It was 10:30 a.m. on the dot when BaFin went on air. The Executive Board, currently made up of four members, had taken their seats on the podium when Oliver Struck, Head of Press and Public Relations, welcomed the approximately 50 reporters logged into the video conference. The annual press conference live-streamed – the second time that BaFin used this format after live-streaming the Annual Insurance Supervision Conference (see expert article on the BaFin website dated 16 June 2021).

Raimund Röseler, head of BaFin’s Banking Supervision Sector, started the press conference by remarking that something else was also different: “For the first time it’s not the President addressing you on this occasion but myself as the longest serving Chief Executive Director“. Following Felix Hufeld’s departure, Röseler holds the office of Interim President until Mark Branson takes over as President on 1 August. Röseler expressed his thanks to Hufeld and stressed the excellent reputation that the former President had enjoyed among the international community of supervisors and standard-setters and the contribution he had made towards sharpening BaFin’s international profile.

No systemic crisis expected

In his speech, Röseler briefly addressed the issue currently on everyone’s mind: the COVID-19 pandemic. After more than a year, he still does not believe that German banks are on the brink of a systemic crisis. Nevertheless, he advised caution: “At the moment, we can only give the all-clear for the system, in other words for the sector as a whole.” But one or two institutions already in difficulties before the crisis might still not survive the pandemic.

Even so, Röseler added, it was not BaFin’s job to prevent such exits from the market at any price, stressing that “a bank’s managing directors are responsible for their institution’s fate”. If a worst-case scenario did occur, BaFin would be instrumental in ensuring that the insolvency was properly managed or the institution resolved.

Röseler also brought up the subject of the cost-income ratio, a key parameter for measuring an institution’s efficiency, which has been deteriorating for the last 15 years almost without exception. The reason was not just declining income but also rising operating costs. “If German institutions want to remain competitive in the long term, they will have to slash their costs even more rigorously than before“, BaFin’s Head of Banking Supervision explained. Digitalisation, he added, also represented a major challenge to the business models of traditional institutions. “The pandemic is acting as a catalyst“.

Wirecard: Aligning supervisory activities with the new reality

Röseler confirmed that BaFin was aligning its supervisory activities with the new reality. “We need to pay even greater attention to institutions’ business models and take an even closer look behind the facade“, he explained. More was needed than the classic ratios, such as the equity and liquidity ratios, to properly identify all the risks. “That was the case with Wirecard – and later also with Greensill Bank“.

BaFin’s work has been and continues to be shaped by the Wirecard case. “We have very thoroughly and very comprehensively analysed the conclusions we need to draw from the case for our working methods“. Röseler confirmed that BaFin was becoming more effective in the course of the authority’s realignment. An example he gave was the new Focus Units, which had commenced their piloting operations at the end of May. With these units, BaFin would be doing precisely what Röseler had just described – taking an even closer look behind the facade. As their name suggests, the units will focus on banks and other companies pursuing business models that appear to be extremely complex or highly innovative. “For companies of this kind, we want to gain first-hand knowledge more quickly and more precisely of where their income is coming from“, Röseler explained. A further major sub-project of BaFin’s modernisation process is the Task Force, which is due to start in mid-August and work closely with the Focus Units. “The Task Force will become BaFin’s own rapid reaction force“, Röseler announced, designed to step into action from one moment to the next and carry out on-the-spot checks at the institutions’ offices. It would also be able to perform forensic audits.

Röseler also expects BaFin to become more effective as a result of the reform of the financial reporting enforcement enshrined in the Act to Strengthen Financial Market Integrity (Gesetz zur Stärkung der Finanzmarktintegrität).

Much like the work of detectives or the police

After making his initial statement, Röseler was joined by the other members of the Executive Board Béatrice Freiwald, Dr Frank Grund and Dr Thorsten Pötzsch to answer reporters’ questions. The current project to modernise BaFin was also one of the main topics of interest for the reporters. Referring to the forensic audits to be performed by the Task Force, reporters were keen to know what forensic meant in this context.

Dr Thorsten Pötzsch, Chief Executive Director of BaFin’s Resolution Sector, explained that “this activity has much in common with the work of detectives or the police“. At BaFin, Pötzsch is also responsible for enforcement relating to unauthorised business – an area in which forensics already play a key role today.

Raimund Röseler used the following example to explain what forensic methods in the context of banking supervision entailed: in the case of Greensill Bank, the documents were closely examined to establish whether they were genuine. “These examinations specifically included ascertaining when the documents were produced, whether the same typefaces were being used in the documents“.

Working with the good guys

The Executive Board was quite confident that the right personnel could be found for the new responsibilities. Béatrice Freiwald, Chief Executive Director of Internal Administration and Legal Affairs, said that they were seeking “a good mixture of experienced supervisors and new experts“. She explained that in the 2021 supplementary budget, provisions had been made for 155 new posts at BaFin, the bulk of which were earmarked for supervision. Internal reallocations of personnel would also contribute significantly towards preparing BaFin for the new tasks lying ahead.

Interim President Raimund Röseler added: “We are not as badly positioned internally as might be generally thought“, and referred to the specially trained, certified IT forensic experts working in BaFin’s IT Supervision Directorate. “And some of our staff are also trained auditors“. When recruiting new staff, BaFin was naturally competing with other employers, but had been successful at hiring well-qualified persons in past years. “Many want to work for us because they want to work with the good guys“, Röseler reported.

On-site inspections nothing new to BaFin

Chief Executive Director Dr Frank Grund pointed out that on-site inspections were nothing new to BaFin, adding that insurance supervision, for example, had been conducting inspections of this kind for many years. Due, however, to the coronavirus pandemic, BaFin was refraining from performing any on-site inspections at companies at the moment. Instead, the inspections were being carried out remotely and the important information obtained in this way. But, as Grund added, “the direct contact with the employees is naturally missing. They don’t get to feel the companies in the same way as when working on-site for two or three weeks“.

When asked about the planned reform of financial reporting enforcement, Dr Thorsten Pötzsch welcomed the change to a one-tier system. “The two-tier system has not proved as successful as we had hoped“, said the Interim Head of Securities Supervision, adding that the introduction of a one-tier financial reporting enforcement would do away with the interfaces between the Financial Reporting Enforcement Panel (FREP) and BaFin and result in increased transparency. “We’ll become more effective now“, Pötzsch concluded.

Béatrice Freiwald added that provisions had been made in the 2021 supplementary budget for 22 new posts for the remodelled financial reporting enforcement. “We will make sure that we recruit specifically auditors for these posts“, said Freiwald, adding that the posts were to be filled this year. The staff from the FREP would also have to be incorporated into BaFin.

Federal Court of Justice’s judgement on banks’ general terms and conditions

The reporters also expressed great interest in the recent judgement of the Federal Court of Justice (Bundesgerichtshof – BGH) on banks’ general terms and conditions and its possible consequences. On 27 April 2021, the BGH decided that provisions in a bank’s general terms and conditions were invalid if they implied the customer’s consent to the aforesaid changes as well as to changes in special terms, regardless of the changes that had been made. The reporters wanted to know how the BGH’s decision could impact an institutions’ means of generating income. “This could prove really expensive for them“, answered Raimund Röseler. “We estimate that around half of an institution’s annual net profit could be wiped out as a result of this decision“.

Chief Executive Director Dr Thorsten Pötzsch expressed his surprise at the BGH’s decision, given that no objections to the procedure for changing general terms and conditions had been raised by the two lower courts. According to Pötzsch, the consequences of the judgement will probably not be confined to the banking sector alone. “The BGH’s decision will have far-reaching consequences for the entire financial industry“.