Check against delivery!

Dear Ladies and Gentlemen,

I would like to bid you all a warm welcome to our New Year press reception and wish you, Ladies and Gentlemen, prosperity and above all good health in the year 2018. It is with great pleasure that I have perused your views and thoughts on the old and new year. Thanks to your great work, I have no need to give you a detailed review of the past year and an outlook on the one ahead, and may confine myself to a few regulatory questions. First of all, though, I would like to say a word or two on our own behalf:

In all beginnings dwells a magic force – it is with these words of Hermann Hesse that my predecessor Jochen Sanio described the first months of BaFin some 15 years ago. We are witnessing a new beginning in these days once again. As of 1 January, a further function was added to BaFin’s scope of duties: it is now also the national resolution authority, a function it has taken over from the former Federal Agency for Financial Market Stabilisation (FMSA). Dr Pötzsch, Chief Executive Director of the new Resolution Directorate, is looking forward to meeting with you this evening.

It is sensible and logical for Mr Pötzsch and his colleagues from the FMSA to now be part of BaFin. Though independent of each other, the resolution and supervision functions now have the advantage of acting under the same roof. And that simply makes their work more efficient.

If a bank becomes distressed we can now restructure it more easily or – if necessary and if the conditions for this are met – resolve it and in this way prevent damage to the general public. In such a case every minute counts, and the specialists from supervision, recovery and resolution have to act as a perfectly coordinated team. That can be brought about more elegantly within a single institution – especially since as a national player we rarely make solo appearances but tend to perform in a highly complex European orchestra.

It is a remarkable coincidence that we should become the national resolution authority just ahead of the 10-year anniversary of Lehman. The economic upheaval triggered by that bank’s collapse, but also the bank rescues during the crisis, revealed a regulatory gap which, at least institutionally, has been largely closed: the resolution regime that has been created in Germany and Europe can help prevent cases like Lehman from happening again. It moreover enhances awareness of a principle which is self-evident but one which has been forgotten: those who reap the benefits also have to make good for the losses.

As important as it is for us now to be able to restructure or resolve banks where required, it is just as important to have in place a viable supervisory regime to set limits for banks during their lifetime. Basel III is such a regime.

In December we concluded the opus magnum of global banking regulation. Yes, it was a long-fought struggle. But does that come as such a surprise when you want to harmonise 28 countries with their diverging structures and interests and at the same time seek to create a comprehensive framework with a high degree of detail? The fact that a consensus was ultimately reached is something you may see as proof that the global regulatory community is able to act. A reliable global regulatory framework for banks benefits global financial stability – and is consistent with the justified desire of the financial industry for regulatory predictability and certainty as well as a level playing field. Basel III is a win for everyone. It will not be an easy task for anyone.

The heart of the latest Basel III reform package was to limit the excessive and unintended fluctuations in the model-based measurement of risk-weighted assets and thus of capital requirements.

Over the past years there have been repeated attempts to discredit internal models altogether and to do away with this risk-sensitive approach. For me one thing was always clear: I would not have agreed to the Basel III compromise if this red line had been crossed. But we succeeded in fending off these attempts. The standard approach is now significantly more risk-sensitive, and internal models may continue to be used, even though the risk sensitivity of this approach has been limited.

Were we looking for an output floor of 72.5 per cent? No! Were we looking for any output floor at all? No! The Basel compromise is probably right on the limit of what was acceptable, which meant that we were just able to agree to it. I suppose that, when it comes to international compromises, you just have to learn how to deal with extremely challenging situations of this kind. That the compromise was possible at all is owing to the fact that we were able to present and negotiate our positions jointly with strong European allies. Just one great example of what is possible when European alliances work. By now catching some outlier banks through regulatory means we are, by the way, not violating the original aims pursued with the reform of Basel III. We are meeting them! That also rings true for some German banks.

What is decisive now is for all member states of the Basel Committee to transpose the rules in their national legislation – without cherry-picking and watering-down of standards. Now, the Basel recommendations have always been intended for the “big fish” among the banks that also move in foreign waters. Most members of the Basel Committee have also embraced this in the past. As is known, the European Union (EU) decided to apply the Basel standards to all banks. We are therefore currently discussing whether and how we can tailor the rules more proportionately to smaller banks within the EU without compromising on stability.

One of our key aims is to continue forging ahead with the project of “daring more proportionality“ shoulder-to-shoulder with the Federal Ministry of Finance and the Bundesbank. By now, some good proposals have been put on the European negotiating table, such as creating exemptions for development banks as they do not pursue any competitive or profit aims but fulfil a public development mandate. For those institutions we do not need uniform European rules but instead adequate national standards. The proposal to introduce a simplified net stable funding ratio for smaller banks is also appealing.

