Check against delivery

Welcome, Ladies and Gentlemen. A whole new decade now lies ahead of us. Let’s make it a good one! On behalf of myself and my colleagues in BaFin's Executive Board, I wish you all the best for the coming years. Amidst the many greetings and good wishes, I would like to take this opportunity to briefly consider three questions: what are BaFin’s resolutions for 2020 and what does the financial industry have to do with this? How is the work of BaFin related to Ludwig van Beethoven, whose 250th birthday we, and particularly the city of Bonn, are celebrating this year? And, more than ten years after the outbreak of the global financial crisis, which of the cornerstones of sound regulation and supervision do we consider so important that we are prepared to argue the case for them at the international level?

What do we intend to achieve in 2020? We want to be even better supervisors! Our intentions for the coming year, however, are not as fleeting as the resolutions one typically makes at this time of the year. And we give them a different name: “supervisory priorities”. The priorities we have set ourselves for the new year, on the basis of our legal mandate, are once again in large part driven by developments in the companies and markets that we supervise. You will not be surprised to hear, therefore, that we have chosen as our supervisory priorities for 2020, alongside the numerous other topics we address, the advancement of digitalisation, IT and cyber risks, the fight against financial crime, the sustainability of business models and sustainable finance. Details of our planned priorities can be found in the publication “Supervisory priorities 2020”¹, which we will be presenting this evening. It is important to us that the public and supervised institutions know what we do and what our priorities are. This time next year we can discuss what became of our new year’s resolutions.

I would like to pick up on one priority in particular: the sustainability of business models. With persistently low interest rates, a weakening economy and new digital competition, the business models of German banks are increasingly coming under pressure. That is why we will take a very close look at the way banks are dealing with low profitability – and what they intend to do to stay in business over the long term. The clock is ticking. We are approaching the eleventh hour. As is well known, we supervise institutions that are struggling particularly closely. But this does not mean that we take hold of the reins ourselves, or, come what may, that we take measures to extend the life of ailing institutions. That is not the point of supervision. It is therefore not unlikely that some institutions will exit the market over the coming years. This is never pleasant, for many reasons. But, in a market economy, it also cannot be regarded as a catastrophe.

How do things look for life insurers and Pensionskassen (occupational pension schemes)? Unsurprisingly, the answer is: in some cases, not good. Life insurers have been taking action to counter this for some time now – and some have indeed been successful. Nonetheless, it will become ever more difficult for the industry to generate the promised interest rates on the capital market. The Pensionskassen are having a particularly hard time. Their portfolios are almost exclusively made up of life-long pensions – in part with high guarantees. The higher the risks facing individual insurers and Pensionskassen, the greater the intensity of our supervision. Institutions that are really feeling the pinch of low interest rates are all the more obliged to demonstrate to us precisely how they intend to improve their situation and – above all – how they intend to ensure they can fulfil their obligations towards their customers in future.

Ladies and Gentlemen, as a young cellist I especially enjoyed playing the fourth movement of Beethoven’s ninth symphony. Back then, the composer’s interpretation of Schiller’s “Ode to Joy” made a lasting impression on me – and today, more than ever, I am still deeply moved by the piece. The motif “Freude schöner Götterfunken” begins very softly. But, with each repetition, as more instruments join in, the melody is strengthened until, eventually, Beethoven’s delivers his tribute to human kinship with such clout that the European Union simply had to make Ode to Joy its anthem. One indispensable component helping to shape something bigger, and at the same time an irreplaceable player in one’s own right – this is also a fitting description of the role played by BaFin in the orchestra of European supervision.

Last summer, in its judgement of the banking union, Germany’s Federal Constitutional Court did not use quite the same wording, but the message is the same. The court gave its blessing to the competencies of the SSM and the SRM² , i.e. supervision and resolution, as part of the European banking union. I very much welcome this. However, the Senate also emphasised that the national authorities continue to have their own responsibilities and that they act on the basis of their own national sovereignty and not merely through delegated powers. This is also something I welcome. This calibration of union and national law shows how we can achieve a beneficial balance between European and national supervision. This provides an interesting lesson, and a potential point of reference for the further development of union law in other areas.

The review of the three European Supervisory Authorities also focussed, in essence, on the appropriate balance between European and national supervision. The result is in the main consistent with our position. Contrary to initial plans, it was possible to resist the temptation to transform all three ESAs³ into supervisory-regulatory hybrids, which, by the way, would have resulted in considerable bureaucratic expense. Instead – long live the subsidiarity principle! – the ESAs were strengthened in those areas where they are better placed to act than the national authorities, for example in fostering supervisory convergence and assessing third-country equivalence. This is the right way to go.

