooperation. We can draw a reliable and comprehensive picture of the situation only if we take due account of both the relevant macroeconomic and macroprudential factors and the individual insurers’ particular circum-stances. And the ongoing period of low interest rates naturally also plays an important role in the Financial Stability Committee. We must, therefore, grapple with a difficult subject at the very outset of our collaboration. However, I am sure that will only strengthen our cooperation.

Dombret: The current low-interest rate setting is making itself felt in all financial sectors. Credit institutions and insurers must take this into account in their business plans. As the Bundesbank has, for some years, been observing the effects of the low-interest rate envi-ronment on the financial system and, not least of course, on life insurers, I expect our coop-eration with BaFin to prove fruitful in this field, too.

Another key issue from both a macroprudential and a microprudential perspective is that of systemic relevance. The Financial Stability Board (FSB) recently ranked nine insurers as global systemically important insurers. How important do you think this step is?

Dombret: The publication of this first list of global systemically important insurers marks an-other step on the path towards a more stable financial system. Banks are not the only entities that can be systemically important – market infrastructures and insurers can be, too. The main factors determining an insurer’s systemic importance are, first and foremost, its inter-connectedness within the financial system and the size of its non-traditional and non-insurance business. I therefore fully support the FSB’s recent move. However, it is clear that we still have a considerable way to go. We must now specify and finalise the regulatory con-sequences associated with this ranking. That will not be easy. Just think of the challenge of creating, for the first time, a harmonised international basis for imposing potential capital sur-charges in the insurance sector.

Hufeld: It is good that we now know where we stand. Insurers are systemically important in a different way than, say, banks, as they do not trade with one another. Nonetheless, identifying global systemically important insurers is a key step towards maintaining financial stability and protecting policyholders. I believe that the best way of protecting policyholders is to establish effective recovery and resolution plans and to tailor supervision to the complexity of the business. As I said earlier, we now need to spell out the regulatory consequences. May I just add that the fact that the list features no reinsurers does not mean that this group of insurance companies is not considered systemically relevant. A decision on this issue will be taken next year.