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I, too, bid you a warm welcome to our Annual Press Conference!

Ladies and Gentlemen

Simple recipes are currently all the rage. I know some very good simple recipes: spaghetti with a dab of butter, for instance. Plus a glass of red wine. In financial market regulation, however, simple recipes generally fail to hit the spot. Can we take a flat-rate capital requirement and use it to regulate all banks? One cannot control the risks emanating from the banking market that way. The subject matter is just too complex. What we need are comprehensive, risk-sensitive rulebooks like Basel III or – transferred to the insurance industry – Solvency II. The new Investment Code is not exactly the sort of thing you’d take on holiday for a little light reading on the beach, either. And nor can supervision of investment funds and their management companies be squeezed into handy paperback format.

Simple recipes are currently being bandied about for consumer protection as well. Here we are having to deal with issues to which a number of disciplines have to find answers. The key questions are: How much protection do consumers need? And how much protection can and should the State provide? Our ideal consumers are responsible consumers who make their investment decisions confidently and on their own responsibility. Can we therefore leave them to it and give free rein to the markets?

I see the responsible consumer not as a close relative of that inherited artificial creation, Homo Oeconomicus. Consumers do not always act rationally, they occasionally act intuitively. We know this from behavioural research. In addition, consumers often do not have the time or are afraid of how much it will cost to look into questions of investment or pension provision. For that reason they trust supposedly independent advisers who, when consulting the rankings that they publish, often look only for the cheapest offer or the highest interest rate. It is therefore expecting too much from many people to understand and evaluate complex investment products. Providers know more than consumers, and this gap is widening rather than narrowing. Unlike professional investors, private investors do not have legal departments standing behind them that could decipher and evaluate providers’ advertising promises and small print.

Consumers therefore tend to be at a disadvantage to providers. And not only in a technical and informational sense but also in a structural sense. That is why in a social market economy the government must protect consumers. It must create an appropriate regulatory framework, an environment in which consumers are as a matter of principle able to properly decide themselves whether to accept – or reject – an investment product, on the basis of adequate and readily understandable information, while being aware of the risks involved. Without this certain degree of protection there can be no such thing as mature, responsible consumers.

Such protection must not take the form of spoon-feeding or ignoring the “responsible” criterion. We cannot cocoon consumers and ring-fence or prohibit all offerings that are even slightly risky. Anyone who takes away private investors’ rights to invest their money in risky assets is encroaching heavily on their individual freedom to an unreasonable degree – and, incidentally, harming competition. We have to keep this in mind, even when we are discussing how to regulate the unregulated capital market.

In this market we are having to deal with market participants and offers who, as the law currently stands, do not need a licence from us and are not subject to our ongoing supervision either. The fact that this market segment exists is not a regulatory deficiency but an expression of the freedom of trade and personal autonomy. But the tighter we regulate the regulated capital market – i.e. those undertakings that do require a licence from us – the more attractive the unregulated capital market becomes for many market participants. There they exploit loopholes in the law but do not (necessarily) break any laws. However, many constructions do deserve to be dubbed at least “abusive” or “non-transparent”. In particular cases the financial loss or damage is immense. But the products offered are just structured in such a way that – as our legal experts put it – they do not constitute banking business or the provision of financial services. In plain language: there’s nothing we can do about it.

We could make it easy for ourselves and say that investors who invest in this market know (or should know) that they do not have the protection of regulation. That would be too easy. The question we should be asking ourselves is: what deposit-taking activities in future and what potential loopholes should we close so as to protect investors against unpredictable losses. Realistically, however, BaFin cannot and should not supervise every undertaking – as it does with banks and insurers for good reason. It cannot be our job to monitor the promised returns of all undertakings. That way, the State would set itself up as judge and jury for every profit-making activity.

We should also think about product information and transparency. Would it not be a good idea to extend the prospectus requirement? We could also do more work on the clarity of information. Prospectuses are probably read only by experienced investors. A classification according to complexity and risk might therefore help to identify more quickly which product is suitable for which personal circumstances and attitude to risk. We will not solve the problem with a risk “traffic lights” system along the lines of “Red means steer well clear!” or other simple recipes, however. We should also think about the marketing of investments – for instance, whether it is sensible to allow complex products to be marketed through unregulated channels or mailboxes.

But I should like to repeat once again what I said at the New Year Reception: we cannot and do not want to spoon-feed investors. All those who invest money also bear the responsibility for their decisions. They must display a healthy degree of scepticism and know where their limits lie. And they must read warning notices and take them seriously. According to the old adage: there is a correlation between risk and return.

