Check against delivery

I bid you a warm welcome to this year’s New Year press reception, Ladies and Gentlemen, and wish you a happy and prosperous 2015. The old year has just flown by, and now here we are again – my Executive Board colleague Karl-Burkhard Caspari and I for the last time, as you will know. But even without us, BaFin will, with its highly qualified and motivated staff, continue to steer its successful course – even in new or even rough waters.

In banking supervision there is a time before 4 November and a time after. Since that date in the autumn of 2014 the banks of the euro zone have been subject to the supervision of the SSM, the Single Supervisory Mechanism – a mouthful that sounds no less cumbersome in German: Einheitlicher Aufsichtsmechanismus. May the new European supervision operate all the more effectively.

The SSM is responsible for the direct supervision of “significant” institutions, for which there are now Joint Supervisory Teams in which BaFin staff work side by side with supervisors from the whole euro zone. The SSM sets the direction of supervision. In the supervision of the big banks the new supervision is pursuing – to start with, at least – a more quantitative – i.e. key-data based – approach. At first glance a step backwards, perhaps. But on closer inspection it can be seen that this approach is pragmatic.

Key-data based supervision has the advantage that it improves the comparability of institutions and their risks, which in turn makes it easier to treat them equally as well. That is sensible and desirable. If you then look at the main areas on which the SSM intends to focus supervision in 2015, you may expect it to produce a full and rounded picture: among other things, the new supervision will closely scrutinise the big banks’ risk management and risk appetite and look into the sustainability of their business models, which BaFin has always done and will continue to do.

And it will learn from the Comprehensive Assessment, such as the application of the transitional provisions of the Capital Requirements Regulation, which are treated differently in some countries, as a result of which differences in the calculation of the capital ratios of individual banks may occur. Prudential valuation will also play an important role, to mention just one further example.

The so-called “less significant” institutions will not escape the new European supervision either. Although these banks are supervised by the SSM only indirectly and will therefore continue to be supervised by national supervisory authorities – which is also reasonable – the SSM will standardise the various national supervisory practices and seek to ensure that these institutions, too, are supervised according to common standards in all euro zone countries.

Although the European Central Bank (ECB) cannot instruct us to do something or not to do something, if national supervisors fail to apply the common supervisory standards, for example, the SSM can take over the supervision of a less significant institution entirely itself. It is up to us not to let things get that far in the first place.

It is a declared aim of the new supervision for the SSM to set common standards for the whole euro zone, and that too makes sense – to a certain degree. The standardisation of regulation and supervision must not degenerate into a levelling down. You know my mantra: only institutions of the same nature should be regulated and supervised in the same way. Long-established and sensible national peculiarities deserve to be treated as such.

The SSM should not even out the differences; it should make appropriate allowances for them. By that I also mean the special features of the German three-pillar model, which is unique in Europe – and worth preserving. My concern is also that standardisation may be wrongly understood to mean simplification – e.g. internal models. Supposedly simple regulation does not always adequately reflect complex reality. Following the crisis, the regulatory reins were tightened considerably – and rightly so. The time has now come to take a deep breath and embark upon the implementation in a careful and thoughtful way. I agree with Mark Carney, Chairman of the Financial Stability Board (FSB), that 2015 will be the year of implementation.

Much care and thought is also required in another respect: the SSM is a network in which supranational players and national supervisors work closely together. A complex construction, then, in which each party must first find its place – including initial frictional losses. The allocation of responsibilities in the Joint Supervisory Teams will have to be considered just as critically as the decision-making processes in the SSM. The Supervisory Board, in which BaFin is also represented, will have to deal with countless submissions.

That is not all, as we all know: under the law as it currently stands, binding supervisory decisions can be taken only by the ECB Governing Council. Its members therefore have to study these submissions all over again. In order to strengthen the Board, a non-objection procedure has been introduced: Board proposals are regarded as accepted if the Governing Council does not object to them within ten working days. And the Governing Council is not allowed to amend the proposals either; it can only accept them or reject them. But that does not alter the risk of the decision-making procedure dragging on for too long, which would not exactly be conducive to the effectiveness of the new supervision. Thought should be given to delegating formal decision-making powers – to the Supervisory Board, to senior management of the SSM or even to the Joint Supervisory Teams. Such a solution would have the added attraction that monetary policy and banking supervision would be more clearly separated.

