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Felix Hufeld, President

I would like to talk to you about success, ladies and gentlemen: the success of the regulatory reforms introduced following the 2007/2008 financial crisis - and the success of financial supervision. In doing so, I will address three questions. Firstly: how successful were the reforms? Secondly: do we need to make efforts to ensure this regulatory success is maintained, and if so, how? And, thirdly: what constitutes success in financial supervision today?

Regarding the first question: the financial market reforms of the post-crisis period closed dangerous regulatory gaps. We supervisors were given some very useful tools. What is more, we are now in a position to resolve banks in an orderly manner. The success of the reforms is measurable - above all by the current state of the financial sector. Even the best regulation cannot eliminate the possibility of a financial crisis. However, the financial sector is now on the whole more stable and more resilient than it was before the outbreak of the sub-prime crisis. For one thing, this is because banks now hold more and better quality capital and have built up liquidity buffers. On top of that, with tailored resolution plans, among other things, we are prepared to resolve banks should this become necessary. We did not gain this added security and ability to act for nothing, but the macroeconomic costs are reasonable. The key goals of the reforms have therefore been achieved. For the time being. Regulatory success is, after all, transient.

Which means, and now I am coming to question 2, that we must make efforts to ensure that this regulatory success is maintained. And we can do this by investing a great deal of energy into implementing the reforms. For example, by implementing the final part of the Basel III framework in the form of concrete European legislation so as to allow the agreed changes to take effect by the agreed deadline in 2022. And by keeping our eyes open as we make use of new rules. If successful regulation is our goal, we must consider the impact of this regulation in practice and we must be prepared to make adjustments.

The closer we get to the reviews of Solvency II and MiFID II, the louder the calls of the lobbyists. I do not want to dismiss all of the industry’s concerns as unjustified. We too see potential for simplification in Solvency II. But we must consider the issue from all sides. Reverting to the laissez-faire attitude of pre-crisis regulation would be fatal. We must never stop striving for appropriate and proportionate regulation, regulation that is also technologically neutral, and that balances rules- and principles-based approaches. It is precisely the factors technological neutrality and the principles-based approach that determine how flexibly and quickly supervisors and supervised institutions are able to react to risks. The alternative would require a new rule for every new uncertainty, with such rules losing their relevance perhaps even before entering into force, or at the very latest with the next development. Time and again, we hear calls for more rules-based regulation, including from the industry. But the more time I spend dealing with the issue of regulation, the greater my conviction that we need a balanced combination of rules- and principles-based approaches.

If we want to keep hold of our regulatory success, we need to make one thing clear: even the unprecedented regulatory effort following the outbreak of the crisis was unable to completely eliminate old risks or pre-empt all future challenges. Constant vigilance is therefore paramount: otherwise, we will once again be overwhelmed by risks, just as we were during the sub-prime crisis.

I will name just a few well-known critical points: interest rates remain very low and continue to put a noticeable strain on insurers and banks. Global indebtedness has risen to record levels. Bank balance sheets in several European countries are still harbouring high levels of non-performing loans. The economic situation in Germany may be comparatively strong, but even here it is beginning to slow down. And financial market participants are highly interconnected; contamination risks are therefore considerable.

Topics such as digitalisation are presenting new regulatory challenges. Even now, value chains that were traditionally joined under one roof are becoming ever more diffuse, with activities and responsibilities being spread across multiple stakeholders. This trend is set to gather pace. Regulators would do well to find answers to the new questions that will arise in relation to outsourcing and the division of labour. We must also ask ourselves how much power we want to concede to machines and algorithms. From my perspective it is clear that the ultimate responsibility must always fall to humans, specifically to an institution’s management.

Sustainability, too, is a relatively new topic in the field of financial regulation. There is a growing expectation that the financial sector will finance the transition to a more sustainable economy. My inner environmentalist says this is a role to which it would be well-suited, given the industry’s task of serving the real economy. The economist in me, however, is wary of capital misallocation, whilst as a consumer protector, I worry about the intermingling of individual investment motives. As a financial supervisor, I have the following warning: anyone who affords privileged treatment to investments or loans without taking the risks into consideration is laying the foundations for the next crisis – and is doing a disservice to sustainability, a matter that is of existential importance for us all. One thing is certain: the road toward sustainable finance will be long and challenging.

