Check against delivery

Ladies and Gentlemen,

A lot has been said and written about the last financial crisis which, indeed, exposed deficiencies and undesirable developments that had gradually built up over the previous decades: greed, abusive conduct, skewed assessments and deliberate cover-ups. But it also became clear that there were fundamental gaps and failures in financial regulation and supervisors who often could or would only practice light-touch supervision.

If we review the years since the crisis, we can see that there have indeed been many important changes for the better. We have enhanced resilience in the European banking sector by significantly improving the quantity and quality of the equity required in banks’ balance sheets. We also developed tougher requirements for risk management and governance structures.

However, the crisis also revealed another very fundamental problem: back then, there was no credible resolution regime that could have limited the upheavals in the financial system.

The European lawmakers subsequently created new European law in the shape of the European Bank Recovery and Resolution Directive, better known as the BRRD, based on the important preparatory work of the Financial Stability Board (FSB). And since 2016, your authority, Dr König, the Single Resolution Board, has assumed full responsibility for resolving and restructuring systemically important European institutions. Of course, the important work of creating and refining a credible resolution regime in Europe is far from complete. I am sure you will talk about that in more detail. But the establishment of means with which to resolve ailing banks certainly represents one of the key lessons learned from the crisis.

Apparently there are people now who think that the reforms have been completed and things are good as they are. I regard ideas like this as dangerous. Nobody knows when new developments or constellations will grow into another real crisis – or the direction where these threats could come from. That’s why regulation may never be considered to be completed: it’s always a work in progress. Moreover, we should not fall back into the cycle that dominated previous decades: regulation today, deregulation tomorrow, crisis the day after tomorrow and back to re-regulation the day after that.

If we want to safeguard financial stability for the long term, we must break free from this hog cycle and ensure that there are appropriate rules and equally appropriate supervisory practices instead.

Furthermore, we should never underestimate the importance of actually fully implementing regulation that has already been agreed upon, such as the Basel III finalisation package. Little more than two years ago, we looked very closely at this in the final rounds in the GHOS, the oversight body of the Basel Committee on Banking Supervision, and committed to transposing the compromise solution for regulating globally operating banks into law in all the countries as quickly as possible. To properly reflect the specific situation in Europe that the implementation affects smaller banks that are not internationally active, I would like to add: this also demands proportionality! The application of Basel III standards in concrete EU law will certainly keep us busy over the next twelve months and I very much hope that the activities of the EU 27 and the UK will stay aligned as closely as possible in the post-Brexit period.

Conduct regulation

Proportionality is also needed for another regulatory hot topic: conduct regulation, which is playing an increasingly important role both in the community of regulators and in the public debates. Several European requirements that came into force recently take it into account. Examples include the guidelines on complaints handling issued by the European Supervisory Authorities, and the MiFID II directive.

At their heart, these moves are right: consumers deserve particular attention because they are at a disadvantage in comparison to providers and professional investors. They don’t have the same knowledge and they don’t have teams of experts to help them make sense of the small print and evaluate claims about returns. However, it’s also possible that we are running the risk of creating a regulatory density and complexity that could call into question the broad-based, legally certain availability of financial products. Conduct regulation is therefore also an area which requires a process of careful deliberation that demands a degree of sensitivity from regulators and policymakers.

Digitalisation

Sensitivity and vision are needed to do justice to some of the new challenges that will put a particularly heavy strain on us, in terms of both supervision and regulation, in the next few years. A lot of them have to do with digital transformation, of course. Innovative digital processes and the penetration of the industry by artificial intelligence are opening up an opportunity for the companies to leverage tremendous efficiency potential – and to create more tailored offerings for their clients. As supervisors, this trend poses a challenge to us in several areas. We must protect the interests of consumers and we have to safeguard the stability of the undertakings and of the financial system as a whole. This means subjecting some processes to particular scrutiny.