Ladies and Gentlemen, it is not possible to mention the SSM without the SRM. The SRM, or Single Resolution Mechanism, is the second pillar of European Banking Union and makes it complete. Based on the Bank Recovery and Resolution Directive, the European Resolution Mechanism will make it possible to do what was scarcely possible for many years before: we will in future be able to organise the orderly resolution of systemically important banks in serious financial difficulties. The general public will suffer no loss and the taxpayer will be spared – with all the means that will soon be at our disposal. The means of choice will be the bail-in. We want and must say goodbye to the bail-out. The banks must be clear that the State will not bail them out if their business model fails. The fundamental market economy principle of liability must apply to them as well. That will make them treat their risks all the more responsibly. It is in this stability gain that I see the biggest benefit of the SRM.

For I do not see its function as being to arrange a first-class burial for ailing institutions that would earlier have been too big to die. The resolution mechanism is meant to act as a preventive and discipline-enhancing tool. It will succeed in that by drawing up a careful and credible resolution plan based on the banks’ own recovery plans, which primarily means that impediments to resolution are removed at an early stage.

For the celebrated resolution weekend it is crucial that banks hold sufficient bail-in qualifying funds. Only then can the owners and creditors of the bank bear the losses and the essential functions of the bank be adequately recapitalised. Both are in turn a prior condition for our being able to arrange its orderly resolution. For this reason the European Resolution Directive stipulates that banks must hold a minimum amount of eligible liabilities. With its Total Loss Absorbing Capacity (TLAC) proposal, the FSB is moving in the same direction but one step further.

In addition to the foregoing, we shall also need regulations to enable us to ensure liquidity in the resolution, so that we do not have to call on the State and central banks. The FSB is also working on this – as is the Single Resolution Board, of course.

A further key to success is the smooth functioning of the Resolution Mechanism. The decision-making channels in the SRM must not be too long either. A bank resolution is not something you can take your time over. The SRM’s cooperation with national resolution authorities, the new European banking supervisor, the EU Commission and Parliament must also be smooth. In this area we are bound to have to clear one hurdle or another.

With its resolution regime the European Union has taken the only sensible path for the euro zone and opted for a cross-border approach. But such is the nature of the problem that we also need a global resolution regime and common resolution practices that apply internationally. The SRM will therefore position itself as a strong negotiating partner and press on with the work in the FSB. Since we still have a long road ahead of us, the SRM should negotiate with third countries on the harmonisation of systems and tools and mutual recognition as quickly as possible.

Ladies and Gentlemen, in addition to the Banking Union, do we also need an Insurance Union in Europe? At the moment European policy-makers are not pursuing this topic. And nor do they have any reason to: a number of important regulatory projects will harmonise supervision and seek to ensure common capital rules both in Europe and world-wide: in Europe Solvency II and at the global level “ComFrame”, the Common Framework, which among other things will include an international capital standard for certain internationally active groups.

Then there is the fact that the existing interaction of insurance supervisors in Europe – brought together and managed by EIOPA, the European Insurance and Occupational Pensions Authority – has proved its worth.

Do we need a Capital Market Union? The European Commission would like to create one in the next five years. It wants to push ahead with the integration of the European capital market, it wants to harmonise regulation and supervision more closely, thereby creating an environment in which “Mittelstand” companies in particular are able to raise funds on the capital market more easily. From a German perspective this is in principle a good idea, but one which should be approached with a sense of proportion. We do not have the sense of urgency here that we had when creating the Banking Union. Before any work begins, there must be a comprehensive and – as it is so nicely put – unbiased analysis.

What reforms do we actually need? Which structures and practices have proved their worth and should be retained? These and other questions must be addressed before we start. It is also important for me that we bear in mind what an important role banks will undoubtedly play in providing businesses with funding in future as well. And if we want to revive the securitisation markets in Europe, then we can do that only with an appropriate regulation that defines for the whole of the EU what criteria high-quality securitisations have to meet.

Furthermore, we must be careful not to make life more difficult for Mittelstand companies – through excessive transparency requirements, for example. We must not lose sight of the concept of proportionality. The fact that the Commission is also including investor protection and financial education in its capital market union plans is right and important. Some private investors are known to have lost money on Mittelstand company bonds, which was also due to the fact that they failed to take into account the “high return = high risk” equation – or were not aware of it.