Please allow me to make a small digression at this point: the revised rules for banks’ capital requirements helped to launch a new type of bond: contingent convertible bonds (or CoCos). I very much welcome the fact that banks are using CoCos in order to improve their capital adequacy. It is good that a market for these bonds is developing and that there is a demand for them. On the other hand, as a securities supervisor we are naturally keeping a close eye on which investors the banks are offering these sometimes complex and in any event innovative bonds to. It’s all about transparency – and avoiding conflicts of interest. Up to now German credit institutions have been behaving very responsibly.

Ladies and Gentlemen, with financial stability, the same question arises as with consumer protection: how much State, how much regulation do we need? As much regulation as necessary and as much freedom as possible. In November 2008 the G20 Heads of State and Government set the post-crisis regulation goal:
All financial markets, all products and all market participants are to be regulated – but (and this the crucial thing) only “as appropriate to their circumstances”. We need a regulatory framework that helps us as supervisors to protect the public good of financial stability and to mitigate the destructive force of a crisis; for preventing crises altogether is just not possible. A complete absence of risk cannot be the goal, either, for that way lies stagnation. An appropriate regulatory framework allows market players enough room to innovate and do business.

Have we observed these social market economy maxims and achieved the G20’s objective? Or have we overshot it? Commentators have just recently stirred the pot of this public debate again by making just this assertion. There can be no question of any over-regulation. Quite the contrary in fact: in the past few years the financial world has probably become a safer place, with its integrity enhanced. But a number of important regulatory steps still have to be taken. Every step – individually to start with – must be appropriate and have the desired effect. The ideal model, however, consists in combining the many individual regulatory parts into one internally consistent and appropriate whole. There would be enough material here for a speech of party convention proportions. But I suspect that you would prefer to ask us lots of question. So just a tour d’horizon.

It will begin with the regulation of over-the-counter derivatives. As called for by the G20, in the summer of 2012 the European Union adopted EMIR (the European Market Infrastructure Regulation), which among other things introduced a requirement to clear standardised OTC derivatives through central counterparties. These need authorisation and are subject to regulatory requirements. Central counterparties from third countries can also operate in the EU – provided the EU Commission rates their home-country supervisory law as equivalent and ESMA, the European Securities and Markets Authority, recognises them. Four central counterparties domiciled in the EU have so far been authorised under EMIR, including Eurex Clearing. Under the Basel rulebook they are therefore automatically deemed to be qualified central counterparties. If OTC derivatives transactions are cleared through such qualified central counterparties, banks require less capital backing for them.

So can we therefore feel secure with the qualified central counterparties? Well, yes and no. We must ensure that new systemic risks do not accumulate in this area and that the spirits we have summoned do not run out of control. It is therefore only logical to consider a regulatory framework for the orderly resolution of central counterparties. This topic is already on the agenda of the Financial Stability Board (FSB).

As far as the effectiveness of Basel III is concerned, we can already see today that the new liquidity rules and tighter capital requirements that will gradually take effect in the period up to 2019 have improved banks’ capital adequacy. The German banks have strengthened their capital base and reduced risk positions. The new rules will give rise to added costs which – and let us not be naïve about this – will also be passed on to customers.

But security and stability come at a price. The aim of any regulation is to minimise welfare losses and, in so doing, not to cause any unnecessary regulatory costs. I know: the fact that earnings are being squeezed by pressure on margins and also by falling net interest income is not exactly making it easy to increase capital. But that is no argument against the Basel rules but an argument in favour of increasing earnings – or reducing administrative costs.

The Basel Committee on Banking Supervision and Brussels remain committed to the principle of risk sensitivity. And rightly so. I even believe that there is still some ground to be made up in this area: we must, for example, amend our treatment of government bonds. It is in parts too “one size fits all” and leads to increased interdependencies between governments and banks.

I would refer anyone who claims that risk sensitivity primarily helps to understate risks, and that what we need instead are flat-rate requirements for all banks, to the problem of simple recipes.
And I would refer anyone who says that we should ratchet up these flat-rate requirements to 30 per cent to the key words “appropriate” and “stagnation”. On the other hand, as a supplement to risk-sensitive requirements and properly functioning risk management systems, a non-risk-sensitive minimum requirement like the leverage ratio makes a lot of sense. And we can surely also think of other additional guidelines, for instance in respect of the appropriate use of risk models.

Ladies and Gentlemen, some banks have the potential to turn the whole financial system upside down if they are brought to their knees. Lehman Brothers – although not so big at all – was such a bank. For that reason, in the crisis governments repeatedly found themselves forced to bail out ailing banks with taxpayers’ money, in order to prevent something worse. With that, another important maxim of the social market economy went out of the window – the maxim that the State marks out the playing field and sets the rules of the game but doesn’t actually play itself – not even as a libero or sweeper. The players on this playing field must be responsible for their own actions. Otherwise there is no incentive for them to act responsibly.

