Check against delivery.

President Felix Hufeld

In gymnastics, a backwards roll may seem like one of the easier moves, ladies and gentlemen, but in politics and regulation, rolling back can be a dangerous thing. Just a quick reminder: the devastating financial crisis of 2007/2008 was partly a consequence of overly lax regulation. Rather than putting the case for renewed deregulation, then, we have to instead consider whether the numerous reforms introduced since the outbreak of the crisis are having the desired effect, both individually and as a whole. This includes the issue of proportionality.

The European Commission has already initiated such an evaluation: for example, in the planned amendment to the Capital Requirements Directive and the Capital Requirements Regulation, it wants to improve the situation with regard to proportionality and reduce the burden on smaller institutions. And rightly so! We have reached a level of regulation which is placing an excessive and, as far as the risk profile is concerned, unnecessary strain on smaller banks. We should change that, but without compromising on stability. All institutions, even small ones, must have sufficient capital and liquidity.

We believe that the proposal from Brussels does not go far enough: we need a nuanced approach, and it is this that we are working on at the moment together with the Federal Ministry of Finance and the Deutsche Bundesbank, and in dialogue with the German Banking Industry Committee (Deutsche Kreditwirtschaft). The questions we are asking ourselves are complex: to which banks should the Basel or Brussels rules apply without limitations? Should we allow simplified requirements in individual cases and, if so, for which institutions? Wouldn't it make sense to develop a simplified regime specifically for the smallest banks? If so, what factors would we then have to take into consideration?

The thing that makes it all so difficult is that if we set thresholds, we create cliff effects, by which I mean incentives for institutions to come in just under or over the threshold. Therefore, we want to put in place as few additional thresholds as possible and instead build on criteria which have already been introduced. One conceivable criterion would be that of systemic importance, for example. What we do not want is a rigid system of categories. We have to be able to move banks from one segment to another if we believe it is necessary on grounds of risk.

Nowhere in Europe are there as many LSIs – less significant institutions – as in Germany, so the principle of proportionality is particularly close to our hearts, as German supervisors. We therefore have a lot of work to do to get others on side. In the European Union, the principle of "the same rules for everyone" generally applies. This is right, but we should add "for those which are the same", since proportionality means that the rules take into account an institution's risk profile. Particularly in such a diverse banking market as the European one, this is really important.

Since I do not think much of the backwards roll as a regulatory move, in the negotiations to finalise Basel III we are advocating meaningful limits on the risk sensitivity of the framework while maintaining it as a regulatory principle. The design and calibration of an output floor for banks using internal models are still on the agenda. The aim of the floor is to prevent risk-weighted assets, and thus the capital requirements of institutions, from diverging from each other without good reason. However, if we set the floor too high, we will crush any risk sensitivity, which from my point of view as a supervisor would be extremely damaging. The participants understand the responsibility they bear. We want to find a sustainable, joint solution – one which we can all live with, which is not the same thing as a compromise at any price.

In conduct regulation, as well, we must beware of rolling back without due consideration. The reforms of the post-crisis period have significantly strengthened us in the field of customer protection – I only have to mention our new tools of product governance, which Elisabeth Roegele will discuss later. Nevertheless, there has been too much of a good thing in conduct regulation as well. To take the example of information: while investors were poorly informed for a long time, they are now flooded with information on the basis of "the more, the better". But this excess of information overwhelms investors rather than helping them. The European PRIIPs Regulation is introducing a new emphasis by bringing in standardised key information documents focusing on the features of the product which are central to the investment decision. Time will tell how this approach works in practice. It may be that we will have to make some further adjustments in this area, but in any case, providing retail investors with sufficient yet understandable and well-structured information is and will remain a central regulatory issue.

The historically low level of interest rates remains one of the major challenges for both supervised entities and supervisors. The longer it goes on, the greater the impact on German banks' already weak earnings situation, particularly for those banks whose main source of income is the interest surplus. This was a finding of our two surveys, and we assume that the ongoing stress test, which we launched at the beginning of April, will not show a fundamentally better picture. Raimund Röseler will go into more detail on this issue shortly. The growing pressure of low interest rates is leading banks to impose larger fees, a development which is being viewed critically by the public, who have got used to receiving many banking services for free.

