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I, too, bid you a warm welcome to our Annual Press Conference, Ladies and Gentlemen.

As you can see, our Executive Board is still not back to its full complement yet. But there are at least now four of us again. Ms Roegele has been on board for some days now. I am extremely pleased that we were able to secure her services as the successor to Mr Caspari. Ms Roegele, you are a returnee, which says a lot about BaFin – and about you.

Ladies and Gentlemen, I am slowly coming to realise what it must be like to be caught in a time loop. Every morning the alarm clock goes off, and our efforts to tackle the consequences of the persistent period of low interest rates start afresh. It’s just like “Groundhog Day”. That film came out in 1993. That year, the yield on 10 year Federal government bonds averaged 6.4 percent. The hero of the film escapes the time loop through spiritual purification. We, too, are constantly striving to become better people, but as far as low interest rates are concerned, that is unfortunately no easy matter. Especially since we supervisors cannot influence the causes. All we can do, as I said, is deal with the consequences.

Life insurers are suffering particularly heavily. In the interest rate environment currently prevailing, the earnings from their investments are falling faster than the guaranteed interest rates on the policies in their portfolios. That is a well-known fact. But what lies in store? Is the German life insurance industry threatened with a wave of insolvencies? Will we see a repeat of Japanese conditions? Speculation of that kind will get us nowhere. As supervisors, we want and need to know as precisely as possible how things stand. For that reason we are demanding more and more forecasts from undertakings. We also want to know what the situation would look like for life insurers under Solvency II conditions. Following our last comprehensive life survey, interest rates have fallen further (ignoring the swings of the last few days). We have therefore once again asked insurers to present us with the most significant Solvency II performance indicators – under the market conditions prevailing at end 2014. They have until 3 June to submit the results.

Our overall picture at this moment in time shows an industry that as a whole is resilient. But without anticipating the results of the survey, one thing is already clear today: adjusting to Solvency II is definitely going to be an uphill battle for German insurers, even though transitional provisions and volatility adjustments are now provided for in the regulatory framework. And if interest rates continue to remain this low, we may have to start using one-on-one defence coverage, i.e. closer supervision, for even more companies.

In order to ensure that they will be able to pay the guaranteed contractual benefits they have promised despite interest rates being so low now, since 2011 life insurers have, as you know, had to create an additional provision to the premium reserve (Zinszusatzreserve). Last year alone life insurers set aside more than eight billion euros for this – a veritable feat of strength. At the end of 2014, across the industry as a whole this Zinszusatzreserve amounted to around 21 billion euros. Since then, the level of interest rates has been extremely volatile, as we all know; insurers might therefore be forced to build up an even greater provision, which would require an even greater feat of strength. To my mind, there is no doubt that, fundamentally, the Zinszusatzreserve makes very good sense; it strengthens the core element of German life assurance: the promise of a guaranteed contractual benefit. But we will consider carefully how strengthening the premium reserve through the Zinszusatzreserve in the years ahead needs to be balanced against other core supervisory objectives, such as risk-bearing capacity and solvency cover. The industry and the German Actuarial Association have already put forward proposals for a re calibration of the Zinszusatzreserve.

The Life Insurance Reform Act of last year also cushioned the effects of low interest rates – mainly by re writing the rules governing the share of the valuation reserves that policyholders receive. It will not be news to you that we took a very clear position on this at the time. The old rules had a procyclical effect and were unfair. Now it is the case that exiting policyholders are not allowed to share in valuation reserves arising from fixed-interest securities if these are needed to ensure that the guarantees promised to existing policyholders are met. A solution that fairly balances the legitimate interests of two groups of consumers: policyholders exiting and policyholders remaining.

Ladies and Gentlemen, as we all know, German banks are also unfortunately feeling the pain resulting from low interest rates. That is not surprising, for net interest income traditionally accounts for around two-thirds of operating profits, and alternative sources of earnings are not thick on the ground. In the near future we will be conducting another low interest rate environment survey of the banks remaining under our direct supervision in order to give ourselves as accurate a picture as possible here, too, and to be able to react appropriately.

It will involve forecasting the Profit and Loss Account in different scenarios. In addition to the “long-term low interest rate environment”, “sudden increase in interest rates” and “further reduction in interest rates (with negative interest rates)” scenarios, we also want to consider stress effects that impact on credit and market risk. We will round off the exercise by asking the banks about their own plans.

We shall of course be applying just the same sort of close scrutiny to the building and loan associations, which operate a model of collective savings and which are also being hit hard by low interest rates. The associations have already reacted to low interest rates and are continuing to do so – mainly by further cutting the interest rates payable on their building savings accounts for new business. But it may take several years for positive effects to begin to show. How great they are will then depend on how high current market interest rates will be – and how attractive the particular tariff is in the light of this.

