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Ladies and Gentlemen

I bid you all a warm welcome here today to our New Year press conference. What I would like to say to you – and to BaFin! – at the start of this new year was put much more elegantly than I ever could by Rainer Maria Rilke in a letter to his wife Clara:

“And now let us believe in a long year, given to us, new,
untouched, full of things that have never been, full of work
that has never been done, full of tasks, claims and demands (…)”.

Tasks, claims and – yes! – demands, too: 2017 will bring every one of us all of that, and that goes for BaFin too. As in previous years, we will see things that have never been and carry out work that has never been done. But above all, we will be kept busy by a triad of issues that has survived many a New Year: the current interest rate low, the question of appropriate regulation and digitisation.

What we euphemistically call the low level of interest rates is hitting insurers but also increasingly banks. At the same time, regulation is becoming ever more complex; and progressive digitisation in the financial sector brings with it risks as well as opportunities and places great demands on us, as supervisors and regulators.

Let us begin with the root note of the triad: low interest rates. With the passage of time, they are impacting ever more heavily – beyond the circle of traditional victims. As we know, these include German life insurers. Almost traditional by now, too, is our message that we rate their stability in the short to medium term as satisfactory. We are maintaining this forecast for the industry as a whole. By and large, Germany’s life insurers have prepared themselves well for continuing hard times on the interest rate front: they have strengthened their capital base, they have cut back profit participation and they are offering products with new forms of guarantee, to mention just a few of the measures.

But what is true for the industry on average need not necessarily apply to individual undertakings, especially the weaker ones. Pressure is increasing. This means they need to mobilise whatever their balance sheet and supervisory law allow. And many owners will have to adapt to the need to strengthen the capital of their undertakings. For us that means that we will still, and increasingly, act in “intensified supervision” mode.

Pensionskassen and Bausparkassen are in a similar situation, which won’t surprise you. In the current low interest rate climate, business models that are designed for the very long term and are bound by the collective ideal are, after all, under particular pressure.

But as time goes by, the low interest rate environment is also becoming more and more evident in the books of the banks. The capitalisation of German banks is relatively good – for now. The longer interest rates remain at a low level, the greater the efforts banks will have to make to operate profitably in the long term and to build up a satisfactory capital cushion. The greatest challenge is faced by institutions that operate primarily in deposit-taking and lending business.

What are they to do? Cut costs, tap other sources of income, review their business model etc. All this has been said often already and by many people – including me. A state supervisor, too, is aware that the cold wind of competition is blowing outside. Sitting it out is definitely not a solution, though.

But that’s not all: the longer interest rates remain low, the greater interest rate risk becomes for banks and insurers. All the more so when in times like these banks are inclined to accept long-term loans and insurers tend to invest in extremely long-term investments. At the same time, the regulatory system is demanding that liabilities and assets be balanced appropriately.

The unintended procyclical effect of financial regulation – also when combined with international accounting standards – is undoubtedly one of the difficult subjects we will have to deal with more closely in the years ahead.

So, with the question of regulation I have come to the middle note of our triad of issues. As we know, it is this note that determines whether the key is major or minor. The current mood of many bankers can also be described as “minor”. If you ask them what has affected their morale the most, the answer you quite frequently hear is “the excessive amount of regulation”.

Regulation has been tightened considerably since the outbreak of the financial crisis in 2007/2008. With good reason! In the years before the crisis, large-scale deregulation had taken place, which had to be corrected. Banks must be sufficiently solvent and the banking system as a whole must be stable and resilient. Only then can banks play their important economic role properly. Among other things, the reforms of the post-crisis period so far have begun with both these points and they have, it can be stated today, strengthened the German banking system.

That must not prevent us from continually asking what is the right degree of regulation. Regulation must create stability, but at a reasonable cost and still allowing businesses the necessary freedom to act. In short, it must be appropriate.