It is therefore not enough to make systemically important banks more resilient by means of higher capital requirements and to supervise them especially strictly – that is already settled. We must be able to make it convincingly clear to systemically important banks that we will let them go under if their business models are not fit for purpose.
For that – and I shall never tire of repeating it – we need a cross-border resolution regime.

The EU has created such a regime with its Directive on [establishing a framework for] the recovery and resolution of credit institutions and investment firms – known for short as the Bank Recovery and Resolution Directive (BRRD). The Single Resolution Mechanism is also making good progress. We need both not least for the banking union and for the European banking supervisor, which will start on 4 November. The fact that we will in future have a clear sequence of liability is one of the (German) successes in the negotiations in Brussels. The first to be called upon will be owners and creditors. They will have to be liable for losses of their bank and be responsible for its recapitalisation before the Resolution Fund has to bear the cost or – and only as the last possible resort – the taxpayer.

If we now succeed in making large systemically important banks “resolvable”, then we in Europe will have taken a crucial step further forward. We have already taken this step in Germany: with the Resolution Act and the Ring-Fencing Act. It is reasonable that we should allow ourselves time on deciding on a European deposit protection scheme. For this would also mean communitising the liability, which under present circumstances would not make sense.

The European resolution regime has one crucial flaw: its scope. What do we do with banking groups that operate world-wide? If our goal is to abolish the de facto state guarantee for systemically important banks, we must design a resolution regime that is effective globally and across borders. The FSB drew up the blueprint for this back in the autumn of 2011 (Key Attributes of Effective Resolution Regimes for Financial Institutions). By the time of the G20 summit in the autumn of this year the key parts will hopefully be settled.

We are working flat out on two questions: how do we guarantee that at the time of the resolution a bank still has sufficient funds to implement the resolution strategy in mind (a.k.a. Gone Concern Loss Absorbing Capacity – GLAC) – and without recourse to the taxpayer? And how do we guarantee that we will also have the necessary authority to act at the international level, i.e. how do we eliminate the barriers to cross-border resolutions?

Ladies and Gentlemen, it has just been announced, as I am sure you all be aware: we are on the point of completing a further component of the future banking union. 4 November sees the start of the Single Supervisory Mechanism (SSM) for euro zone banks. Exactly one year after the corresponding Regulation came into effect. We will therefore soon have an integrated European banking supervision system with genuine powers of intervention – and from 2016 a single resolution mechanism as well.
And that only a few years after the EU launched the idea of a decentralised European system of banking supervision as the answer to the financial crisis. The mills of Brussels grind slowly? Not in this case, at any rate.

Before the transition into the new age of supervision there will be a special kind of steeplechase – without any preparation and with an extremely ambitious timeline. In Germany alone 24 banking groups or more than 60 individual banks, more than 1,700 accountants and more than 230 BaFin and Deutsche Bundesbank supervisors are on the starting line. It is all about the comprehensive assessment, the extensive multi-part examination of all the euro zone banks that have been classified as “significant” and which are therefore expected to come under the direct supervision of the ECB. These banks are meant to enter the new age of supervision free of any legacy problems and with clean balance sheets. That is the object of the exercise – and the pre condition for the start of the new European banking supervision system proceeding smoothly in November.

The Asset Quality Review got underway a few weeks ago. The first phase, portfolio selection, has already been completed. We are now in the middle of Phase 2, the impairment test. The Asset Quality Review alone requires a huge organisational and administrative effort! And time pressure is a fundamental problem of the comprehensive assessment. The date of 4 November is set in stone, there is no chance of changing it. The operational risk is correspondingly high. Many jobs are running in parallel. If one hurdle is not cleared, be it only data being delivered late for technical reasons, the whole process is thrown out of kilter. And the clock is ticking. A lowering of quality is not an option, though, for the Review – like the stress test – must be credible and reliable. In the short time available, meeting the demands is a major challenge (as it is always put so nicely) for the banks, the supervisors and the accountants. I therefore have a certain sympathy for some banks complaining that their day-to-day business is suffering considerably and that the workload is overwhelming them. From the very beginning BaFin and the Deutsche Bundesbank have argued for a risk-based procedure and the most selective data requirements possible – with some success. This subject will also keep us busy during the months ahead as well. Which makes me optimistic: all those involved, the banks, we as national supervisors and also the ECB, are well aware of the importance of the job in hand. Failure is not an option.

