Check against delivery.

Ladies and Gentlemen,

It is a pleasure to be here for at least three reasons.

1. It is great to enjoy the company of such a distinguished group of experts.
2. I am a member of the clubs who owns this beautiful place.
3. The last speech I gave here was on my own silver wedding and it was graciously well received by my wife.

On the other hand: A speech between the starter and the main course can quickly lead to a conflict between the stomach and the mind. Especially if it involves a tour d’horizon of the world of financial supervision and regulation at the end of a long day of presentations. I’d therefore like to focus solely on some of the more recent und and quite fundamental trends faced with financial regulation.

But let me start with something basic und only seemingly simple: As with all the topics we are dealing with, those that I will be talking about today revolve around a central axis: financial markets must be regulated appropriately, and that requires effective supervision which enforces the regulations in place. Appropriate financial regulation makes a significant contribution towards ensuring that our financial system is and remains stable, that is to say that it can reliably fulfil its societal functions in the long term. Appropriate financial regulation allows us supervisors to protect the public good of financial stability by mitigating risks on financial markets but without patronising institutions and the general public or stifling market participants and innovation. For this reason, appropriate regulation creates the framework for economic growth and prosperity. This sounds simple bit it is not. In real life it is a constant struggle to calibrate different, sometimes conflicting political goals well – both on a regulatory as well as on supervisory level.

We therefore cannot allow regulation to become too volatile itself and to follow the rhythm of the last few decades: regulation today, deregulation tomorrow, followed by a crisis only to return to regulation all over again. If we want to ensure financial stability in the long run, we must free ourselves from this vicious cycle and instead rely on appropriate regulation and supervisory action. Even if we are dealing with relatively new phenomena.

Digitalisation, for instance. Let me give you just a few examples: companies are now able to tap into huge potential to increase efficiency thanks to digital processes – especially when they combine these processes with artificial intelligence. Pairing artificial intelligence with big data also allows for more tailored customer offerings – but this obviously also allows for new threats to consumer integrity.

Traditionally, the value creation process at the majority of banks and insurers took place under one roof.

But an increasing number of processes are now being disintegrated and outsourced to third-party companies, and this is something we are also seeing in the financial industry. This trend is likely to gain further momentum. What may be rational and logical from a business point of view raises a number of questions from a supervisory point of view. Such as the question of who is going to be held liable for mistakes or legal violations in the future. Financial regulators need to find appropriate answers for the increasingly heterogeneous world of financial services providers. But there is a red line that must not be crossed: tasks can be outsourced; responsibility, on the other hand, cannot be outsourced. It must remain where it belongs: with the financial institutions managers.

I am deliberately referring to managers and not management here. The tools that have been made available thanks to big data and artificial intelligence may encourage people to delegate not only routine tasks to algorithms but also real business decisions. This leads to very fundamental questions around the rule of law, as machines will never be able to bear responsibility as defined by law. Who would you sue if something goes wrong? The algorithm? Good luck with that!

As we move forward, we must ensure that processes, regardless of how automated they are, continue to be integrated in a proper business organisation (ordnungsgemäße Geschäftsorganisation), a certain level of transparency or least explainability and ultimately human responsibility. “I didn`tdo it, the black box did it”, should not be acceptable.

As we all know, digitalisation is also opening the doors to new criminal activities. Companies in the financial sector are popular targets: in 2018, one in five cyberattacks occurred in the financial sector.¹ Such attacks can cause great distress to individual companies – or the market as a whole, even beyond national borders. The Financial Stability Board (FSB), has categorised cybercrime as a global threat and has called for a common understanding of this issue worldwide. When it comes to BaFin, the FSB is pushing at an open door. We are closely involved in security discussions held at global level and are in contact with supervisory authorities in other countries around the world.