A fundamental question is: who will we actually be supervising in the future? People, machines, algorithms or all of the above? Insurers, for example, are already able in many cases to manage processes such as risk evaluation for new business or claims handling, especially for standardised cases, but also increasingly for more complex ones, without any human intervention. It’s clear that it will be increasingly possible in future to delegate entire processes and key decisions from people to machines.

But what happens when something goes wrong, resulting for instance in an error? Can a management board member then say “It wasn’t us, it was the algorithm”? I say: No! Ultimate responsibility must always remain with management, meaning the people.

Cybersecurity

It’s well known that digitalisation is creating tremendous opportunities, but also gateways for criminals. And companies in the financial sector are popular targets: one in five cyber attacks in 2018 affected the financial sector.¹ Attacks like this can destabilise individual companies – or the entire market, even across national borders. The Financial Stability Board, in which BaFin also collaborates, classes cybercrime as a global threat and is calling for a common global understanding of the problem.

On a national level, we maintain a regular, intensive dialog with the relevant authorities and have also created our own group that deals exclusively with IT security at the undertakings we supervise.

In order to establish principles and minimum standards for the management of IT-risk in financial institutions, we have spelled out the corresponding requirements in our “Supervisory Requirements for IT in Financial Institutions”, or BAIT, as well as VAIT and KAIT, which are the counterparts for insurance undertakings and asset management companies. Together with the European Central Bank (ECB), we also regularly test the banks’ defence mechanisms in order to enhance their resilience as well as their ability to manage crises.

Sustainable finance

Sustainability is another topic that is becoming increasingly important for financial supervisors. That’s because banks and insurers may be impacted by climate-related risks in many ways. To provide the undertakings we supervise with guidance on how to handle “sustainability risks”, we published a supervisory guidance notice at the end of last year. But what is sustainable, and what’s not? We have to clarify this question. We need a classification system for this that is valid not only in Germany, but will also be accepted across Europe, and potentially globally.
The European Commission is therefore driving forward its work on a taxonomy at full speed, based on important preparatory work done in the context of the FSB at a global level.

Additionally, we should certainly not ignore any risks that may arise in connection with even the greenest of companies, investments or loans. Green loans or investments are by no means per se less risky than other investments or loans – and certainly can’t be considered risk-free. That is why I’m strictly opposed to giving any special privileges to green investments if they are not justified with regard to the underlying risks, such as by relaxing capital requirements. The question of whether and how much capital financial institutions have to hold for credits or investments may only hinge on the risks in the balance sheet, and not on whether we think the way the funds are used is ecologically sound or not. If we don’t do this, there is not only a risk of misallocation of capital, but also of a stealthy run-up to the next financial crisis. And that would be the opposite of acting sustainably.

Ladies and Gentlemen,

Evidently the Ancient Greeks already understood how important the concept of sustainability is. The following quotation is attributed to Herodotus, one of their chroniclers. For me it contains the perfect definition of sustainability: “Whatever you do, do it wisely, and consider the end.²” Which is something that also should apply to all forms of regulation.

So what should we do in times of uncertainty to prevent the next crisis? In addition to considering the end we should keep the following points in mind:

• Firstly, if you don’t know exactly what is going to happen, increase the resilience of the system altogether – that is precisely what regulators are doing.
• Secondly, vigorously apply close and strict supervision– this relates to our own task as supervisors.
• Thirdly, stay on guard, listen very carefully to early warning indicators and don’t pay attention to people telling you that everything is fine and that you should take a break.
• And finally, don’t listen to industry calls for deregulation - particularly, if they try to make it sound more agreeable and more moderate by giving it a name other than deregulation.

Of course, we will never be able to prevent financial crises completely, but if we stick to those simple measures, we have a fair chance of safely navigating even through rough seas – and of preventing or at least mitigating damage to financial stability and to millions of citizens.

Many thanks for your attention. I’m looking forward to the discussion.

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