Their attitude is understandable but short-sighted, since if people want to be customers of healthy banks or savings banks, they have to accept that the institutions will impose prices in line with their expenses and will open up new sources of income if old ones dry up. Doing so is the most normal thing in the world for all companies of all sectors which undergo change, and as soon as the economic tailwind eases off, the pressure on institutions could rise considerably again.

We know that the persistently low interest rates are putting a great deal of pressure on life insurers; we have been saying so for years. True, the sector will not end up fighting for its life in the short or medium term. Insurers have markedly improved their risk management and awareness and we expect all of them to present adequate Solvency II solvency ratios on 22 May – as Dr Frank Grund will explain in more detail shortly. However, we are supervising a number of life insurers especially intensively, and with good reason.

Some life insurers no longer offer the traditional policies with fixed guarantees, but others still do. The sector as a whole is moving towards products without fixed guarantees. All in all, therefore, it is coming up with a more diversified range of products – which is exactly what we have been calling on it to do for years.

An important safety buffer amid the low interest rates is, as you know, the Zinszusatzreserve (ZZR). Life insurers will have paid around €64 billion into it by the end of the year – a significant achievement and a real feat of strength! In future, the ZZR should be built up in a way which does not sap the strength of undertakings quite so much, especially as they have largely supplied it from hidden reserves, which is likely to become increasingly difficult for some of them.

Now to another subject with social relevance: information technology is no longer a secondary requirement for generating income in today's financial world, but forms the basic infrastructure for all processes. In short, without IT almost nothing in the financial sector works at all anymore. This has made the industry vulnerable: financial service providers, to which people entrust their money and their most private material data, are among the most popular targets of cyber attacks. If cybercriminals gain access to a bank's IT system, financial losses ensue, the reputation of the institution suffers, and customers and investors lose confidence. A cyber attack can even damage the stability of the financial system as a whole and thus the economy. Therefore, our requirements of financial services providers' infrastructure need to constantly move with the times as well. We have, for example, updated our Minimum Requirements for Risk Management (MaRisk) accordingly and will underpin and further define them with additional requirements in order to compel banks to take appropriate preventive measures and increase their IT security. We still see significant room for improvement in this area, and those thinking they are playing it safe by just tinkering with their IT systems here and there are making a dangerous mistake.

Of course, we will not just leave it at the banks. Insurers and other financial market players also have a lot of data and a lot of old IT. Then there is the growing trend of outsourcing. What is certain is that companies and supervisors have to see to it that they are up to the challenges of cybercrime as well – it is a bit like performing a somersault on the horizontal bar!

Meanwhile, quite a different sort of exertion is required to ensure that people have access to basic payment accounts as the law intends. I will now hand over to Béatrice Freiwald to explain more.

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

Ladies and gentlemen, only those with access to cashless payments can participate fully in economic and social life. For that reason, consumers have had a right to a payment account with basic functions since last June.¹⁾ Since then, one question has come up time and again: how much is such an account allowed to cost? Credit institutions are not allowed to demand prices which are so high as to effectively prevent access to the accounts, but an upper limit has deliberately not been laid down in law. The charge has to be appropriate.²⁾ If it is not, we can instruct a bank to adjust its charging model accordingly. In this process, we are acting in the public interest to remove banks’ shortcomings, although this also has a direct effect on the individual contractual relationships of consumers.

But when is a charge appropriate? The law mentions two criteria which we take into account in our assessment. Firstly, the charge has to conform to market practice. According to the law's explanatory memorandum, a charge is appropriate if it covers the institution's costs and brings in an appropriate profit. That means that banks do not necessarily have to offer basic payment accounts on the same terms that they do, for example, for account models for which they deliberately choose not to cover their costs. So what do we base our assessment of the appropriateness of charges on? Well, one factor is other basic payment accounts, but it is not the only one. The decisive factor is the terms which are standard on the market for comparable services.

