Check against delivery.

President Felix Hufeld

Ladies and Gentlemen,

Talking to representatives of the financial industry these days, I've been hearing about three main issues: low interest rates, digitalisation and regulation.

It is not our job to evaluate monetary policy – but the consequences of it do concern us. For a long time now, these consequences have not just been troubling those typically affected, life insurers and Bausparkassen, but have been spreading like a slow poison through the whole banking sector – as evident in its balance sheets. Institutions which primarily base their business models on interest income and maturity transformation are having increasing difficulty generating sufficient income in the long term. Moreover, the longer interest rates stay low, the more the interest rate risk in the banking book becomes a problem. This makes it all the more important for institutions to underpin this risk with sufficient capital. But at some point, a much more fundamental question might arise: what does a business model have to look like in a world in which the traditional interest income only plays a minor role? Sooner or later, banks will have to find an answer to this, as will regulators and supervisors.

The low level of interest rates has been putting life insurers under pressure for some time now, and it is hard to say how things will develop in the long run. It may be that, in the long term, not all companies will be able to withstand this pressure. Nevertheless, our forecast that insurers will have sufficient staying power at least in the short and medium term is still current – partly due to the lower profit participation and the additional provision to the premium reserve (Zinszusatzreserve), and also due to the fact that undertakings themselves have taken action. The new products with modified forms of guarantee are a clear sign of this.

By the way, it is a myth that Solvency II, which came into force at the beginning of the year, makes it impossible to offer guarantee products. The new regime merely exposes pricing faults, it does not cause them. Undertakings can therefore continue to offer guarantee products if they consider it sensible, provided that their balance sheet is strong enough. In the current market situation, the recent proposal from the Federal Ministry of Finance to limit the maximum technical interest rate for new contracts to 0.9 percent from next year is correct and unavoidable.

Digitalisation is also causing real pressure to introduce changes in the financial sector. Fintech companies are making inroads into the market and challenging banks, in particular. They have huge aspirations: they don't just want to go tapping shyly at the doors of the established players, they want to kick them in! So will the banking business soon be going on without banks? What is certain is that fintech companies are really shaking up the market. But, firstly, they haven't discovered the philosopher's stone yet either, and, secondly, the traditional banking industry is not at imminent risk of dying out. It still has a talent or two to make good use of, even in the digital age. Thirdly, it is already becoming clear that the two sides are not just opposed to each other but can often complement each other.

When dealing with the issues of digitalisation and fintech companies, the established banks will face the same situation as with all strategic questions: some will be dealt a better hand than others.

However, who will get what market share will not be decided either by politicians or by supervisors: the success or failure of a business model is decided by the market – but there are good reasons why this market is regulated. That's where we come in, and the motto must be "same business, same risk, same rules" – applied in proportion, of course, as always. As supervisors, we can neither put up barriers in order to protect established companies, nor give newcomers special treatment. We can be expected to communicate appropriately, with "appropriately" meaning comprehensibly, quickly and, as far as possible, electronically. To give an example of this, we recently started offering a tailored service to potential founders of fintech companies on our website, which we plan to gradually expand.

The third key issue, regulation, hits a nerve for many. Yet what many see as a burden is actually the necessary and deliberate answer to an unprecedented financial crisis: for example, more and better capital, stricter liquidity requirements and leverage ratios, tougher requirements in various areas of risk management, provisions to ensure better resolvability and, yes, the requesting of much more data than before.
We should not forgot what the reasons for the tightening-up of regulation were, just eight years after the major disaster on the financial markets. Otherwise there is a risk of another regulatory "pork cycle" consisting of crisis, regulation, deregulation, and another crisis, which can be in no one's interest – not that of regulators, customers or the industry itself. The essential elements, now and in the years to come, will be: dependability – we have to complete Basel III, for example –, proportionality and the assessment of adverse effects and interactions.

Ladies and Gentlemen, one topic is emerging in the public debate which is testing the limits of traditional financial supervision: behaviours which do not just raise questions of legality but of legitimacy as well. Such questions pose major challenges as we as supervisors seek to deal appropriately with them – on both a practical and theoretical level.

