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Ladies and Gentlemen,

Welcome to BaFin’s New Year press conference. I wish you all the best for 2019, and I am sure that we will continue to have interaction with each other over the coming year in one way or another. You know almost as well as I do the issues that we are working on; sometimes even better, it seems. So instead of a tour de force, I will present to you a brief tour d´horizon of a few selected key topics.

In the English-speaking world, the song “Auld Lang Syne” is traditionally sung¹ at the turn of the year. In the Scots language, this means something along the lines of “days gone by”. The chorus in the German version of the song translates into English as: “Say goodbye, brothers, a return is uncertain.”² And saying goodbye is what we will sadly be doing on the night of 29 to 30 March, when the United Kingdom leaves the European Union at exactly 11pm GMT.

As you know, the House of Commons plans to vote on the Brexit deal negotiated by Prime Minister Theresa May at 8pm CET tonight, i.e. in around half an hour. If the MPs vote in favour of the deal, the path would be clear for an orderly Brexit. In this case, transitional provisions would come into force after Brexit and the United Kingdom would, from a regulatory point of view, not become a third country overnight.

I imagine that you are as eager as I am to find out the result of the vote. If you receive the breaking news on your mobile phone during my speech we can discuss it later on.

Brexit affects us, as supervisors, on three levels. On the first level, the operational and communication level, it was important right from the start to engage in direct, open dialogue with institutions. Over hundreds of one-on-one meetings and workshops, we have – shoulder to shoulder with the ECB – explained the supervisory requirements to banks that are considering moving to Germany and what they can expect from a regulatory point of view. At no point did we take on the role of marketing agent for Germany.

We have repeatedly stressed that we will insist the applicable standards are not diluted, let alone ignored. And that licences have to be worthy of their name. As we have said many times before, we will not accept letterbox companies.

Brexit presents us with challenges that cannot be overcome simply by looking in a manual. For a process such a Brexit, there simply is no manual. Being communicative, pragmatic and flexible without handing out supervisory benefits – the trick was, and is, to find this fine line.

More than 45 financial institutions are in the process of establishing or significantly strengthening their presence in Germany. I think that we, in all modesty, may see this as proof of the trust companies have in BaFin’s work.

The second level involves a number of issues that we are no longer able to address solely on a bilateral basis or with conventional supervisory tools. This includes, for example, clearing and contract continuity. In terms of clearing, we have received positive signals from Brussels.

Just before Christmas, the European Commission issued an Implementing Decision³ that will recognise the UK as equivalent under EMIR⁴ for a transitional period in the case of a no-deal Brexit. Specifically, this means that the requirements applicable in the UK will be considered equivalent to the EU regulations and that central counterparties (CCPs) will be permitted, with authorisation from the European Securities and Markets Authority (ESMA), to operate in the European Union to the same extent as before for a limited time period of one year. The London Clearing House, which is of considerable importance for clearing in continental Europe, reacted swiftly to this decision and intends to continue to offer its full range of services after Brexit.

With regard to contract continuity, we are developing a fallback solution at national level to allow BaFin, in the case of a hard Brexit, to grant authorisations for a limited time period until the end of 2020 to the extent required to keep the financial markets functioning and to avoid disadvantages for domestic policyholders.

The Federal Cabinet issued a draft bill to this effect in mid December, the Brexit-Steuerbegleitgesetz, or the “Tax Act relating to Brexit”.

The Bundestag is expected to decide on this bill in February. I am confident that we will be able to give companies the chance, at least for a transitional period, to wind down existing contracts in an orderly manner or to transfer them into new structures that are legally future-proof. It goes without saying that we require all affected institutions to put in a great deal of effort themselves in order to continue their business activities as smoothly as possible.

The third level is one on which we at BaFin have been and still are observers, even advisors at times, but never players. This is the level of politics where the future relationship between the UK and the EU 27 is shaped.

One of the first key questions, however, is: will there be a withdrawal agreement, and therefore a transitional arrangement?

Ladies and gentlemen, perhaps we will know more in the course of the evening. Then we will have plenty to discuss.

The work to strengthen the EU banking union, meanwhile, is still moving forward. In December, the EU finance ministers made a good job of the reform of the banking sector.

The plan is to upgrade the Single Resolution Fund (SRF) as a backstop to ensure that the taxpayer does not have to bear the burden of banks that become insolvent in the future. To this end, the banks themselves would be required to provide the fund with more than 60 billion euros by 2024.

In an emergency, if even that is not enough then the difference has to be made up using the European Stability Mechanism (ESM). In principle it is the correct approach to work out crisis scenarios before the crisis even occurs. Ten years ago we would have been glad of such a backstop. But it is clear that the backstop amounts to a deeper mutualisation of banking risks in the eurozone. An even better approach than sharing risks, however, is to reduce them. And so I welcome the ministers’ decision to strengthen the resilience of European financial institutions and to improve the supervision of cross-border banking groups.

A mandatory leverage ratio is planned, as envisaged in the Basel III package. This means that regulatory capital should equate to at least three percent of the total exposure. A moderate figure, in my opinion.

We often hear people demanding a ratio of twenty percent or more⁵, particularly from academia.

But it is not just in medicine that “the more the better” is the wrong maxim. If you keep increasing the dose of medication, it usually brings no additional benefits, while the side effects get even worse. The same holds true for the leverage ratio: applied in moderation, it can act as an outer crash barrier and be a useful complement to the existing risk-sensitive requirements and a functioning risk management system. But if raised too high, one size fits all limits can actually increase the risks. If used as the only or even the primary tool for capital management, undifferentiated leverage ratios are counterproductive.