You know what I think on this matter: all investors rely on transparent and fair market conditions. But private investors need special protection because generally they do not act on an equal footing with providers and professional investors. They do not have the same know-how, they do not have comparable access to information and they do not have an army of experts to help them decipher the small print and assess the extravagant returns promised by providers. The State must therefore – and this is not the first time I’ve said this – create a legal environment that enables private investors to obtain sufficient information to be able to make their investment decisions. There is already a lot of legislation protecting private investors, more is on the drawing board. The points covered include marketing and product design – in MiFID II, for example. But what good are all these regulations if investors cannot find their way through the jungle of information?

Sociology has never been a speciality of mine nor my hobby either. But a sentence from Theodor W. Adorno did appeal to me: “Mature is he who speaks for himself because he has thought for himself and does not merely repeat what others say”. To think for themselves and not merely repeat what others say – that is what I also expect from consumers, from private investors. Most of them will never have the know-how of providers and professional investors, but they should acquire at least some basic knowledge. It is also the duty of the State to provide them with it.

Ladies and Gentlemen, one market segment in which investors have not been adequately protected up to now is the unregulated capital market. The lawmakers wish to change that with the Retail Investor Protection Act (Kleinanlegerschutzgesetz), which is scheduled to come into effect before the summer break. There has been a lot of intense discussion over the ministerial draft. How far is the federal government going in its draft? It could have taken a radical line and blocked off the unregulated capital market for private investors altogether. It would probably even have been applauded had it done so. But it decided otherwise – for good reason: the solution cannot lie in keeping private investors out of this segment. That would be like declaring them incapacitated. There must be a balanced relationship between State regulation and personal responsibility.

That is also precisely what the Retail Investor Protection Act is all about as well. I’ll just mention a few key points: extending the obligations regarding the publication of prospectuses; more pertinent information for investors; tighter rules governing marketing and advertising and more powers of intervention for us.

Consumers may therefore expect even more protection from us than we have been able – and allowed – to offer up to now. But I must warn against false hopes. We will continue not to supervise providers and issuers of capital investments. Although they must submit a prospectus to us and – if we have approved it – publish it before the investments are offered to the public, we still do not express an opinion on whether the investment makes financial sense and offers a promising return – nor can that be our job either.

BaFin will also continue not to protect individual investors or clients by helping them to assert their rights – that is a matter for ombudspersons and the courts. We continue to act solely in the public interest and are responsible for collective consumer protection. But our position has been strengthened from what it has been up to now: collective consumer protection is now enshrined in law as another supervisory objective for BaFin and will in future cover all areas of supervision. The lawmakers are thus giving us even more to do and are at the same time strengthening our hand.

We shall be pleased to make our contribution, for – and it’s not the first time I’ve said this – we are a protector of consumers out of conviction. I also hope to get valuable support from the financial market watchdog. If consumers then think for themselves and do not merely repeat what others say, if they therefore take their share of the responsibility, then we will have taken a major step forward.

Now, Ladies and Gentlemen, to a long-running supervisory issue: the low level of interest rates. It is like a medicine: the longer you take it, the greater the side-effects become – for all businesses concerned. The situation is difficult for life insurers in particular. Although our stress tests and forecasts still show that undertakings will be able to meet their commitments in the short to medium term, their investment income is falling faster than the guaranteed returns in their portfolios. So what will happen next? And – especially important – what will happen under Solvency II? We wanted to find out, and in the late summer of last year we asked undertakings what their capital position would look like under Solvency II conditions.

The result was that German life insurers as a whole would be able to cope with entering a new era of supervision – thanks to the transitional provisions and the volatility adjustment that the rule book now provides for. Only a very few undertakings were unable to prove that they had adequate capital, despite these measures; in aggregate their market share is not even one percent. Unfortunately, since our survey, capital market interest rates have fallen further, which means that we are having to examine the results very closely again. One thing is already certain now: if interest rates remain so low, life insurers will have to work hard to strengthen their capital base sufficiently during the 16 year transitional period.

What can we do? Precious little as far as the root causes of the problem are concerned. Which does not mean that we would be helpless. At this point I should like once again to sing the praises of the additional interest provision (Zinszusatzreserve) that life insurers have had to build up since 2011 in order to strengthen their premium reserve and so compensate for the undisclosed shortfalls on the liabilities side arising from lower interest rate expectations. The aggregate amount of additional interest provisions is expected to have reached some 20 billion euros at end 2014. In 2013 alone undertakings set aside around 6 billion euros for this purpose. The figure is likely to have been a little more in 2014; the final figures are not yet available. I also know that insurers have to earn this sum first. But I still maintain that the additional interest provision is a sensible instrument. But it must not be the only one.