Practically speaking, it is neither desirable nor possible to supervise every single business action. Theoretically speaking, behaviour may be problematic for various reasons and open to debate, but not necessarily illegal. Letterbox companies are a prime example of this. They can be used for tax evasion, but not everyone with such a company is a tax evader.

It also gets difficult when it is a matter of dispute under civil or tax law whether and from what point on a certain behaviour becomes illegal – and here the issue of so-called “cum ex” and “cum cum” trades springs to mind. The question of when executive supervisory action is possible, necessary or even itself against the law cannot be easily answered if the legal environment is not clear. What is certain is that it cannot be the job of a state supervisory authority to clarify unanswered legal questions, much less relevant social debates, in the course of its basic administrative duties, ahead of the legislature or case law from the highest, or least a higher, court.

An authority does not make the law, it applies existing law and does so on the basis of specific areas of competence which have been assigned to it. The fact that we, as supervisors – particularly as supervisors with very far-reaching powers of intervention – are bound by the relevant laws and bases of authority in all that we do is a cornerstone of a state under the rule of law and itself a value that guarantees our freedom.

We are resolute in following up any indications that supervisory requirements may have been breached; we check whether irregularities exist and identify these with absolute clarity.

If the situation has developed to a state where supervisory action is necessary, we do not hesitate for a moment to step in – think of Maple Bank. We are no less determined to correct misconduct and, where necessary, to punish it with significant fines, as we have done recently.

As you can see, we continue to move in a highly active regulatory and supervisory environment. My colleagues will now highlight some individual aspects.

Béatrice Freiwald, Chief Executive Director of Internal Administration and Legal Affairs

Ladies and Gentlemen,

I also welcome you to the press conference and would like to pick up on the issue of sanctions.

When it comes to sanctions, BaFin is often viewed as very lenient, with the argument generally being that supervisors in other countries impose far tougher sanctions and do so much more frequently. There are two reasons why such comparisons are not really appropriate: the word "sanction" does not always mean the same thing in the supervisory law of other countries as it does in ours, and the prerequisites for sanctions to be imposed are often different as well.

The tools which BaFin has at its disposal for the supervision of banks and insurers as the law stands are primarily designed to avert danger, that is, they are preventive. We monitor companies in order to identify irregularities and thus be in a position to ward off the resulting threats. Even if we caution or dismiss a managing director, we do not impose a retroactive sanction; rather, we are acting to avert a risk.

Unlike in the Anglo-American legal systems, we have so far only imposed sanctions to take action against administrative offences which are specifically laid down in the supervisory laws. If we want to sanction misconduct in the area of market supervision, for example, we do that with an administrative fine, the aim of which is to have both a punitive and a general preventive effect. We can also impose fines in the prevention of money laundering. From the 2015 annual report, which came out today, you can see that last year, we imposed fines totalling over €40 million (€40,053,078.50) in this area, including the highest-ever single fine in the history of German financial supervision.

Of course, it is noticeable that we are nowhere near the scale of penalties which are imposed by the US authorities, for example. This is partly because in Germany, unlike in the US, companies cannot be prosecuted under criminal law – only the members of their governing bodies and their employees can. In Germany, we can only take action against companies under the law on breaches of administrative regulations. The resulting fines are not comparable with the penalties of corporate criminal law as we know it from the Anglo-American legal systems. Apart from that, one has to ask what the point is of payments which exceed a company's economic capacity.

Having said that, significant sanctions which have a direct effect on the balance sheet certainly have a disciplining and deterrent effect. That is why the provisions on member states' sanctioning regulations have recently been successively and significantly increased at a European level, something which is also being reflected in German law. For example, in a few days the Bundesrat will discuss the First Act Amending Financial Market Regulations (Erstes Finanzmarktnovellierungsgesetz), which has already been passed by the Bundestag and which transposes the European Market Abuse Regulation and the Directive on Criminal Sanctions for Market Abuse, among other things, into German law. This will considerably tighten up the sanction options for insider trading and market manipulation, and the range for administrative fines under the German Banking Act (Kreditwesengesetz) will be significantly increased again as well. In addition, the Fourth EU Money Laundering Directive further lifts the separation of hazard prevention and sanctioning in favour of a standardised, EU-wide understanding of administrative sanctions.