One tool that is having a short-term impact is the termination of housing savings contracts into which people have saved too much money. In recent months associations have also terminated contracts that had earned the saver the right to be granted a loan for at least ten years without applying for a loan. Only a few days ago there was a story in the press that BaFin was supporting the associations in terminating such contracts. Earlier it had even been said that we were actually demanding that they do so. Neither of these stories is true. Whether associations terminate housing savings contracts or not is for their senior management to decide, not us. And it is for the courts to decide whether such terminations are permissible under civil law.

Let us now cast an eye over other aspects of our work. It is changing substantially; in particular it is becoming more international and more European – at both the regulatory and institutional level. For around four-and-a-half years BaFin has been involved at various levels in the European System of Financial Supervision that the EU established after the global financial crisis burst upon the world in order the better to equip the European financial market against the same sort of events in the future. By now this system has bedded in pretty well, even though – not very surprisingly – it is not always free of conflicts of interest and tensions.

The European Supervisory Authorities are currently behaving self-assertively – occasionally very self-assertively. Now and again they ask for more data than we think is necessary. They try to exercise more influence in the supervisory colleges than they are supposed to. And from time to time they draft regulatory standards and guidelines that overshoot the actual regulatory mark. The draft of a regulatory standard produced by ESMA, the European Securities and Markets Authority, on MiFID II, which would effectively have prohibited commission-based investment advice, ran into strong criticism from representatives of the European Parliament.

Fundamentally, ESMA and its fellow authorities the EBA and EIOPA can adopt guidelines independently – based on decisions of their Boards. As a matter of principle, that is not indisputable. De jure, these guidelines are not binding either. De facto, though, there is considerable pressure to implement them since, as you know, national supervisory authorities must state their reasons if they do not want to apply them.
And BaFin does that as well if it comes to the conclusion on a case-by-case basis that guidelines are not appropriate from a German perspective. That is what happened only recently with a set of EIOPA guidelines on Solvency II, some of which we here in Germany will not be applying. It goes without saying that as BaFin we feel committed to the principle of acting in a manner conducive to European harmony, which has Constitutional status here in Germany, by the way. But that does not mean that we accept all guidelines without due reflection or even blindly. Here, too, it is constantly a question of finding the right balance.

When this System of European Financial Supervision was set up, there was talk of it being a giant step towards centralisation. And rightly so, although actual – i.e. operational – supervision was not Europeanised at that time (apart from ESMA’s responsibility for rating agencies). That did not happen until 4 November last year, when the mandate for supervising euro zone banks was transferred to the Single Supervisory Mechanism (SSM), a supervisory network under the lead management of the European Central Bank (ECB). The significant banks of the euro zone – including 21 German banks – have been under the direct supervision of the SSM since that date.

But even though the right of final decision rests with the ECB, the SSM and the national competent supervisory authorities explicitly pursue a joint supervisory approach. It is therefore not as if BaFin no longer played any role in the supervision of significant institutions. Quite the contrary, in fact: the in-depth knowledge of my Banking Supervision colleagues is still indispensable, and nobody knows that better than the ECB, and it is not for nothing that it wants national authorities to be closely involved. This wish tallies well with our demand to be allowed to continue to operate relevant supervision.

Of course, lots of things have now changed from the way they used to be. The SSM uses a much more quantitative or key-numbers based approach, which undoubtedly helps to improve comparability between banks. There is nothing at all to object to in this – as long as everyone can agree that good supervision on a case-by-case basis – and supervision must always stand or fall on a case-by-case basis – should also include a qualitative, deliberative and evaluative component.

The notion that supervisory decisions can be solely derived from a mechanical, key-numbers based or decision tree process of deduction may be a beautiful dream for a good many people, but is unrealistic and cannot therefore be the guiding principle of our supervisory activities. The right mix of quantitative and qualitative supervision will first have to be found in the SSM as well. I am sure that by working together we will succeed.

The many so-called less significant institutions, of which around a half, or approximately 1,600, are German, are supervised by the ECB only indirectly. These banks therefore remain under national supervision, which also makes sense. However, the ECB sets the framework conditions here, too, by prescribing common supervisory standards. That also makes sense. Supervisory practices in the countries of the euro zone sometimes vary greatly and therefore need to be further harmonised – provided that national legal realities and specific national peculiarities worth preserving are not affected. Only institutions of the same kind should be regulated in the same way.