Now, with regard to question 3: what constitutes success in financial supervision today? A supervisory authority is successful if it fulfils its legal mandate and ensures a stable and functioning financial market – which includes consumer protection. But I do not want to limit myself to such a brief answer, as simple as it is true. Although, there is much more to the term “legal mandate” than it first seems.

The success of a financial supervisor is not measured by whether it is able to keep every single bank operating. We apply rules, and institutions are free to operate within these rules. It should be possible for a bank to be forced out of the market if its business model is no longer viable. It is for good reason that we now have a resolution regime with which such exits can be organised in a smooth and orderly manner – provided the market does not take care of things itself through acquisitions.

The success of financial supervision is also not measured by supervisors taking on the role of a prosecuting authority. This is not the Wild West, but a state governed by the rule of law. We cannot simply pin a Sheriff's badge to our lapel and ride off to arrest anyone we are suspicious of – such as those potentially involved in money laundering. It is the public prosecuting authorities that act in the case of suspected money laundering. Only they can use police means and methods of investigation. And if they conduct an investigation, that does not mean that we have been sleeping on the job. Quite the reverse, in fact: around 90 percent of suspicious transaction reports come from the financial sector¹ – and these are made on the basis of prevention systems that have been created specifically to produce such reports and that fall under the scope of our supervision. That is our responsibility. If we identify shortcomings, which sometimes is the case, then we act. And when we receive concrete evidence indicating that a criminal offence has been committed, we inform the public prosecutor's offices

Furthermore, for the event that financial market participants operate dangerously close to the legal boundaries under tax law, or even overstep these boundaries, the relevant competencies are clearly defined. Only the tax authorities and the prosecuting authorities are in a position to assess whether such actions constitute tax offences or whether the market participant in question is “merely” making use of legal loopholes. If we believe there are reliable indications that tax offences have been committed, we inform the prosecuting authorities. We have been doing this, and have been permitted to do this, since a legal amendment was passed in 2015. Above all, of course, we make use of our own tools as financial supervisors, to the extent that this is legally possible and appropriate.

The few examples I have given show that, even today, for a financial supervisory authority to be successful, it must operate confidently in its own field: administrative law. And it must work in close cooperation with other public sector institutions. It is therefore important to us that this cooperation be further strengthened. Setting ourselves up as an authority with an all-encompassing field of competence for the sake of supposed success, or accepting such a role, would be questionable with regard to the principles of the rule of law. Success is making our contribution towards creating a stable and reliable financial market that can benefit us all, and doing so in concert with other public authorities as part of a well-orchestrated symphony.

Dr Thorsten Pötzsch, Chief Executive Director of Resolution Directorate

Ladies and Gentlemen,

Various money laundering scandals in Europe have prompted politicians to take regulatory action. And that is a good thing! We need to further improve cooperation in Europe, especially in the fight against money laundering. One group in particular has benefited from the lack of consistent regulation in Europe up to now: law-breakers. While they have proved time and again how successfully they are working together internationally, the competences of the police, courts and supervisors in the fight against money laundering have, in most cases, ended at national borders. Some scandals can be prevented or at least the damage they cause can be limited if authorities are able to better cooperate across national borders.

The Council of the European Union’s action plan of 4 December 2018 and the European Commission’s roadmap of 31 August 2018 are definitely steps in the right direction: first, a comprehensive evaluation of the status quo; second, the creation of real supervisory convergence; and third, the analysis of the issues that European legislators still need to address in order to supplement both substantive law and concrete supervisory powers.

I also welcome the strengthening of the European Banking Authority (EBA), which will in future be able to demand that investigations be carried out at national level and, where necessary, take supervisory action itself. However, the EBA must not become a “supervisor of supervisors”. And before we start talking about European anti-money laundering supervision with a real operational mandate and intervention rights, the necessary framework for this must be created. The most important prerequisite would be to completely harmonise the relevant laws – at least for credit institutions. European directives would then have to be converted into an actual European anti-money laundering regulation that would be directly applicable. But we should still wait for the analysis results first.

We also need to closely cooperate at European level in order to better monitor, in particular, correspondent bank relations that play a fundamental role for the real economy in international payment transactions. But I think this is an issue that should be dealt with meticulously rather than with a broad brush. Failing to examine this carefully would potentially drive risky cash flows towards alternative channels that are subject to less regulation and monitoring. Neither regulators nor supervisors can tolerate a laissez-faire attitude towards correspondent banking. The institutions will have to adjust.