That would enable us to reduce the operating expenses of the smaller institutions whilst still having an effective supervisory tool at our disposal. Based on the proposals we now have to achieve a good overall outcome in the upcoming European negotiations – which, as always, is no easy matter.

If we want to dare more proportionality in banking regulation, that is not, by the way, a hidden deregulation proposal. The aim is to achieve greater differentiation of European banking regulation based on the risks of institutions. The rules for the big institutions are, rightly, particularly demanding, whereas for the smaller ones the regulatory maxim in some areas of the EU regime may be to “keep it simple”, especially when it comes to administrative issues.

A further regulatory opus magnum is also giving rise to debate: the European reform package consisting of MiFID II and MiFIR which, together with the PRIIPs Regulation, is once again fundamentally changing the behavioural rules in the EU. Greater transparency, better investor protection – five words that sum up what has been spelled out in hundreds of pages in MiFID II alone. There is no question that MiFID II is also in the regulatory super-heavyweight class – and thus generally speaking in good company.

You know my views: even in behavioural regulation, we have to safeguard the principles of reasonableness and proportionality. If the burden of the new rules should prove to be excessively high or the undesired collateral damage too great, that would not be in anyone’s interest – quite to the contrary. But before we carelessly slap the label of “regulatory overkill” on MiFID II, we would do well to keep two things in mind:
Firstly: let us not forget that in the still young behavioural regulation there was still an urgent need to act. The new rules land on an industry which – putting it mildly – not only covered itself with glory when it comes to the treatment of its customers and how it designs and markets its products. The reforms are therefore right in terms of their premise. For example, MiFID II looks at the entire value added chain, from the product provider to the customer, and in this regard strengthens the weakest link: the customer. That is just as much necessary as it is right.

Secondly: Are we able to judge already now whether MiFID II is too much of a good thing? No! We are currently dealing with the usual teething troubles. As with all rules, the principle here is: only once we have applied MiFID II & Co. for a while can we determine what effects the rules will actually have – in and of themselves and taken together. It would not be surprising if we also had to make the odd re-tweak to MiFID II here or there. It is not without good reason that a review of the most important new rules of the Directive is planned – albeit only in about two years. So let’s just see how things develop.

Over the next two years we will already be able to distinguish more clearly who is merely engaging in the ritualised lamentations that are always heard after major frameworks have been introduced and who – based on hard facts – is drawing attention to undesired side effects that we actually do have to think about. Anyone who has fact-based arguments will always find BaFin willing to listen.

We are aware that implementing two frameworks such as MiFID II and PRIIPs is no small feat. We therefore continue to pursue our principle of “supervision with a sense of proportion” that has already stood us in good stead when introducing other mammoth projects.

If there are some who make a serious effort to implement the rules within the prescribed time limit but do not manage on time, for example because of IT problems, we will not bite their head off. That said, supervision with a sense of proportion does not mean being given a carte blanche not to take MiFID so seriously in general and to be slack with regard to one rule or the other.

This, by the way, is also true for insurance undertakings and brokers. They now have to implement the requirements of the European Insurance Distribution Directive (IDD). But while this directive is likely to enter into force later than planned, for us in Germany the date of 23 February 2018 is getting closer and closer. From that date onwards, the implementing act has to be applied, and important changes in favour of consumers have to be in place. For example, the product approval process with its target markets, additional requirements for online distribution and the contentious issue of designing the commission scheme.

Ladies and Gentlemen, it may sometimes be legal to behave in accordance with legislation currently in force, but this is generally held to be not legitimate. The Panama Papers may be a case in point here: we have investigated whether German banks were also implicated in shell companies and other tax avoidance schemes arranged through the Panamanian law firm Mossack Fonseca. Above all, we wanted to find out whether they breached money laundering rules in this context.

So far, it appears that none of the eleven institutions which were involved in such dealings had substantially breached money laundering rules. We do view these dealings critically, especially given how the money laundering officers can control group-wide implementation of money laundering standards in offshore territories. Formally, however, the banks largely complied with the money laundering regulations in force. Due to a lack of mandate, we could not verify whether taxes were evaded.

The key issue is that, as a general rule, the models and structures we encountered in the investigations are permitted under German legislation, and that not everyone availing themselves of them is a tax evader. What, from an ethical perspective, is to be made of the fact that banks may allow themselves to be used to avoid taxes – even though in a legal way – is an entirely different matter.

Here we are approaching the limits of what regulators can and may achieve in a state governed by the rule of law. To paraphrase the insight of former constitutional judge Ernst-Wolfgang Böckenförde we could say that, as of a certain point, the liberal state governed by the rule of law, also in financial regulatory matters, lives by prerequisites which it cannot guarantee itself.

