Check against delivery

Ladies and Gentlemen,

A press conference over the phone is not the ideal format for a lengthy statement. For this reason, I will address the following three questions as briefly as necessary: Where does BaFin stand in the coronavirus crisis? What is the situation in the financial industry? And what will happen in the future?

Like many other institutions, BaFin is fighting a difficult battle on three fronts: protecting staff, helping to slow down the spread of COVID-19 and – at the same time – making sure that it can continue to operate smoothly both in its supervisory and cross-sectoral divisions and in the divisions where key policy decisions are being taken to prevent the virus from spilling over to the financial market.

We have adapted our supervisory requirements in light of the crisis. For instance, we have allowed banks to make use of capital buffers – buffers they are required to build in good times for hard times. The main objective of the measures we have taken is to provide relief to institutions so that they can rapidly allocate their own funds and the public funds that have been made available to those who need it. They are also aimed at strengthening institutions to ensure that they are able to cushion against potential credit defaults to the best extent possible.

Is this to be perceived as blind recklessness? No. The adjustments we have made are temporary. We are also acting strictly within the scope of the law, making use of the leeway provided. In other words, we are going as far as financial regulation, accounting standards and financial stability allow us to go. You will have noticed that we have not allowed risk management and credit standards to be thrown to the winds by institutions. Allowing them to do so would significantly backfire, as hardly anyone would continue to trust banks after that.

Some will eventually say – after the fact at the latest, whenever that may be – that we should have done this or that differently. And I am not just referring to the notorious know-it-alls. Hindsight is 20/20 – and this is true for financial supervisors as well. But we are still in crisis mode – and this means making viable decisions on a factual basis that is not always perfect, all while under time pressure. And this is exactly what we are doing.

So how is the financial industry handling the situation? Banks are in a difficult and complex position: earnings have been weak for years, interest rates are low, digital competition is continuing apace– and now the coronavirus crisis has hit. But the German banking sector is still relatively resilient and continues to function. In this new crisis, we are now reaping the rewards of the regulatory reforms introduced after the 2007/2008 crisis. The banking system is more stable because it has more and better capital. It also has more liquidity – even though demand is currently high and although institutions are accepting most requests to defer payments and granting new loans as well. But this is only part of the whole truth. The situation today would be much bleaker if the Federal Government, the European Central Bank and BaFin hadn’t taken extensive measures.

You might be wondering how the coronavirus pandemic is affecting life insurers. The persistently low interest rate environment remains the biggest problem for the industry. And the crisis is placing an additional burden on the investments of these undertakings. However, the situation is not a threat to their continued existence as things stand today. Solvency ratios will drop – this was revealed in a survey we conducted at a selected number of life insurers. But this will not lead to underfunding for any of these undertakings. This is also thanks to the flexibility offered by Solvency II, which sets out transitional provisions that are extremely helpful for us – and for the industry in particular. The crisis can have a short-term impact on liquidity, too: if there is a slump in new business or if insurance policies are terminated or premium payments are deferred, the stable flow of income that insurers usually have could be disrupted. This is not yet a cause for concern for us – but we are keeping a close eye on the situation even more than before.

On the financial markets, we have seen high price losses and high outflows at funds. However, the industry seems to have made it through with little damage. By and large, investors were able to sell their shares without any problems.

But what about the future? At the moment, no one can reliably predict what will happen. Will we see a second wave of infections? When will a vaccine or medicine to fight the virus become available? To what extent will we slip into recession? What would be the consequences? There are so many questions and so many assumptions. It is only with time that we will be able to determine the actual impact of the crisis on the financial market.

Let’s go back to the fund industry. Although this industry could see further liquidity outflows, open-ended investment funds can at least find some relief thanks to an amendment introduced by German legislators before the coronavirus crisis emerged. The objective is to allow these funds to improve their liquidity management with a range of tools and to prevent funds from having to close down. As financial supervisors, we expect that asset management companies will rapidly assess whether they will make use of these new tools, and if so, which ones.

What about the banking sector? This sector is likely to be hit the hardest. Even the billion-euro rescue packages for the real economy will not be able to completely prevent some borrowers from defaulting in the coming weeks, months or years, perhaps. There aren’t any reliable figures just yet, and banks and supervisors are currently working with scenario analyses. However, this issue is already a cause for concern for us, which is why we have repeatedly urged banks not to weaken their capital basis by paying out dividends or distributing profits. This message seems to have been heard by the vast majority.

Time and time again, people ask whether a systemic crisis is looming. This seems unlikely based on the current situation. As I said earlier, the financial system has become more stable, and the government has set up extensive aid programmes for the real economy. I wouldn’t stake my life on every single bank – I wouldn’t do so even if there wasn’t a crisis. But the banking sector has what it takes to survive the crisis – even if it will be affected to some extent. One thing should be clear: the crisis is exacerbating the problems that banks already had. Credit institutions will urgently need to work on their business models even more than before once the crisis is over.

But what about the future of insurers? All in all, the industry is resilient even though it has had its challenges for some years now. We don’t know yet whether the turbulence we are currently seeing, particularly on the assets side, will continue for some time. We don’t know either how quickly assets will stabilise. Are we dealing with short-term volatility? If so, the impact of the crisis will be limited as we have the regulatory tools to deal with this. But if valuations and default risk on the markets are changing in the medium or long term, this would have a more severe impact on capital.

Last but not least, let’s take a look at BaFin itself. After the crisis, we will go back to normal supervisory activities – within a reasonable amount of time, step by step. We will not impose any sanctions on banks that are playing their part to help stabilise the economy. A great deal of caution is needed for regulatory issues, too. In the European Union, various simplified requirements from the 2019 banking package are to become applicable sooner than originally planned, while the leverage ratio buffer for global systemically important institutions is to be postponed by a year. This is a reasonable decision that had already been reached in Basel. Those who see this and the temporary measures we have taken as the gateway for a new wave of deregulation cannot see the bigger picture. Why is it that the banking sector did not trigger this crisis but actually has the power to mitigate its impact on the real economy in the long run? The regulatory reforms that were introduced following the collapse of Lehman Brothers do not account for this entirely – but they definitely play a major role nevertheless. We simply cannot compromise on financial stability ever again. The crisis might even show us how we can improve regulation even further. I already have a few ideas as to how this can be achieved – but we will discuss this once the crisis is over. After all, there are currently many other important issues to be addressed.