A second criterion is user behaviour. The charging model must be based on the way in which the individual customer uses payment services, via which medium and to what extent. Therefore, the institutions either have to have different offers for different types of user, which is common practice for general payment accounts, or they have to take varying user behaviour into account in their charging models. In other words, customers who use their account less or do without certain services pay less. In particular, institutions which enable customers to influence with their behaviour the amount they are charged for other payment accounts need to include this in their considerations. Institutions which distinguish between users going online or going into a branch for their general payment accounts, therefore, are not allowed to offer only a fixed fee for their basic payment accounts. We have already conducted hearings with ten institutions regarding their charging models. Most of them acted on our arguments and now offer at least two charging models for different types of users of their basic payment accounts.

There is a special aspect to our supervisory powers when it comes to securing access to the basic payment account: institutions must enter into a basic payment account contract with all consumers who fulfil the statutory requirements. If they do not, the consumers can ask us to look into their case. If a consumer does in fact have a right to open a basic payment account, we can enforce their claims in individual cases. At this point, therefore – and only in such situations – we intervene directly to change an individual contractual relationship.

We have so far caused basic payment accounts to be opened in this way in about 110 cases. We only needed to issue formal orders 17 times; in the other cases, the institutions already reacted after the hearing. In the first six months after the introduction of the basic payment account, an average of nearly 40 consumers a month contacted us about banks refusing to open an account for them. Since the beginning of this year, this figure has fallen to about 20 cases a month, which we take as a sign that institutions have got used to the basic payment account model.

Raimund Röseler, Chief Executive Director of Banking Supervision

The earnings situation and resilience of small and medium-sized German credit institutions in the low interest rate environment are among our major issues, ladies and gentlemen. We have already carried out two surveys together with the Deutsche Bundesbank and, since April, these topics have been the focus of our joint stress test as well.

We are not going to all this effort without good reason: the persistently low level of interest rates are weighing ever more heavily on the results of the around 1,500 credit institutions directly supervised by us, so we supervisors need to gain a full picture of the severity of the situation. Since we are not obtaining all the information we need for that from the standard reporting system, we have to get it another way.

Some institutions have complained about the effort involved, it is true, but we are careful to burden institutions as little as possible. In this area, too, we work according to the principle of proportionality. What is more, we sought a thorough exchange of views with industry associations, data centres and institutions at a very early stage. We held numerous meetings to give the parties concerned the opportunity to tell us their side of the story and we took their perspectives into consideration at certain points.

Our stress test comprises three parts.

In the first element, we survey credit institutions' planning and forecast data as well as data from five supervisory scenarios on interest rates for the period from 2017 to 2021. In these scenarios, we work on the basis that interest rates will remain low, but we have also built in positive and negative interest rate shocks.

The second element consists of a stress test in the strict sense of the word, that is, including interest rate risks, credit risks and market risks. It is our intention here to test the resilience of institutions if further stress factors are added, such as an abrupt change in interest rates, increasing defaults in the credit portfolio or sudden falls in asset prices.

Incidentally, it is not a matter of passing or failing the stress test. We want to use the risks from the stress scenarios to measure the supervisory target own funds indicator.

In the third element, we look at the granting of loans for residential properties, credit standards and the burdens from pension obligations. All these issues are closely related to the low interest rate environment. Residential property prices continue to rise, so we believe it is important to gather information on the quality of banks' residential mortgage loans and lending policies.

We want to find out if institution-specific or even systemic risks are developing. In addition, we want to know whether banks are inflating their credit volume in a way which is not appropriate to the risks in their search for alternative sources of earnings.

Our survey about pension provisions is ultimately about enabling us to estimate the extent to which institutions' efforts to achieve the technical interest rate for their pension provisions in times of persistently low interest rates is affecting their earnings situation.

As you can see, ladies and gentlemen, we really do have good reasons for our third survey and I am confident that the majority of institutions will confirm that.