Ladies and Gentlemen, two years ago Dr Grund and his colleagues experienced what Ms Roegele and her colleagues are experiencing these days: the introduction of a regulatory super-heavyweight. Solvency II has been in force since the beginning of 2016. Insurers have arrived in the new risk-sensitive world and are finding their way around there reasonably well. That is good news considering how complex the new regime is. However, for 2018 we expect that the undertakings will wade even deeper into the new regime. In some places we still see a need for improvement – as with the ORSA , as well as the solvency and financial condition reports¹ that are still lacking in depth.

As expected, the companies are also still struggling a little with the principle of proportionality that is explicitly enshrined in the Directive. Checklists are a thing of the past.

With Solvency II, we have abandoned the tradition of rules-based supervision and instead practise a forward-looking and principles-based supervision. For a start, it is the responsibility of the undertakings to measure their risks themselves and – also with a view to the future – to adequately mitigate such risks. We look at the result and evaluate it individually. That is challenging for both sides, but we grow into this task together.

The exciting regulatory issues of this year also include the question of what will happen to the Zinszusatzreserve (i.e. the additional provision to the premium reserve introduced in response to the lower interest rate environment). We ought to find a good answer to that as quickly as possible. As at the end of 2017, the additional interest reserve will have likely grown to roughly 60 billion euros – a considerable safety cushion for customers. However, it is neither required nor advisable to continue building up this – in principle very sensible – reserve at the same pace as before. The interrelation between hedging existing guarantee obligations and anticipating future returns on capital must be readjusted in view of the persistently low level of interest rates – also and in particular in the interest of policyholders of more recent contract generations.

Another hot topic this year is the Solvency II review. That we should take another critical look at the framework at such an early stage is something which is set out in the Directive itself and which also makes sense.

We have gained first experience, and the framework conditions have changed. Nobody wants to make radical changes to the market-value-based system, but we can and want to adapt and improve it. Just take the example of the standard formula. It is too complex, and we strongly advocate simplifying it. What’s more, the standard formula no longer reflects reality. Unlike the internal models it does not take account of negative interest rates. That in turn is something that can result in undertakings underestimating their interest rate risk.

Ladies and Gentlemen, the other thing driving the financial industry, supervisors and regulators is of course the advance of digitalisation. Almost on a daily basis it gives rise to new service providers, products, trends – and risks. The companies have to succeed in protecting themselves and their customers from such risks. And they have to ask themselves with what strategies they can be successful in the digitalised world. Is it sufficient, to put it somewhat boldly, to adapt only processes, or do the business models have to undergo a radical transformation?

We, too, as supervisors and regulators, have to come to grips with digital transformation in all its facets. We have to classify it in legal and economic terms and see whether and how we must act to safeguard financial stability and protect consumers – whether on the level of regulatory practice or on the legislative level.

Does that make our role one of a “brakeman”, or a preserver of outmoded structures? No, certainly not. We have already shown, as we will also continue to do, that we take a transparent and constructive approach to fundamental change and innovation – watchword: fintechs or fit & proper requirements for IT directors – but always from the standpoint of what we are: supervisors and regulators. And it also must continue to be clear that no matter what political issue, however relevant, is being considered – such as infrastructure investment, green or sustainable finance, digitalisation, to name just some examples – this by no means justifies in the financial world a regulatory bonus to be granted independent of fact-based analysis, assessment of risk profiles, probabilities of default, risk-return ratios or similar.

Anyone doing that is sowing the seeds of new financial crises: establishing home ownership for weak-income households in the USA at the beginning of the 2000s was a political aim that was as legitimate as it was widely applauded. It was only when this met with an inadequate and in some respects silent financial regulatory regime that the situation turned into a disaster, as is known.

In the many-voiced chorus of political debates it is therefore the duty of financial regulators and supervisors to clearly draw attention to old and new risks, whether to end-customers or to financial stability. How successful we will be at making ourselves heard remains to be seen, but will also depend on how well we succeed in finding answers to new, in some cases far-reaching questions. How can we supervise business models that are decentralised – starting with peer-to-peer models and not stopping at blockchain? How do we protect the users and customers of such business models?

And what will become of traditional providers of the financial market if players, whose main sources of revenues are outside the financial industry, offer financial products with the primary motivation of generating data without being dependent on the revenues from such products? Who will bear the risks? Are we still supervising the right companies at all? It is these and many other questions that we are currently working on right now at BaFin and in the regulatory bodies. But I am very excited about what you have say about this, Ladies and Gentlemen.

I am sure that you have valuable ideas for us. After all, there’s a reason why we invited you here. Thank you very much for your attention. My colleagues on the Executive Board and I look forward to the discussions with you.

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