These days, Felix Hufeld often oversees the whole of BaFin’s financial supervision activities from his desk at home – even at the weekends. But as a result of the coronavirus pandemic, he still sees his Bonn and Frankfurt offices more than usual as business trips have been cancelled. Most of BaFin’s 2,700 financial supervisors are now also working from home. BaFinJournal spoke to Hufeld by phone at his home office in the Hochtaunus region of Hesse, where he is trying to limit the impact of the coronavirus crisis on the financial industry as best he can. A key element of his strategy: open communication.

Mr Hufeld, the German government has set up some extensive aid programmes for companies in the coronavirus crisis. The banks are the distribution points for this liquidity. Are they up to the task?

Hufeld: Yes, they are. I’m optimistic that banks will rise to this monumental challenge. This time banks are not part of the problem, as was the case in the financial crisis of 2008, but part of the solution. Currently, the institutions are having to fulfil their basic function - that of providing companies and individuals with loans and liquidity - in extremely problematic conditions. This is the only way to keep the real economy afloat.

How is BaFin managing the impact of the pandemic on the financial industry?

Hufeld: The starting point of the coronavirus crisis was not a financial crisis but a huge exogenous shock to the entire economy. At this stage of the crisis, our main challenge is to minimise spillovers to the financial industry. BaFin’s financial supervisors are in contact with many bankers and industry representatives every day, as per usual. And we are constantly reassessing the Covid-19 situation on the basis of global financial market data and the institutions’ key figures. We are also closely coordinating our activities with our colleagues in Germany, Europe and around the world.

And what kind of relief are you offering financial institutions?

Hufeld: In light of the coronavirus crisis, we have introduced a large number of operational relief measures to give banks and other financial services providers greater room for manoeuvre. As financial supervisors, we also go to the limits of what we believe to be acceptable. But we do this nevertheless. Another area of particular importance in the crisis is open communication. Take for example our Covid-19 FAQs, which are regularly updated on our website (see info box).

Do you have a plan for winding back the relief measures?

Hufeld: Right now, we are still focusing all our efforts on acute crisis management. Everything else will be dealt with later. But once the crisis has passed its peak, we will gradually wind the relief measures back to the pre-crisis level. Anyone hoping for deregulation will be disappointed.

While the new KfW instant loans of the German government are based on 100 per cent liability waivers that are backed by government guarantees and dispense completely with the usual risk assessment, they will nonetheless increase the debt burden of the companies taking out such loans. The higher costs associated with servicing these loans could cause serious financial problems for the companies concerned. Is there a risk that existing bank loans could default?

Hufeld: This extensive aid programme closes an important gap for Germany’s Mittelstand. These small and medium-sized companies, with a workforce of up to 250 people, are key employers with strong regional ties. In most cases, the principal bank is the local Sparkasse or Volksbank. However, a concurrence of several factors in the crisis could have major repercussions for some institutions, e.g. a regional positioning coinciding with a lending business that is heavily exposed to specific sub-sectors. It will take some time before we are able to gradually see what impact these many different factors will have in each case.

In light of the government’s extensive aid programmes, there is currently a general assumption that banks should be granting loans without carrying out any checks. Is this assumption justified?

Hufeld: No, it is not. When an institution takes on credit risks, it must also check that minimum credit standards are met. Nobody, and that includes politicians, expects banks to dispense with these checks altogether. For if they did, the next banking and financial crisis would be inevitable, given the test of endurance to which the real economy is currently exposed. Surely that can be in no one’s interests.

Besides banks, BaFin also supervises life insurers. Consumers invest money in life insurance products to make provisions for their retirement. Is their money still safe there?

Hufeld: The situation facing life insurers is serious because their business is also dependent on investment income. However, it does not pose a threat to their existence, as revealed in a special survey conducted by BaFin at a selected number of insurers. Although the solvency ratio, which indicates the industry’s ability to withstand a crisis, is falling in the case of several insurance undertakings, none of them appear to be underfunded. It is worth noting that the EU supervisory regime Solvency II offers flexibility, which is proving extremely valuable to manoeuvre through the crisis.

And how greatly are other financial services providers affected by Covid-19?

Hufeld: Whether you’re talking about investment funds, Pensionskassen or insurers, all financial services providers with business models that depend heavily on investment management and, by extension, on generating investment income are affected by the coronavirus crisis in the short term in the area of liquidity management. It is not possible at this juncture to reliably estimate the medium to long-term impact. At BaFin, we are closely monitoring the situation.

What factors could play a role here?

Hufeld: We must wait and see how the crisis develops before we can say whether the current upheavals on the assets side will continue for sometime. How quickly are stocks rallying? Are bond markets stabilising? We have sufficient regulatory tools to deal with short-term volatility – and if this is what we are faced with, the impact would be limited. But if the fluctuations continue in the medium to long term, this will naturally have a greater impact on capital. The full extent of many burdens and risks for the financial industry will only become evident gradually in a series of waves. But I do believe that we have a very good chance of preventing a systemic crisis from happening at all.

Interview by Annkathrin Frind, BaFin Communications Directorate