Another key step to enhance cooperation in the fight against money laundering within the EU is the agreement reached in January to exchange information between national anti-money laundering supervisors and the European Central Bank.

Banks and supervisors alike must learn the right lessons from previous scandals. And this is exactly what BaFin is doing. We regularly exchange information not only with other European authorities but also with the Financial Intelligence Unit and large institutions in the private sector. And this year, we are extensively examining how international banks are implementing anti-money laundering legal requirements for correspondent banking.

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

Ladies and Gentlemen,

Even a year and a half after entering into force, the Markets in Financial Instruments Directive II (MiFID II) is still the subject of many – and also heated – discussions. In the vast majority of institutions, processes have been integrated with considerably less disturbance than was to be anticipated given the scope of the directive. This was shown by several market surveys in which we specifically examined the issues that particularly concern investors. The focus was on the new conduct of business rules, such as taping, or the recording of telephone conversations, ex-ante cost information and the statement on suitability. Allow me to dwell in more detail on some of the findings relating to the main conduct of business rules:

We welcome the fact that the process of taping has been implemented by banks largely without errors when providing investment advice. And on the whole, we are satisfied with how the institutions have implemented taping requirements.

We expect the ex-ante cost information provisions to bring a number of benefits for investor protection. And the institutions have made progress in certain areas as well – particularly in relation to the quality of forecasts. However, there are still considerable differences in the cost information provided to clients, making it impossible to really compare costs.

This is partly because the provisions are still new. And in some areas, we are dealing with directly applicable EU law that ESMA⁴ and the national supervisory authorities must interpret. Some EU Member States still have different views on a number of detailed issues concerning the implementation of MiFID II. But I see an urgent need for further adjustments at EU level and working on compromises. We need common standards to avoid distortions of competition. This is why BaFin is involved in debates at EU level, and among the achievements made, we have managed to come up with a pragmatic solution for products with no product costs, in particular shares, which will make it easier to provide information on costs in the context of trading over the phone

As far as the statement on suitability is concerned, too many institutions have not yet implemented all of the requirements. We cannot accept this. After all, BaFin clarified early on how the new provisions are to be interpreted and implemented. And although this may be different in other cases, there is no disputing how the rules are to be understood. ESMA has recently confirmed our interpretation of the statement on suitability, making it binding EU-wide. We will be monitoring whether the institutions are meeting their obligations in this respect. But to reiterate: the glass is more than half full, and I am certain that the market will manage to do even better here as well. There is no lack of competence in the institutions concerned.

Raimund Röseler, Chief Executive Director of Banking Supervision

Ladies and Gentlemen,

A harsher wind has been blowing through the banking sector in recent years. This can be attributed to digitalisation, new competitors and to interest rates, which have been very low for some time now. There is a lot of liquidity in the market, and at the same time limited demand for credit. In such an environment, many banks may be tempted to aggressively market loans and to offer them at very favourable conditions. We are therefore concerned that institutions may relax their requirements regarding the creditworthiness of their borrowers or the quality of collateral, and at the same time neglect to make sufficient risk provisions.

In Germany, we can look back on the past decade as a period of economic success during which the ratio of non-performing loans has fallen considerably. It is therefore not surprising that institutions do not view watered-down credit standards or gaps in their risk provisioning as their most urgent problems. But times can change. Both the Federal Government and five leading German economic research institutions have already significantly reduced their growth forecasts for the current year.

We have reviewed selected statistics and analysed how comprehensively institutions are prepared for a downturn or even a recession. We noticed that the volumes of credit defaults has more than halved since 2014 thanks to the good economic situation, and that there have been far fewer problems with repayments. At the same time, the volume of new risk provisions recognised has also nearly halved.

We consider the combination of a potential erosion of credit standards and a reduction in risk provisioning to pose such a danger that we are taking a closer look at the issue. In April, together with the Bundesbank, we launched a survey on credit standards of around 100 less significant institutions operating in Germany. The results are not yet available. Of course, we will inform you as soon as we have validated results.

The low interest rates and the competitive pressure have also led us to establish a new division to deal exclusively with the institutions that are under particularly close supervision. This division started its work at the beginning of the year. In it we have pooled much of our knowledge regarding financial crises. This does not mean we have set up an intensive care unit because we think German banks are struggling. Rather, we want to take precautions while the economic situation is still good so that we can be prepared in the event of a real downturn.

