Ladies and Gentlemen,

When our traditional New Year Press Conference was held at the beginning of 2020, only a few of us could have guessed that a dangerous new coronavirus would spread across the globe just a few weeks later. The coronavirus pandemic has made it impossible to meet in this way – which is why I am reaching out to you with a written statement this time. On behalf of myself and my colleagues on BaFin's Executive Board, I would like to wish you and your families all the best for the new year.

Last year was marked by events that will also have an impact on 2021. I would like to address three of these: the coronavirus pandemic and its implications for the financial sector, the impact of the Wirecard case and Brexit.

Some occasionally say that the coronavirus crisis will lead to a systemic banking crisis. But as things currently stand, the German banking sector is in fact relatively robust. This is primarily thanks to the regulatory reforms that were introduced after the 2007/2008 financial crisis. Together with the Deutsche Bundesbank, we have simulated what could happen if a deep recession were to arise despite all of the stimulus programmes in place. We found that even if GDP were to drop by 10.8%, Germany’s less significant institutions would still have an average Common Equity Tier 1 capital ratio of 11.2%. This is more than what is legally required. For this reason, a systemic crisis currently appears to be rather unlikely.

However, the following five points should be noted, too. Firstly, the situation today would be bleaker if the Federal Government, the European Central Bank and BaFin hadn’t taken extensive measures to mitigate the impact of the pandemic. Secondly, there will be an increasing number of credit defaults, especially when the government’s assistance programmes will come to end. It is still uncertain when this will happen exactly and how significant the holes in banks’ balance sheets will be as a result of these credit defaults. This will probably come in several waves.

Thirdly, the sector may be robust, but that does not mean that all banks are. Some of the institutions which were already weak before the pandemic might not survive the crisis. Fourthly, it is not possible to reliably forecast how the economy will perform during the pandemic. This is why we are making predictions in the form of scenarios. These are becoming increasingly precise – but they are still scenarios. If the current situation had to be described in just one word, it would be “uncertainty”. This is why it is all the more important for financial institutions to prepare for as many eventualities as possible. This can be done by taking a very restrained approach to the distribution of profits, for example.

Last but not least, there are well-known problems in the German banking landscape. The unsurprising news is that these problems still exist and they have become more and not less acute. Net interest income, which is still the top source of income for banks in Germany, remains low while digital competitors are becoming increasingly fierce and innovative. A great deal of inventiveness is needed – and so is determination, as the clock is ticking. There are institutions that are both inventive and determined despite the difficult conditions they are facing. But there are other institutions that seem to be waiting for the overall situation to improve and for interest rates to rise again. That will not work.

What about insurers? I would like to start by taking a look at those particularly affected by the pandemic. This includes products such as credit and surety insurance, event cancellation insurance and business closure insurance. In the case of business closure insurance policies, it is clear that some claims must be paid out and that some must not. But there is a heated debate about the sets of terms and conditions that are less clear between these two sides of the spectrum. Court rulings will offer some clarification on how these terms and conditions are to be interpreted.

At the moment, we do not see any liquidity problems. But in times of social distancing and given the risk of infection, new business may suffer the consequences, especially in the segments directly affected by the COVID-19 pandemic. Travel insurance, for instance, is barely needed at the moment. There is also a downward trend in demand for life insurance. However, a wave of insurance policy cancellations is not discernible at present.

The COVID-19 pandemic has dampened hopes that the current phase of extremely low interest rates will quickly come to an end. This is putting life insurers under pressure, and this is even more true for Pensionskassen (occupational pension schemes). Whether sponsors and shareholders would be able to provide assistance to their schemes if needed depends on their own particular situation.

On financial markets, the atmosphere was very tense shortly after the outbreak of the pandemic. This led to high price losses and high outflows at some funds. At the time, there was even talk that a new liquidity crisis à la 2007/2008 was looming. The support measures taken by governments, central banks and supervisory authorities fortunately warded off this threat and helped significantly calm the situation on the liquidity side as early as in April. Based on similar experiences, we are advising asset managers to protect their liquidity even more rigorously using the new tools that have been at their disposal since the end of March 2020 through the German Investment Code (Kapitalanlagegesetzbuch). As far as implementation in practice is concerned, we are still engaged in a close dialogue with the industry.