The ECB is developing its standards jointly with national supervisors. In the negotiations we act as convinced Europeans and at the same time take the opportunity to enlighten our non-German colleagues on the characteristics of the German banking market, which is sometimes no easy task. But we will continue to try to persuade our partners. In addition, in the case of the less significant institutions in particular we need to pay close attention to the appropriateness of administrative requirements. The guiding principle that we feel bound by as BaFin is not maximalism but proportionality.

As you see, Ladies and Gentlemen, our work is not becoming less important as a result of the Europeanisation of supervision. But it is changing. So we supervisors are also having to re think. It is now a question of supplementing our authority, which was traditionally based on our direct, executive power to issue directives, with an authority based on the ability to exert highly professional and at the same time tactically astute influence. We must not mourn the power we have lost, we must replace it by constructive influence – in the SSM, in the European System of Financial Supervision and also globally.

Another important element of the European Banking Union is the Single Resolution Mechanism (SRM), which came into operation at the beginning of this year. The Single Resolution Board (SRB), headed by Dr König, will assume its full powers for the resolution of significant banks and banks operating on a cross-border basis in the euro zone at the beginning of 2016. The creation of the European Banking Union, with the SSM and the SRB, with its legal foundations for banks, for their resolution and for deposit protection, is one of the most important European reforms since the introduction of the euro. Despite the kinship of the name, the EU plan for a Capital Market Union is not a directly comparable project. The Commission’s motives here seem to be more economic-political than regulatory in nature.

There is of course nothing wrong with this, as long as it doesn’t mean the dismantling of financial regulations in the process. I as a supervisor must be allowed to issue this warning. It is perfectly all right to promote investments by insurers, Pensionskassen and Pensionsfonds in infrastructure projects, provided that the risks that this may give rise to are not downplayed and appropriate risk management requirements are set. Otherwise the next bubble will really be programmed in.

It is also all right to strengthen capital market based forms of funding, even securitisations, if in so doing we do not forget the painful lessons of the financial crisis. Basically, however, I wouldn’t know why we in Germany should let ourselves be talked into believing that capital market based funding is structurally superior to bank-based funding, especially for an economy with so many medium-sized, family-controlled businesses as ours. But no matter whether capital market or banks, the crucial thing is that both funding channels also remain resilient in times of crisis and that it is not the real economy, investors and ultimately the taxpayer that suffer the consequences if rules on capital management or risk management are too lax.

Ladies and Gentlemen, permit me to say a few brief words on a subject that, quite rightly, has become an integral part of financial supervision: collective consumer protection. It will be legally anchored as a supervisory objective for all BaFin directorates through the Retail Investor Protection Act (Kleinanlegerschutzgesetz). With this, the lawmakers have given a strong signal: collective consumer protection is an important public good. BaFin will therefore remain able to seek to prevent or eliminate consumer protection related malpractices in all areas of supervision if a general clarification in the interests of consumer protection appears necessary.

BaFin is therefore to continue to act solely in the public interest. Protection of individual consumers is left to consumer protection and ombudsman organisations governed by private law, which as you all know fulfil this function firmly, and ultimately to the jurisdiction of the courts.

For this purpose, a consumer protection related malpractice may arise in particular if – and I quote – “a significant, prolonged or repeated violation of a consumer protection Act [exists] that may jeopardise or impairs the interests not only of individual consumers”.
According to the government’s explanatory memorandum, such a malpractice occurs especially “when an institution or company [...] fails to comply with a relevant decision of the Federal Court of Justice (Bundesgerichtshof) relating to the application of a civil-law standard having consumer protection effect”. It goes on to say that in cases in which BaFin becomes aware of systematic or serious breaches of consumer protection legislation and no Court of Justice ruling can be expected in the foreseeable future, it may intervene itself.

That means more capacity to act and more responsibility. The subject is demanding. Difficult questions will be asked: for instance, when the interests of different groups of consumers clash. We may also find it difficult to reconcile issues of consumer protection with issues of an undertaking’s risk-bearing capacity or of financial stability.

So it is essential to find astute and balanced solutions, and it is precisely because we are an integrated financial supervisor that we are in a particularly good position to take these decisions in a professional manner. We are therefore looking forward very much to working well together with the recently established financial markets watchdog which, as a very market and consumer-oriented stakeholder organised under private law, will be able to support and complement us as the State financial supervisory authority extremely well.

I could talk much longer about the other possibilities of the Retail Investor Protection Act, but I would just like to pick out a few examples. We shall soon be able to have the financial reporting of the issuer of an investment audited by an external auditor. If we initiate proceedings against offerors who have contravened the Capital Investment Act (Vermögensanlagengesetz) and impose fines, for example, we may publish the action we have taken on our website, in order to warn investors. We will also be able to restrict or even prohibit the marketing of certain financial products. With these and other tools the lawmakers have strengthened our role in consumer protection – without releasing investors from their own responsibility and without stifling financial initiative and innovation. This dual balance is important.