This is also crucial for me in the current Basel negotiations. Actually, the day before yesterday the GHOS, the Group of Central Bank Governors and Heads of Supervision, was intending to draw a line under the Basel III rulebook. The meeting was postponed because some final, albeit important, details still need to be resolved. I share the view of Mario Draghi, chairman of the Group. My objective, too, is and remains to bring Basel III to a satisfactory conclusion and find a sustainable global compromise. Most questions have been answered. The main thing still remaining is the design and calibration of an “output floor”, which is meant to limit variability in the use of internal models.

I should emphasise that this discussion is not about tight or less tight regulation. It is about global regulation with a relatively high degree of detail but which at the same time is meant to take due account of very different national market structures. There cannot therefore be a compromise at any price. We believe it is right to limit the risk-sensitivity of the Basel rulebook, and thus the use of internal models as well, in a sensible fashion. But we are not prepared to effectively give up risk-sensitivity as a regulatory principle.

Which, by the way, does not mean that we are succumbing to the siren song of the banking lobby. Also, approaches that would in our view be open to compromise would definitely make demands – remember Rilke’s words? – of a number of banks. Demands that we as a supervisory authority consider appropriate and manageable.

As called for by the G20 Heads of Government, we in the GHOS have decided that we do not want significantly higher capital requirements on average. It is not by chance that this decision raises two questions. Firstly: from what point and for what peer group is an increase significant? And secondly: in what individual cases are exceptions acceptable or even desirable? We will provide the answer to these questions as regulators and supervisors not as representatives of the special interests of the banks – and also not just solely from a national perspective.

The subject of appropriateness – or to use another buzzword – proportionality is currently on the agenda in Brussels as well. It is not as if there has been no proportionality up to now. We are already imposing significantly higher requirements on large and systemically important banks than on medium-sized and small banks. However: we need more proportionality. I therefore believe it is advisable that the planned revision of the regulatory framework for European banks should also involve concessions for smaller banks – on, for example, reporting requirements, disclosure obligations and remuneration.

We must now reflect properly on how we can best proceed. As things stand at present I think the following point is important. Apart from the general issue of greater flexibility, if we want to draw clearer demarcation lines between, in simple terms, large and small, then this should preferably be where dividing lines already exist today. In any event, we should avoid additional cliff effects as much as possible. And one thing is clear: There will be no rolling back of regulation towards pre-crisis levels.

Solvency II, the European rulebook for insurance supervision that came into force just over a year ago, also makes demands of insurers. Nevertheless, the rulebook is justified. It makes risks easier to identify and thus easier to control. One challenge remains, as previously mentioned: the procyclical effect of any market-value based supervisory system.

Despite all the demands made of them, undertakings have arrived in the new supervisory world. Behind them lies a tour de force of preparation. But there can be no let-up now either. Solvency II will probably never be a piece of cake – least of all for life insurers. Then there are the difficult market conditions and the requirements of the Zinszusatzreserve to cope with. We are observing these various issues very closely, as you can imagine. And if things go pear-shaped, it won’t just be observation either. I need only mention “intensified supervision”.

Ladies and Gentlemen, regulation does not amount only to prudential rulebooks such as Solvency II and Basel III. Just as important is regulation of conduct. You know that this branch of regulation is also and not least one of the core concerns of BaFin – for example, the collective consumer protection provisions. Consumers need special protection.

Quite a lot has therefore happened in recent years in the regulation of conduct and especially in consumer protection as well, and further developments are on the way. We are currently aiming for regulation that covers the whole value chain of a financial product. One has only to think of the European MiFID II Directive.

In essence, this approach is the right one. But we may run the risk of creating a welter of rules and complexity in the regulation of conduct, which could call into question the comprehensive provision of financial products. This cannot be a rational regulatory objective. For if it is no longer a paying proposition to offer financial products, or if this involved incalculable legal risks, eventually, there will not be any such products on offer anymore. Consumers would definitely not be helped by that. We must therefore not abandon the fine line of proportionality in the regulation of conduct either.

We are also grappling with proportionality on a daily basis in our supervisory practice. For that reason we use sharp instruments, such as product intervention, only after careful consideration and with a sense of proportion. You will of course recall our consultation on the ban on the marketing of what had hitherto been called in German “Bonitätsanleihen” (credit-linked notes). The industry reacted to this with an extensive self-commitment: inexperienced and retail investors must no longer be offered such notes in future. That is precisely what we wanted. We wanted to protect less experienced buyers and retail investors.