And of course, we are making use of all the tools at our disposal in Germany, too. BaFin and the Deutsche Bundesbank are in close communication with the Federal Office for Information Security (BSI), for instance, and we have our own experts focusing exclusively on the IT security systems of the institutions we supervise. As supervisors, we have a clear idea of the requirements that these institutions’ security systems need to meet. And in November 2017, we spelled out our expectations in our Supervisory Requirements for IT in Financial Institutions circular. Incidentally, our IT inspections have so far shown that there isn’t a single bank that has an IT security system which we are completely satisfied with. But even if all requirements were perfectly met would we ever say: we are completely done, we are completely safe? Probably not, I am afraid to say. In an interconnected world Cyber-Risk will always remain a challenge.

Another phenomenon has made its way up to the top of our priority list: sustainability. Sustainable finance has become a focal point of our work. You might be wondering why that is the case. Let’s take climate change as an example. As a financial supervisory authority, BaFin has a legal mandate to ensure the integrity, stability and proper functioning of financial markets. And climate change is posing a threat – as the research predicts – to the stability of individual companies and entire financial markets as well.

For this reason, the institutions we supervise are required to keep an eye on and appropriately manage their climate risks. We will be publishing a guidance notice on this subject towards the end of the year. In early May, we discussed this topic with representatives from industry, academia and politics at our sustainable finance conference.

The conference confirmed the impressions I’ve gained during numerous discussions with individual company representatives: for the majority of the industry, sustainability no longer is a distant, abstract issue. Many managing directors are willing to allocate capital to sustainable and economically sensible projects. But what I also hear time and again from the industry are calls for a reliable and transparent taxonomy. And I couldn’t agree more. Without a taxonomy, we are unable to objectively determine which financial products and financial services can be considered sustainable. The legislative process within the EU to provide such a taxonomy is moving ahead swiftly. But let’s be honest. Even if there is a taxonomy, it won’t be the end of differences of opinion, political debates and a lack of clarity to distinguish between the good, the bad and the ugly.

Given my role as a financial supervisor I hope you will forgive me for sending out a strong note of caution: No investment and no loan, in fact no action in financial markets, is without risk. And that goes for green investments as well. If financial regulation is used to support political goals neglecting risk, this can lead to a misallocation of capital and encourage retail investors to make high-risk investments they don’t fully understand. This is why I am strictly against privileging green investments or loans. Whether and the extent to which banks and insurers have to back investments or loans with capital can only be decided based on the type of risks they are exposed to. Otherwise we would be doing a disservice to the important issue of sustainability – and laying the foundations for the next financial crisis.

The third and last topic I would like to address is the rising trend of aging societies. We have been dealing with this topic for some time now in the area of solvency supervision for insurers. Today, I would like to address this from a consumer protection perspective. The fact that the age of the population in many countries around the world is increasingly growing means that the challenges facing the financial industry and its products are also changing.

I became particularly aware of this during a G20 symposium in Tokyo at the beginning of June. With its low birth rate and very high life expectancy, Japan is in a sense the canary in the coal mine, being the first to encounter the problems this brings to society on a broader scale. The Japanese have therefore been trying to develop solutions for a while now to support the elderly to manage their finances themselves for as long as possible.

Europe still has quite a lot of catching up to do in this regard. We, too, need to find suitable regulatory solutions here. Senior citizens must be given unobstructed access to financial services, also in times of rapid digitalisation. But this in itself is not enough. Customer advisers need training to ensure that they are able to respond to the needs of elderly people and offer them tailored solutions. And of course, products for senior citizens in particular need to be clear and understandable. For this reason, BaFin also provides information on financial topics that is aimed at elderly people. Unfortunately, they are also a popular target among criminals. This is not just a task for the police – financial supervisors have a role to play, too.

And the financial industry also needs to play its part, not least for its own sake: it would be well-advised to develop ideas to protect these customers, who are predominantly loyal to the financial institutions they use.

Ladies and Gentlemen,

digitalisation, sustainability and aging societies are three megatrends that will be the subject of not only regulatory debates but also social debates in the foreseeable future. The programme of this conference features some of the numerous technical issues and challenges involved. All of them offer plenty of food for thought. But for now, let’s move away from regulatory topics onto tonight’s culinary delights. I wish you all an enjoyable meal and a pleasant evening. Thank you!

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