In particular, questions are being asked of the industry itself. Cutting costs may be one answer. But above all, it must develop products that are consistent with the market environment – i.e. low interest rates – as well as satisfying future regulatory requirements. At the same time it must of course meet the needs of its customers, and today they are looking not only for safety and a good return but also greater flexibility. MiFID II will soon even oblige insurers – like other providers as well – to gear their product development to the interests of consumers, which should actually go without saying.

Nevertheless: a welcome step taken with the best of intentions. It must not, though, lead to us erecting market barriers or re introducing product control by the back-door. Nor must we cripple undertakings with excessive administrative requirements and so stifle their enthusiasm for innovation either. It’s all a question of balance.

Undertakings started taking the first steps on new products in 2013. Here it proved once again what an important role confidence plays. Objectively, customers can rely on a promise to pay. Subjectively, they find many products incomprehensible and too complex. Undertakings must make their products comprehensible for their customers, so that they can understand the benefit of them. Transparency in marketing is the be all and end all. The European Mediation Directive will lay down new guidelines for this. Here, too, it is important to maintain a balance – a balance between the legitimate interests of customers and the legitimate interest of undertakings in a functioning marketing system.

Ladies and Gentlemen, low interest rates are one of the biggest challenges for German banks as well. Traditionally, net interest income accounts for around 70 percent of German banks’ operating income and is thus by far the most important source of earnings. For this reason, among others, they do not score highly for profitability on an international comparison. At the current level of interest rates, just maintaining net interest income is a challenge, and the earnings potential from maturity transformation is likely to continue to contract. A sudden change in interest rate policy could pose particular problems for banks that offer long-term loans.

So what about new sources of earnings? In view of the banking density in this country and the resultant fierce competition, there is not really a way that holds out a promise of great success. It’s very difficult for a bank to successfully stand out from the competition by offering customised products. There is, therefore, at least a risk that in their search for earnings banks will take too short a view and build up massive risk positions in the long term that bear no relation to any short-term successes they achieve. Here we’re back again at the oft-mentioned sustainability of business models, to which BaFin is devoting a great deal of attention and which the SSM has made one of the main focuses of its supervision.

Banks could also try to drive costs down. Mergers may help in this, but they are not a panacea. The oft-mentioned synergy effects are often all too fleeting. And two ugly ducklings do not automatically turn into a beautiful swan. Banks may also consider their national or regional presence. Another possible approach: as a matter of principle banks should charge prices for their services according to the risks and costs incurred. So much for the theory. Because of the fierce competition in this country, pricing according to the risks and costs incurred is frequently not feasible.

Other countries are in much the same position. Customers may like free current accounts, securities custody accounts or credit cards, but they have no economic logic, and cross-selling doesn’t always solve the problem either.

When talking of low interest rates, Ladies and Gentlemen, I cannot continue without mentioning the Bausparkassen (building and loan associations). It is not surprising that they, too, are suffering from the low interest rate environment. Unlike other institutions, they cannot open up new lines of business. The Building and Loan Associations Act (Bausparkassengesetz) allows them to conduct business only in connection with residential property and restricts their investment opportunities to low-risk and therefore low-return investments. What the Bausparkassen can do, is they can develop new scales of interest rates. Quite a few Bausparkassen did this again last year and introduced new building savings contracts offering much lower rates of interest. But there is one key problem that they have not solved in this way: the fact that the old building savings contracts carrying high rates of interest that they still hold in their portfolios are squeezing their earnings. Many Bausparkassen are therefore resorting to another means. They are terminating contracts – not because savers are saving too much, as in the past, but for another reason: Bausparkassen customers are not accepting a building savings loan, even though their building savings contract has been eligible for such a loan for at least ten years, and are using their building savings contract as a savings deposit. The Bausparkassen take the view that building savings contracts are not meant to be used in this way.

A persistent rumour has been circulating for weeks that we called upon the Bausparkassen to terminate contracts. Of course we didn’t. Such decisions are a matter for the institutions to take on their own responsibility. As is always the case when contracts are terminated, it is up to the courts to decide whether the terminations are admissible under civil law.

So you see, Ladies and Gentlemen, the new problems are the old problems. The progressive internationalisation of supervision, consumer protection, the quest for appropriate approaches to supervision and the low interest rate environment. Instead of continuing this list even further, I should now prefer to exchange thoughts with you, Ladies and Gentlemen. I am sure that our discussions will be interesting. Thank you very much for your kind attention.