Around five minutes in, Felix Hufeld adopted a more personal tone. During his speech to around 40 journalists at the authority’s New Year Press Conference on 16 January, BaFin’s President revealed that, as a young cellist, it was the fourth movement of Beethoven’s ninth symphony that he especially enjoyed playing. Hufeld described how the composer’s interpretation of Schiller’s “Ode to Joy” had made a lasting impression on him – and that today, more than ever, he is still deeply moved by the piece.

The motif “Freude schöner Götterfunken” begins very softly. But, Hufeld continued, with each repetition, as more instruments join in, the melody is strengthened, “until, eventually, Beethoven delivers his tribute to human kinship with such clout that the European Union simply had to make Ode to Joy its anthem.” As one indispensable component helping to shape something bigger, and at the same time an irreplaceable player in one’s own right – according to Hufeld, this is also a fitting description of the role played by BaFin in the orchestra of European supervision

National sovereignty

Last summer, in its judgement of the banking union, Germany’s Federal Constitutional Court did not use quite the same wording, but the message is the same (see expert article on the BaFin website dated 19 September 2019); Hufeld explained how the court gave its blessing to the competencies of the SSM and the SRM, i.e. supervision and resolution, as part of the European banking union. According to Hufeld, the Senate also emphasised that the national authorities continue to have their own responsibilities: they act on the basis of their own national sovereignty and not merely through delegated powers. This calibration of union and national law shows how we can “achieve a beneficial balance between European and national supervision,” explained BaFin’s President.

The review of the three European Supervisory Authorities also focussed, in essence, on the appropriate balance between European and national supervision, Hufeld continued, adding that it had been possible to resist the temptation to transform all three ESAs into supervisory-regulatory hybrids . Instead – “long live the subsidiarity principle! – the ESAs were strengthened in those areas where they are better placed to act than the national authorities,” for example in fostering supervisory convergence. In Hufeld’s view, this is the right way to go.

Separation of powers also applies to the fight against money laundering

Hufeld believes that it would be wrong to transfer responsibility for anti-money laundering supervision to the European Banking Authority (EBA). In order to effectively combat money laundering, increasingly moving supervision in this area to the European level will be unavoidable, he acknowledged. However, excepting a few special cases, the ESAs are not in fact supervisory authorities, they are “above all regulatory harmonisers”, and to give the same body both the authority to issue standards and the responsibility to enforce them would run contrary to the primacy of the separation of powers. The European Central Bank is also being considered. However, the ECB only has a mandate for the 19 euro countries. And the fight against money laundering is not an issue that only concerns banks.

The best solution, in Hufeld’s opinion, would be “a new separate European authority that operates as part of a close network with the national authorities.” But “we also need a European regime that is harmonised in terms of substantive law,” explained Hufeld.

Brexit

As a committed European, Hufeld describes Brexit as “a process that poses a fundamental challenge to European unity.” If the British House of Lords and the European Parliament now also give their approval to the withdrawal agreement, then the transitional provisions, which were negotiated parallel to the agreement, will enter into force. The Tax Act relating to Brexit would thus become obsolete, as would the transitional measures based on this act, which BaFin had at the ready for the event of a no-deal Brexit, Hufeld explained. He also stressed that this must be clear to the affected companies.

Becoming even better supervisors

“We want to be even better supervisors,” is how Hufeld summed up BaFin’s New Year’s resolutions for 2020. “Our intentions for the coming year, however, are not as fleeting as the resolutions one typically makes at this time of the year,” he added. And BaFin gives them a different name: “supervisory priorities” (only available in German). The priorities BaFin has set itself for the new year are “once again in large part driven by developments in the companies and markets that we supervise.”

Business models under pressure

BaFin’s President chose to address one priority in particular: the sustainability of business models. Faced with low interest rates, a weakening economy and new digital competition, the business models of German banks are increasingly coming under pressure, he explained. That is why BaFin will take a very close look at the way institutions are dealing with low profitability – and what they intend to do to stay in business over the long term.

Hufeld’s message was clear: “The clock is ticking. We are approaching the eleventh hour.” As is well known, BaFin supervises institutions that are struggling particularly closely. “But this does not mean that we take hold of the reins ourselves, or, come what may, that we take measures to extend the life of ailing institutions,” Hufeld explained. That is not the point of supervision, he continued; it is therefore not unlikely that some institutions will exit the market over the coming years.

Feeling the pinch of low interest rates

Hufeld reported that the situation is also not that good for some life insurers and Pensionskassen (occupational pension schemes). Life insurers have been taking action to counter this for some time now – and some have indeed been successful, Hufeld explained. Nonetheless, it will become ever more difficult for the industry to generate the promised interest rates on the capital market, he continued. The Pensionskassen are having a particularly hard time: their portfolios are almost exclusively made up of life-long pensions – in part with high guarantees. “Institutions that are really feeling the pinch of low interest rates are all the more obliged to demonstrate to us precisely how they intend to improve their situation and – above all – how they intend to ensure they can fulfil their obligations towards their customers in future.”

Risk as a guiding principle

With regard to the principle of risk sensitivity, Hufeld showed his protective instinct, explaining that this principle has proven its worth but is nonetheless, time and again, coming under threat. “Sometimes this is a result of political efforts to bring about change,” he said, giving as an example the topic of “sustainable finance”: Hufeld warned that to stir up excessive enthusiasm for investment, and in doing so blind investors to the risks, or to privilege green investments and loans across the board without regard for their risks, is to choose a path that will lead straight to the next crisis – and that would damage sustainability. “Green does not automatically mean low risk!”

BaFin’s President also worries about the principle of risk-based supervision in the implementation of the final part of Basel III into “concrete European legislation”. “Back then, we too supported the output floor, which is not a risk-sensitive tool.“ According to Hufeld, however, the output floor is only acceptable as one of many components of supervision: as one element that serves to reduce the unwanted variability that comes with the use of internal models. It must not, however, serve as a starting point for a departure from risk-based supervision and a return to the pre-crisis methods of Basel I, said Hufeld. “It is our aim to help shape the course of regulatory action and to argue the case for the principle of risk-based supervision. That would be another good resolution for 2020.”