It is clear that we would never have achieved this if we had not openly held out the threat of using the sharp instrument of banning this product. We are now watching to see whether the self-commitment is having the desired effect. The public response to our intervention was divided. We got a lot of flak from one of the orthodox wings and received lavish praise from the other. Seems to me, we got it pretty much right.

We are now turning our attention to contracts for difference (CFDs), since we want to protect consumers against losing house and home as a result of additional payments obligations. The first reactions to our consultation – including those from the industry itself – confirm that there is obviously a need for action here.

Ladies and Gentlemen, now to the upper note of the triad: progressive digitisation. It is frequently described as destructive, but it is a creative destruction, and for that reason it also offers opportunities. And by that I mean not only cost savings in day-to-day business. Digitisation and big data analytics are influencing the whole value chain of financial services, sometimes perhaps even destroying it and then reassembling it. A good many links in the chain may possibly be obsolete in a few years.

It will be exciting to watch what this creative destruction will do to the business models of banks and insurers. For instance, insurers may in future be able, thanks to the amounts of data that can be collected and analysed, to tailor their premium scales ever more precisely. However, what is perfectly sensible and desirable from a regulatory perspective might ultimately put the concept of the community of the insured to the test.

And then there is the new competition: innovative and nimble fintechs are entering the market in large numbers. Although they are not rendering established banks superfluous – at least, not all of them – they are challenging them. And challenging us as supervisors as well, by the way. We are taking this challenge seriously. We shape our supervisory administrative procedures according to specific target groups – not by throwing our rules and principles overboard but by applying them appropriately to fintechs as well.

What we made clear from the beginning still applies. What we do is supervision, not business development. Both are important and sensible. They just should not be mixed up.

Incidentally, in the longer term it needn’t be just small fintechs and established financial sector undertakings that change the shape of the financial sector on the digitisation ticket. As you know, there are large companies outside the financial industry that hold huge amounts of customer data. What is to prevent these data giants from running financial services as a sideline? In ten or twenty years, who will be the chief cook and who the bottle-washer? The market and its customers will provide the answer to these questions.

Where there is opportunity there is also risk. Digitisation creates a huge target. Businesses and value chain processes in the financial sector are heavily IT-dependent, and we have a significant proportion of legacy systems that have evolved over time. What worries me is that IT security is frequently considered only from a cost angle. But confidence in financial services providers today means above all confidence in the security of IT and the protection of personal data.

Guaranteeing this security on a lasting basis is an immense challenge – for both traditional providers and for fintechs. For what is considered secure today may be a gateway for cyber-attacks tomorrow. We insist on this security and demand that undertakings also insist on this security from their IT services providers and suppliers. We have a mighty steep learning curve ahead of us all.

To conclude, Ladies and Gentlemen, I’ll now depart briefly from the triad of issues. As supervisors in Germany, we are currently having completely new experiences. We are being approached by banks who want to submit to our supervision voluntarily. Banks, you might already have guessed, who are considering moving their headquarters or their business from London to Germany. (And no, I won’t mention any numbers or names.) As a convinced European, I had hoped and – to be honest – had believed right up to the end that the UK would remain part of the European Union. I was correspondingly disappointed the morning after the vote. But – to borrow from Adenauer – this is the situation were are faced with now, and disappointment must be replaced by pragmatism.

We still don’t know how soft or hard Brexit will be; the political negotiations will drag on for years. But undertakings need clarity as soon as possible. We offer this clarity if we are asked. We are not on a poaching expedition. As the German supervisory authority we want to offer providers from other countries a reliable framework that enables them to provide financial services in the new political circumstances – in Germany and in other countries of the EU.

So what shall we do with the New Year now, Ladies and Gentlemen? Let’s leave it to Rilke again: “Now let us see that we learn to take it without letting fall too much of what it has to bestow”.

That also applies to the snacks that now await us all at the buffet. My colleagues from the Executive Board and I look forward to having interesting conversations with you.