Just a few more words on the stress test, Ladies and Gentlemen. As you know, on 29 April the European Banking Authority (EBA) published the methodology and macroeconomic scenarios for the 2014 bank stress test. As far as the methodology is concerned, the first question that immediately arises is that the bank balance sheets that are being examined in the Asset Quality Review are going to be used as the basis for the stress test. However, for time reasons both exercises are running more or less alongside each other. How we might sensibly link the two is currently still the subject of intense discussions, for naturally the results of the Asset Quality Review must be the starting point for the stress test.

As always, there are two approaches: the top-down join-up approach, in which the banks first perform the stress test calculations on the basis of their annual financial statements as of 31 December 2013. The results of the Asset Quality Review are ignored. The ECB would then adjust the stress test results for these results on the basis of standardised assumptions and scaling factors. The banks would not be directly involved in this approach. With the bottom-up join-up approach, on the other hand, the banks would be provided with the results of the Asset Quality Review for the purposes of the stress test. The banks would then have to re calculate certain parts of the stress test. Standardised top-down adjustments would not be necessary. As a compromise and a practical solution, a hybrid approach is now being pursued.

We are in favour of using – as far as possible – a bottom-up approach which would then reflect the banks’ individual circumstances. It is just a question of appraising individual banks and not an “average” bank. Only in this way can the ECB then decree supervisory measures in a legally certain and transparent manner on the basis of the results of the Asset Quality Review and the stress test. Furthermore, greater transparency would only be fair to the banks and would assist them in their capital planning at an earlier stage.

There has already been intense discussion in the press on one particular topic: if the banks are told the results of the Asset Quality Review before the comprehensive assessment has been completed – for example, for stress test purposes – securities law requirements would also have to be adhered to. I am talking here of the ad hoc disclosure requirement. The ECB has the idea that we national supervisors will pass on the data to the banks in such a way that they do not incur an ad hoc disclosure obligation. We are on the horns of something of a dilemma. EU legislation is unambiguous: any piece of information that can be classified as “inside information” triggers an ad hoc disclosure obligation. It is up to the banks to assess whether an item of news has the potential to influence a share price.

A bank could therefore see itself legally compelled to publish partial results of the comprehensive assessment before the scheduled publication in October, which could have undesirable side effects. Neither the ECB nor we national supervisors could prevent that. However, this is a risk that exists – albeit not to this order of magnitude – with any supervisory examination and measure. So not too much importance should be attached to it. We should not in any event engage in dangerous blind flying. Information must be passed on to the banks, if only to be sure that what one has in the end are robust results.

Now to a crucial question: how will the 24 German candidates perform in the Asset Quality Review? I am cautiously optimistic.
As I said, in the past few years German banks have both strengthened their capital base and reduced their risk positions. I still believe, therefore, that the Review will not come up with any great surprises. The baseline stress test scenario should not throw up any nasty surprises either. However, I cannot exclude the possibility that the adverse stress scenario could be very challenging for individual institutions. This scenario is in fact a tough one when I consider the parameters that will apply to our banks.

In late April the ECB announced how banks will have to cover any capital shortfalls. Basically, there are two options: the banks can generate fresh capital or – to some extent at least – reduce their risk-weighted assets. According to the ECB’s current thinking, a reduction based on sophisticated internal mathematical models would in general be permitted only if these changes were already planned and known to the relevant national supervisory authority. That surely makes sense. But it is particularly important that any capital shortfalls should be covered first of all by private funds. If that should not be possible, it would be up to the Member States to seek to ensure the recapitalisation of the banks. I am therefore pleased that the negotiations in Brussels in recent weeks have provided the necessary clarity: in all cases the State may only be the last resort.

Ladies and Gentlemen, I promised you a tour d’horizon. To end with, therefore, just a few short words on two topics that are especially close to my heart. A short while ago I spoke of an internally consistent and appropriate regulatory whole. That will not be possible until we finally succeed in comprehensively regulating the shadow banking sector. As we all know, the tighter the reins we keep on regulated sectors, the more attractive that market becomes. Once again, the fact is that the EU has already gone a fair way down this road. And once again, the fact is that this is not enough. We need a global rulebook. An especially ambitious project which it will not surprise you to learn we will most certainly not make any progress on with simple recipes but which we must under no circumstances ease up on. The fact that I have said nothing on Solvency II or German life insurance and the participation in the valuation reserves does not mean that these subjects are no longer worth talking about. Quite the contrary! You know what we think on them. But now that I’ve finished, we can talk about them if you wish.

But first, thank you very much for your kind attention.