However, we must all bear in mind that sanctions alone cannot provide good and effective supervision. We can only achieve that by using our powers to ward off dangers before they arise.

Frank Grund, Chief Executive Director of Insurance and Pension Funds Supervision

Ladies and Gentlemen,

As we have already heard, the low interest rate environment is putting German life insurers under increasing pressure. There is a lot of speculation, including internationally, that these undertakings are increasingly turning to risky assets to be able to fulfil their guarantee commitments.

But this is something that we cannot confirm at this time – not even regarding the smaller undertakings. In any case, I get the impression that many of this sort of assessments do not adequately take into account the particularities of the German insurance sector.

That also explains the viewpoint which is sometimes expressed, namely that German insurers pose a risk to financial stability. I consider this risk to be extremely low. Solvency II enables us to judge it even better than before, as the new regime thoroughly lays bare insurers' risks. From the end of May, we will be fully informed, because then we will have the day-1 reports.

And we should not forget the stabilising effect the additional provision to the premium reserve (Zinszusatzreserve) has, for example, even if its calibration might have to be looked at again.

But let's not just focus on life insurers. Pensionskassen (occupational pension schemes) are suffering even more from the low interest rates. Their portfolio consists almost entirely of contracts which oblige them to pay life-long pensions to insured persons. These persons are getting older and older, on average, which puts an additional burden on results.

Under our guidance, the Pensionskassen started to take countermeasures at an early stage in order to maintain their capital adequacy; nearly all of them have made additional provisions. However, the average technical interest rate is still 3.28 percent, and that is difficult to achieve these days.

In individual cases, therefore, Pensionskassen might soon be unable to provide their benefits in full using their own resources. We're talking to them about what to do next. In the interest of those entitled to pensions, we are encouraging the schemes to advise their sponsoring companies, that is, employers, to provide funds. For Pensionskassen which are stock corporations, the shareholders could make an additional contribution.

But what happens when employers or shareholders turn down this request? They are generally not obliged to comply with it. Pensionskassen in the form of an insurance association generally have a restructuring clause in their articles of association which allows benefits to be reduced if the deficits cannot be compensated for by available own funds.

In such cases, however, the subsidiary responsibility laid down in the German Occupational Pensions Act (Betriebsrentengesetz) usually holds the employer liable. The employer has to guarantee that its employees can receive their full benefits. Of course, that is only possible if it is still in existence and can achieve this. The Pension Security Association (Pensionssicherungsverein) would not step into the breach under such circumstances, by the way.

If the Pensionskasse is a stock corporation, the employer is also generally liable. Most stock corporations are also members of the Protektor insurance guarantee scheme and are comparable with life insurers there.
The low interest rates are also putting Pensionsfonds under pressure, but these have for the most part not provided guarantees. If it came down to it, the employer would have to contribute. If it were unable to do so, the Pension Security Association would have to step in.

So neither life insurance customers nor those entitled to a pension from Pensionskassen and Pensionfonds will be left without protective mechanisms. As far as Pensionskassen are concerned, these mechanisms might have to prove themselves in practice in the near future.

We are well aware of the responsibility we bear in this matter.

Elisabeth Roegele, Chief Executive Director of Securities Supervision/Asset Management

Ladies and Gentlemen,

Last summer, collective consumer protection was laid down in law as one of BaFin's supervisory objectives by the German Retail Investor Protection Act (Kleinanlegerschutzgesetz), giving it the same status as the supervision of companies and markets. At the same time, the legislature once again significantly expanded our competencies in this field.

That means that we face high expectations – and rightly so. To meet these, we have set up a department which is based in both Bonn and Frankfurt and which deals with issues relevant to consumer protection in securities, banking and insurance supervision. The focus is, therefore, not just on investors but on customers of banks and insurance undertakings as well. We want an appropriate level of protection for all consumers, no matter what financial sector they are active in.