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

Ladies and gentlemen, the death knell has been sounded for the German life insurance sector many times – and yet we are sticking to our essential finding that the sector will not encounter problems which threaten its survival in the short or medium term, despite the ongoing low interest rate environment which is having a serious impact on the health of life insurers.

As you have already heard, we currently expect all life insurers to comply with the solvency ratio under Solvency II this time round. While that is good news, you should not read too much into the ratios when the undertakings publish them on 22 May. Even though it is basically possible to compare the figures, they are not suitable to compile a ranking, since viewed in isolation the information they provide is limited.

For example, let us say insurer A has a solvency ratio of 140 and insurer B has a ratio of 120; this does not tell us anything about the portfolios of the two. It might be that A's business is much more volatile than B's. Solvency II is very sensitive to market changes, so it might be that B, with its 120%, has the more stable portfolio.

What is more, insurers can take different approaches to risk measurement and they can use transitional measures. It is necessary to know and understand all that and more to interpret the figures on 22 May.

The persistently low interest rates are causing some insurers to decide on a run-off, that is, they stop taking on new business and partially or completely wind up their portfolio. Some policyholders react with concern to this news even though the undertaking still has to meet all its contractual agreements and comply with supervisory regulations. However, the already conflicting aims of policyholders and shareholders diverge even further if the competitive pressure eases off due to a lack of new business.

We have so far only consented to an external run-off – a transfer to a run-off platform – in one case and we are examining two others, so there is no major trend to speak of at the moment. Run-off platforms really can be a suitable instrument for recovery. Selling off the portfolio is no panacea, however. The legal hurdles are so high that a transfer is rarely worthwhile for the buyer, because BaFin will safeguard the interests of the insured and that can end up being expensive for the acquiring undertaking.

In economic terms, therefore, it only makes sense to take on a portfolio if large cost advantages can be achieved, for instance thanks to a particularly powerful IT system or a significantly more streamlined organisational structure. A further point which I think is important is that run-off platforms are bound to look at whether they can make use of Solvency II transitional measures, so they could be particularly attracted to the portfolios of those undertakings which are not using such measures.

In sum, policyholders can still rely on BaFin if their policy is sold to a run-off platform or their insurer just stops taking on new business. In those cases, too, we make sure that commitments, once taken on, are honoured.

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

Yesterday evening, ladies and gentlemen, we made use of our product intervention option for the first time. We have restricted the marketing, distribution and sale of financial contracts for differences (CFDs). Contracts with an additional payments obligation may no longer be offered to retail clients from 10 August.

In so doing, we have made great progress in one of the most urgent issues of consumer protection. Investing in CFDs with an additional payments obligation is like a game of chance – with the decisive difference that investors can not only lose the invested capital but parts of their other assets as well. In fact, depending on the leverage, the investor could lose everything they own. This is a risk which those of us who protect consumers cannot accept.

Those who think I am painting too gloomy a picture should remember the fallout from the so-called Francogeddon, the unpegging of the Swiss franc from the euro by the Swiss National Bank, which led to a rude awakening for investors. Those who had previously invested four-figure sums were suddenly expected to make additional, six-figure payments. All the statistics show that the vast majority of retail clients investing in CFDs with an additional payments obligation end up on the losing side.

In making this decision, we find ourselves in good company: ESMA has warned repeatedly of the dangers of CFD transactions. In the European Union, Poland, France, Belgium, the UK, Ireland, the Netherlands and Malta have already taken or announced supervisory measures concerning CFDs. The issue is on the agenda in all EU countries. The professional public have obviously understood the problem as well, as we can see from the fact that around a third of submissions to our consultation welcomed the regulating of CFDs. That's something!

Providers of CFDs with an additional payments obligation now have three months to adjust their business models. Some of them already offer products without an additional payments obligation, while others announced they would develop them in anticipation of our intervention.

We also hope, however, that our consultation may have triggered a certain quality competition in the CFD sector. The reactions of some providers could be interpreted that way. In any case, I would like to see the industry thinking about how it can develop a fair and transparent product range. This would be of benefit not just to consumers but to the providers themselves as well.

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