It can also be seen elsewhere in the Act: instead of deterring private investors from entering the unregulated capital market, the products on offer there are to be made more transparent, for instance, by extending the prospectus requirement of the Capital Investment Act to them. But in order not hinder the funding of innovative small and medium-sized businesses – from the Fintech sector, for example – the Act exempts crowdfunding in the form of crowdinvesting, subject to certain conditions.

There are other pieces of legislation that appear to me to threaten this balance. Among other things, I am thinking here of the revised Markets in Financial Instruments Directive, MiFID II, which, in addition to very many other regulations, also contains regulations on consumer protection. For example, it lays down (in Article 25(6)) a requirement for a statement on suitability of the investment recommendation. In future, investment firms will have to specify in their recommendations – and I quote – “how that advice meets the preferences, objectives and other characteristics of the retail client”. In addition, all communications relating to orders are to be recorded: telephone conversations, emails, faxes, on-premises discussions etc etc.

The new MiFID lays down a number of other investor protection requirements – for instance, on cost transparency and the acceptance of commission. Offerors will also be obliged to take their lead from the interests of the end-clients when developing products. Issuers (which fall under MiFID) and distributors will have to define in advance what target market their financial instruments are to be marketed on. In December last year, ESMA (the European Securities and Markets Authority) put forward numerous details on these regulations. Banking and insurance regulation will see similar requirements being set in future, and the proposed re-casting of the Insurance Mediation Directive also picks up the subject.

The financial industry is currently faced with a wave of such projects. Basically they all make good sense. But if we strangle offerors with excessive administrative requirements, we will also strangle the supply of financial products. Consumers would then suffer as well. In particular, I am not keen on lightly transferring the level of regulatory detail found in European maximum harmonisation projects to projects that are meant to achieve minimum harmonisation. The radical MiFID-isation that we have been observing for some time is not a blessing.

Ladies and Gentlemen, in November 2008, shortly after the collapse of the investment bank Lehman Brothers, the G20 Heads of State and Government set in train regulatory repair work of an unprecedented scale: all financial markets, products and participants were to be regulated, as appropriate to their circumstances. What has become of that grand plan? Significant parts of the G20 reform agenda have been dealt with – but not all yet. I will mention just a few examples.

The derivative markets have (still) to be made safer. For that reason we are supporting the initiative of the Financial Stability Board (FSB) and other standard-setters to standardise and collate trade repositories’ data on OTC derivatives trading. Shadow banking is another area in which a lot of regulatory work still remains to be done. The FSB has now also turned its attention to asset management; a very large amount of funds has flowed into this sector in recent years. We will have to look at whether this sector is adequately regulated. And we will have to examine whether the big players should be subject to tighter or additional regulation.

Similar questions arise in respect of central counterparties. Because they are closely interlinked with clearing members, we will have to create a credible recovery and resolution regime for them as well. In banking supervision we are very much further forward on solving the too-big-to-fail problem, but at the global level we have still not quite achieved our goal. Among the things that we are still lacking is a global framework for cross-border recognition of resolution measures. Work on this will definitely take a few more years yet.

In addition to the G20 agenda, there are other regulation projects that I could talk about, such as the work of the Basel Committee on Banking Supervision on the standardised approach for credit risk. Or the questions relating to the zero-weighting of government bonds that have been circulating since the sovereign debt crisis in Europe at the latest. We will also have to address the question of new risks, such as cyber-risks and risks arising from market misconduct, especially benchmark manipulation. In the opinion of the FSB, manipulation in some institutions has reached such a scale that it could possibly be regarded as a systemic risk.

But following the regulation marathon of the post-crisis years, the primary matter at hand now is the quick, full and common implementation of the numerous reforms already agreed upon. But we cannot think that this will be the end of the matter: it will be necessary to think through what sort of impact these reforms will have. For despite all simulations, it is only through practical application that the actual effects of regulation can be seen as well as any unintended consequences. It is also necessary to take into consideration the interplay between various regulatory frameworks.

Ladies and Gentlemen, I said earlier that our work is not becoming less important. It is not becoming less complex either, and that applies to all of BaFin’s directorates. Even a subject like the low level of interest rates, which has been with us for years, is continually revealing new facets, so that we are not finding life boring even in the time loop. Speaking of which, I should now like to conclude my remarks and thank you for having listened to me so attentively so far. I now look forward to your questions.