We make use of various sources of information in our work, including enquiries or complaints from consumers, findings from ongoing supervisory work and audit reports. The consumer centres and, above all, the financial markets watchdog provide us with important information as well. In addition, we approach providers directly with targeted surveys. When we have analysed their responses, we ask those companies which raise concerns for more details, for instance in an on-site meeting.

Credit-linked notes are one of the issues which we want to investigate in this way. We want to find out whether they are too complicated for the average retail investor to understand, given their relatively complex structure, and whether we need to step in. We have to look very carefully at this, because we have no desire to patronise investors. There needs to be a balance between protection and individual responsibility. Consumers must be given the opportunity to decide for themselves about a product or a service on the basis of sufficient information and knowledge. If this balance is threatened or disturbed at the consumers' expense, making it difficult or impossible for them to make their own decisions, we employ tools to maintain or restore it.

We will also be starting another survey on the subject of payment protection insurance in the near future. We are interested in whether taking out this insurance is truly optional, whether the relevant information obligations are being complied with, and what proportion the commission makes up of the total costs of a loan. Another survey affecting the banking sector will look at whether banks and savings banks are systematically disadvantaging customers by unreasonably delaying the passing along of interest rate changes on consumer loans to them.

Ladies and Gentlemen, the public is right to expect a good service from us, including in the field of consumer protection. However, sometimes we are left facing misplaced expectations. The most obvious example of this is the still widespread view that it is BaFin's role to help attain justice for individual consumers – but we cannot do that, because there is a division of responsibilities in consumer protection. As an executive body, we do not pronounce judgement; only the courts can do that. Consumer protection organisations, ombudpersons and dispute resolution entities also take up the concerns of individuals, while we act in the public interest and protect consumers as a whole.

Raimund Röseler, Chief Executive Director of Banking Supervision

Ladies and Gentlemen,

If bank managers were granted a wish right now, they would surely ask for gentle interest rate rises. The current low rates are certainly the biggest factor weighing on earnings in the German banking sector. And we are observing that the longer rates stay this low, the more significant interest rate risks will become. It is hardly surprising that with this level of interest rates, investors do not want to commit themselves in the long term and borrowers want to secure their rates for as long as possible. This is a problem which is hitting institutions with a broad customer base in the deposit and credit business particularly hard. 50 percent and rising of all credit institutions now have higher interest rate risks.

Interest rate risks are not a new phenomenon for supervisors; we have had them in our sights in the past.

What is new is that we will this year begin to determine a capital add-on as part of the Supervisory Review and Evaluation Process (SREP) for all the about 1,600 institutions directly supervised by BaFin. In principle, this is nothing completely new. We have looked at whether a bank's capital adequacy matches the risks taken in the past, too. But this time we will specifically tell all institutions how high we estimate their capital requirements to be, and we will be very transparent in doing so. The institutions are justified in wanting to understand how we come to our estimate.

The first institutions, about 330 of them, will get an SREP notice this year. A notice of hearing for the first round is being prepared and is likely to reach the banks in June.

However, since the second and third-round banks also need to adequately underpin their interest rate risks now, we are requiring an appropriate capital add-on from them all.

We are working on a general administrative act to this effect for all small and medium-sized banks, so those which are not part of the first SREP round will be affected by the general administrative act, but only until they have undergone either the second or third round of the SREP. I expect this process to be completed by 2018 at the latest.

We know that some institutions are nervous about the measure, but we do not expect it to cause any great upheaval. Sure, in individual cases there will be quite noticeable capital add-ons, but most institutions have been able to make use of the good recent years to build up sufficient reserves to meet these requirements.

We are convinced that with the SREP and the general administrative act, we have created a balance which will stand up to an international comparison. Taking both the interest rate risks and the results of our stress test from last year into account is an elegant process.

We are particularly proud of the fact that we have managed to develop a useful SREP concept which does not place additional data requirements on institutions. We are only using data which we have anyway. I believe that this can be an example for other supervisory authorities.