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

Ladies and Gentlemen,

Bloated, number-obsessed, bureaucratic – these are all labels that people like to attach to Solvency II, the European supervisory regime for insurers. I do not think much of that type of blanket criticism. Solvency II has proven its worth as a system based on market-consistent valuation and has improved risk management. But given that it is to be reviewed next year, we should use the opportunity to improve it. There are three points that are particularly important to me: the standard formula, long-term business and reporting. Beyond this, we need to ask ourselves where we can be more proportional in our actions.

A key figure under Solvency II is the solvency capital requirement (SCR). It refers to the capital that insurers need to hold in order to absorb a level of loss that occurs only once every 200 years. The SCR is calculated either using the standard formula or on the basis of an internal model. An important difference between the two is that only internal models can take negative interest rates into consideration. It is time the standard formula followed suit.

The Solvency II review also needs to adequately reflect the needs of long-term business, by which I mean life insurance. In life insurance, the dates of the payouts for obligations insurance undertakings have to policyholders can sometimes lie a long time in the future. To put it simply: life insurers are able to ride out fluctuations in investments. We are therefore advocating appropriate capital requirements for undertakings with highly illiquid obligations. In addition, there is a need for a crisis tool to act as a temporary cushion against the consequences in the event of an economic crisis.

The reporting system has been met with resistance from the industry. It comprises quarterly reporting of data and three narrative reports, one of which is intended specifically for the public. During our analyses, we frequently stumble across gaps, repetitions and vague or general statements. We should learn from this, and adapt the predefined structure such that the undertakings provide us with precisely the information we are looking for.

Another crucial issue is to improve proportionality. Proportionality means that regulation and supervision need to be aligned with the nature, scale and complexity of undertakings’ risks. This is an aspect that needs to be strengthened. It is not yet clear whether this will lead to new thresholds for the application of Solvency II. As regards the large amount of quantitative data to be reported, our goal is for it to be made even easier for low-risk insurers to obtain an exemption from the interim reporting obligations.

Ladies and gentlemen, by 30 June 2020 we need to reach an agreement with our European partners at EIOPA, the European Insurance and Occupational Pensions Authority, on the technical advice to provide to the European Commission for the Solvency II review.⁵ I am confident that we will make decisive progress on the standard formula, long-term business and proportionality.

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

Ladies and Gentlemen,

The world is becoming increasingly digital. For BaFin, this means that we are assisting the institutions under our supervision as they develop their structures and processes to meet today’s digital standards. And BaFin is itself in the midst of a digital transformation. It is no coincidence that the internal digitalisation of our authority is one of the cornerstones of the digitalisation strategy we published in February.

How far have we got? A large portion of our supervisory and supporting processes have already been digitalised. This process will continue and will gather pace. At the beginning of the year, we advertised for the position of Chief Digital Officer. As soon as the selection process has been concluded, the CDO will focus our digitalisation activities in one place and will support us in further improving our processes with regard to digitalisation. Together with their colleagues from the Digital Office, the CDO will act as our digitalisation navigator.

One task of the CDO will be to create a shared understanding within BaFin of what digitalisation means. BaFin can only fully succeed in digitalising its processes if all of our colleagues are equipped with the necessary digital skills, which also includes basic knowledge in mathematics, informatics, science and technology. This is because we want to understand key digital mechanisms and their impact on our supervisory activities. Our human resources development initiative “Fit for the Future” is already placing greater emphasis on the skills that will be in particular demand in the years to come, such as strong analytical abilities, which will be indispensable for the supervisors of the future.

Also with regard to sustainability, we have made it our goal to make our working processes largely paperless. To this end, we intend to manage all our internal processes electronically using a modern document management system and workflow support software. The keywords here are electronic filing and electronic invoice management. We do not simply aim to save thousands of pieces of paper, we also want to significantly accelerate and improve our processes. Communication with supervised institutions must also be made more digital. It is already possible to make use of various notification procedures to submit information to BaFin electronically. We intend to further develop these possibilities. This is not only because companies and the public can expect this of us. We also hope that digitally networking different data will make a key contribution to our supervisory work. In future, this work will be characterised by vast possibilities for analysis – and by supervisors with the skills to use these possibilities to conduct analyses that are qualitatively much more in-depth.

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