I can fully understand a certain degree of fatigue in view of the now highly complex banking regulations. This fatigue was evident from the difficult debates regarding the finalisation of Basel III. But allow me to caution against a knee-jerk yearning for simplicity, like that of Basel I, purported to be less prone to disruption.

The principle of risk sensitivity was introduced by Basel II for good reason, and it is vital that we defend it. The non-risk-sensitive world of Basel I was in no way better in terms of financial stability.

We should be pleased about the decisions that have been made on the issue of proportionality. For the first time, “small and non-complex institutions” have been given a clear definition in regulation. In the years to come we will have a reliable foundation on which institutions can be granted specific relief in the future. This is something that BaFin, the Deutsche Bundesbank and the Federal Ministry of Finance have made the case for time and again over the past years.

And just as we protested, and always will, against deregulation, it is also true that for small and medium-sized institutions, too, the level of supervisory requirements needs to be based on the respective risk. The Single Rulebook for all European banks will only be accepted in the long run if the requirements it contains are formulated such that they are proportionate and appropriate.

The Council and the European Parliament still have to give their approval. But I am optimistic that these last steps will be completed soon.

Digitalisation will continue to be on the lips of everyone in the financial world in 2019. One aspect that is of particular concern to us, as supervisors, is how to deal with companies that are not traditional banks and insurers but that are increasingly expanding into finance and, in some cases, carrying out financial activities that in themselves do not currently require authorisation. Even today value chains that in the past were under one roof, both physically and in terms of legal responsibility, are increasingly being split up. This is a trend that will only accelerate, with more players appearing on the scene. These players include bigtech companies like Google, Amazon etc., which are not subject to BaFin’s direct supervision. Owing to their financial strength and their expertise, these companies would also be in a position to have a considerable influence on the financial markets. Should BaFin supervise these bigtech companies? Certainly not the companies as a whole.

The more obvious solution, in my view, is to turn our attention to specific behaviour patterns of such companies and their consequences for market developments.

This is what we already do in securities supervision – including with regard to non-financial companies, whose shares, for example, are admitted to trading on the regulated market but which as a whole are not, of course, subject to BaFin’s supervision. These companies are nevertheless subject to ad hoc and other disclosure requirements, for example, such as in their capacity as issuers. Comparable conduct requirements might be suitable tools to protect, in cooperation with competition watchdogs and data protection specialists, the integrity of the financial markets in the new, digital world, including with an eye to bigtech companies.

Ladies and Gentlemen,

One topic that you reported on many a time over the past year was that of suspected cases of money laundering at domestic and foreign banks.

For me, money laundering prevention is an urgent priority, and I would like it to be evident from the way that all institutions conduct business that it is a very high priority for them, too. True to the phrase in the Bible: “You will know them by what they do.” Well, I am aware that whenever suspected cases of money laundering are discussed, someone will ask what BaFin is doing about it.

Let me be very clear on this: investigating and prosecuting such cases is not the job of BaFin. This lies in the hands of the law enforcement agencies, which is where the FIU⁶ sends the respective suspicious transaction reports, not to BaFin. The law enforcement agencies also have access to sources of information that BaFin does not, and are able to use police resources and investigation methods.

We play a different role: we have to consistently ensure that institutions have appropriate systems for money laundering prevention in place and that these at least comply with the legal requirements.

And if we find that this is not the case at a bank or a savings bank, we intervene and require that the procedures be changed. But that is not enough. Better coordination is needed in Europe: on this point I emphatically welcome the steps that been taken so far.

But both the banking supervisory level and the level of the FIUs and the law enforcement agencies have to be taken into account here. All possibilities for managing risk need to be applied, combined with the latest technologies, to achieve the best prevention possible. That occasional misuse cannot be ruled out even with the best prevention methods, and that substantial amounts of money flow outside of the financial system, does not, of course, justify failing to put the greatest amount of effort possible into preventing money laundering.

The low interest rate environment has continued to cause difficulties for German banks and insurers in the past year.

For Pensionskassen, which exclusively pay out life-long pensions, the low level of interest rates has been a particular strain. In principle, we expect Pensionskassen to take all necessary and proportionate measures to meet their obligations in the long term.

The sponsors and shareholders of a number of Pensionskassen have already made additional payments, or at least promised to do so.

Despite this, we still see a need for action in the case of a few Pensionskassen. Otherwise there is a danger that they will not be able to pay out all benefits in full if the low interest rate environment continues long-term. If we, as supervisors, deem it necessary, we are able to prohibit Pensionskassen from writing new business, which is something that we have done in the past, as you are probably aware. Conversely, we should also not forget that the vast majority of Pensionskassen will survive the period of low interest rates either using their own resources or with the help of a sponsor.

Unlike in the USA, Europe has not yet had an interest rate reversal as such, but supervisors must be prepared for such a scenario – not least because the majority of German banks and savings banks are still almost 70% dependent on net interest income. In their quest for higher returns, many institutions have attempted to use longer maturities to compensate for the low interest rates, for example by extending fixed rate periods when issuing building loans.

However, the capital add-ons imposed by the German and the European supervisors should have an effect on this interest rate risk. But one thing that we must not forget to consider is the danger that interest rate risk could increase the economic risk and the real estate risk. The interdependence between these three areas of risk is what forms macroprudential risk.

That is the end of my brief tour d´horizon of some of the topics that will continue to be the focus of our work in 2019. And now, to round off, I would like to go back to “Auld Lang Syne”. The Scottish original ends with, “And we’ll tak’ a right gude willie-waught.” In other words: “And we'll take a right good-will draught.” So that is what I invite you to join me for now.

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