BaFin rapidly took a number of measures following the outbreak of the pandemic in order to offer supervised entities relief during the crisis and to prevent any undesirable procyclical effects. We are able to do this because the entities are relatively resilient thanks to the regulations in place and because the legal framework allows us to be flexible in this way in the event of a crisis. This logically means that when the crisis has been overcome, we will ramp up regulation again to return to the status quo ante. As we have said many times before, we will do this in a prudent manner, taking small steps at a time. It is not yet possible to say when we will do this. This is because the action we take also depends on how things evolve – which brings me back to the issue of uncertainty. What is already clear, however, is that our temporary crisis measures will not, in any case, lead to deregulation or “light touch” supervision. It should also be reiterated that the fact that banks are now more stable than they were prior to the 2007/2008 financial crisis is largely the result of the regulatory lessons that we have learnt from the crisis.

The events surrounding the payment service provider Wirecard dealt a huge blow to Germany as a financial centre. Trust was lost and it must now be regained. BaFin, too, is playing its part to rebuild this trust.

How can something like this be prevented from happening again – assuming that criminal activity and large-scale fraud can be prevented in the first place? To be able to answer this question, we need the determination to get to the bottom of things – and we are certainly willing to do this.

In close cooperation with the Federal Ministry of Finance, we will undertake concrete initiatives – in the area of financial reporting enforcement, for instance. As a governmental supervisory authority, BaFin’s powers in this area are to be strengthened extensively. In future, BaFin is to be granted powers to intervene faster, and competencies are to be clearly defined. This is set out in the draft Act on Strengthening Financial Market Integrity (Gesetz zur Stärkung der Finanzmarktintegrität). This is something I welcome very much. In the first few months of the new year, we will also be working hard on a range of other measures which will make our supervisory activities even more effective overall.

Theresa May’s famous phrase “Brexit means Brexit” became a reality at the start of the year. The transitional period – during which the United Kingdom was still part of the Customs Union and the Single Market despite its exit from the European Union (EU) – has now come to an end. The former EU Member State is now a third country in the full sense of the term.

And as much as I regret that Brexit has happened, I am relieved that a hard Brexit was avoided. Things are still very complex in the area of financial services, however. These services now fall under EU supervisory law on the one hand and UK supervisory law on the other – unless there are other regulations in place that set out other terms, e.g. based on equivalence decisions taken by the European Commission.

Financial services providers based in the United Kingdom lost their European passporting rights on 1 January. They no longer have direct access to the entire European Economic Area (EEA), which means that they are no longer authorised to provide cross-border financial services there. One of the alternatives is to establish a subsidiary in one of the EEA countries in order to make use of the European passport. The companies that intended to continue providing services without interruption had to do this by 31 December. Approximately 60 financial entities made the move to Germany, either by opening a branch here before the end of the year or by expanding their business here to a significant extent.

To enable them to make a smooth start and prevent chaos on the markets, we provided information, at a very early stage, about the applicable legal requirements to the companies that were willing to make the move to Germany. We have held many discussions, organised workshops and answered countless highly complex questions. And it was worth making this effort. The chaos that had been feared did not erupt – at least to date – and there was no negative impact on financial stability. But even three weeks after New Year’s Day, there are still questions about implementation that need to be clarified.

I believe it is important that we remain in close contact with our colleagues in London, even after Brexit. Brexit means Brexit, but we still want to make the best out of it. The United Kingdom is no longer part of the European Union, but it is and remains part of Europe. We should now refocus our attention on our common interests.

I do hope that such a written statement for the new year will remain an exception. I look forward to seeing you again face-to-face, in the hope that we will succeed in tackling the coronavirus pandemic this year.

Felix Hufeld
President of BaFin