A transfer of anti-money laundering supervision to the EBA⁴, however, is something I would not agree with. If we are to effectively combat money laundering, increasingly moving supervision in this area to the European level will be unavoidable. That much is clear. However, excepting a few special cases, the ESAs are not in fact supervisory authorities, even though their names suggest otherwise. The ESAs are above all regulatory harmonisers. And to give the same body both the authority to issue standards and the responsibility to enforce them would run contrary to the primacy of the separation of powers. The European Central Bank is also being considered. However, the ECB only has a mandate for the 19 euro countries. And we must not forget that the fight against money laundering is not an issue that only concerns banks.

In my view, a new separate European authority that operates as part of a close network with the national authorities would be the best solution to effectively combat money laundering in the financial sector within the EU, and possibly also further afield. In order to achieve this, we also need a European regime that is harmonised in terms of substantive law. Here I would prefer a regulation, which would be directly applicable, rather than a directive, which would give countries flexibility in their implementation – or which they might not implement at all. Just imagine an orchestra with every musician playing from a different score.

Ladies and Gentlemen, with Brexit still on the horizon, we have for some time now been living through a process that poses a fundamental challenge to European unity. The United Kingdom will leave the European Union, something I still very much regret. In London, the House of Commons has already ratified the withdrawal agreement with the EU. If the House of Lords and the European Parliament now also give their approval, then the transitional provisions, which were negotiated parallel to the agreement, will enter into force. The Tax Act relating to Brexit would thus become obsolete. As would the transitional measures based on this act, which we had at the ready for the event of a no-deal Brexit. This must be clear to the affected companies. I hope, therefore, that they have listened to our advice to ensure in good time that they are ready for Brexit – and to use the brief transitional period to make the necessary preparations. It is not yet clear whether this deadline will once again be extended.

After a decade marked by crisis management and re-regulation, we have now reached a point at which it is necessary to defend regulatory and supervisory successes I had believed to be beyond question. One example here is the principle of risk-sensitivity, which is closely related to proportionality. The idea that regulation and supervision should be based on risks has proven its worth. It is not without reason that we choose our supervisory priorities on the basis of the risk situation and that it is our ambition to further improve this kind of high-precision supervision. Nonetheless, it seems the principle of risk-sensitivity is, time and again, coming under threat. Sometimes this is a result of political efforts to bring about change, the keyword here being “sustainable finance”, which is also one of our supervisory priorities for the new year. As important as sustainability may be for us all in light of climate change alone, we must not forget: anyone who stirs up excessive enthusiasm for investment, and in doing so blinds investors to the risks, or privileges green investments and loans across the board without regard for their risks, by relaxing capital requirements, for instance, anyone who decides to follow that path, is choosing a path that will lead straight to the next crisis – and that would damage sustainability. Green does not automatically mean low risk!

Shortly before Christmas, we published on our website (www.bafin.de) a Guidance Notice on Dealing with Sustainability Risks, and have thus given ourselves a pioneering role when it comes to the financial supervision of sustainable investments. Of course, the question of how to deal with sustainability risks requires international answers. BaFin is no solo artist: as Germany’s supervisor we cannot decide alone what can be regarded as sustainable and what not. We can leave that to the EU for example with its taxonomy. And that was not our ambition: the answers to many regulatory questions are not yet clear. We as supervisors wanted to learn how to deal with these questions now. And it was our aim that the companies under our supervision learn how to assess and appropriately manage their sustainability risks now. And that they are able even now to make use of the opportunities this development brings.

It is in fact because so many questions remain unanswered that we have adopted a very broad definition of the term “sustainability” and published our guidance notice in a form that is not legally binding. Soon the European Commission will request similar guidance from the EBA. Let’s look at it this way: we are leading by example. Which is why we also published an English version of our guidance notice yesterday – as a kind of prompt for the EBA, SSM and others, but also for global standard-setters. I did mention that BaFin aims to take on an active role in helping to shape the broader supervisory context.

I also worry about the principle of risk-based supervision in the implementation of the final part of Basel III. I can remember very clearly that, around two years ago, after countless negotiations in the GHOS, the steering committee of the Basel Committee on Banking Supervision, we made a promise: the compromise regarding the reform package finalising Basel III should be implemented globally – and in full. The regulatory discussions in the coming twelve months will revolve around the key question of how this compromise is to be applied to concrete European legislation. I am sure you will also remember that, back then, we too supported the output floor, which is not a risk-sensitive tool. This output floor, however, is only acceptable as one of many components of supervision: as one element that serves to reduce the unwanted variability that comes with the use of internal models. It must not, however, serve as a starting point for a departure from risk-based supervision and a return to the pre-crisis methods of Basel I. It is our aim to help shape the course of regulatory action and to argue the case for the principle of risk-based supervision. That would be another good resolution for 2020.

And now, I hope your resolutions won’t stand in the way of the rest of this evening. After all, today is the 16th of January: at this point, we are usually a little less strict with ourselves.

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