Check against delivery.

My colleagues on the Executive Board and I would like to welcome you to BaFin’s Annual Press Conference and to thank you for accepting our invitation. It is a great pleasure to be able to welcome some of you here today in person.

I would like to begin today by talking about the risks facing the German financial system – and its stability. Ensuring the stability of Germany’s financial system has been one of BaFin’s core duties for almost exactly twenty years now.

Let’s be clear: the German financial system is stable. But the war in Ukraine, a source of untold human suffering, is also a reminder that financial stability is not something that can be taken for granted. As things currently stand, it can be expected that the German financial system will be able to weather the direct impacts of the war and of the sanctions imposed on Russia and Belarus. The direct ties to these countries and to Ukraine are limited.

However, the second- and third-round effects, which are difficult to predict, could be problematic. For example, we are currently seeing how the war is curbing economic growth around the world, how it is disrupting trade relations, driving up the prices of gas, oil and other raw materials, and how it is further exacerbating the problem of supply chain shortages, which has been affecting the German economy since the beginning of the COVID-19 pandemic.

We are also seeing a continued rise in inflation as a result, which makes an increase in interest rates, including in the eurozone, ever more likely. And we know that there could be a military escalation, or a political escalation in relation to trade and energy supply, at any time. This would inevitably result in market turbulence. Major events have unforeseeable consequences.

But we, as BaFin, do not only consider the financial consequences. We are also mindful of the fates of those seeking safety in Germany. It was important to us to provide fast and unbureaucratic help for these people, which we did by simplifying the process of opening a basic payment account.

As financial supervisors, we must align our actions with the risk environment. We must try to determine, in advance, where and under what circumstances the financial system is especially vulnerable. Our focus is directed at these primary risks. And because we want our work to be transparent, we will be publishing our risk assessment every year from now on.

Besides the impacts of the war in Ukraine, BaFin’s primary focus is currently directed towards six short-term risks, and two future risks. Recent events – the COVID-19 pandemic and most recently the war in Ukraine – have made it clear that new triggers of risk can arise at any time.

I would like to provide a brief overview of the current risk map. This is without any claim to completeness, and without detailing all of the many interdependencies. And, of course, not every risk will materialise!

In spite of increases in market interest rates in recent months, the persistently low interest rate environment continues to be one of the greatest challenges facing the German financial industry. Above all life insurers and Pensionskassen are under particular strain. Some of these institutions are subject to particularly close supervision: we are currently closely monitoring around 20 life insurers and a little more than 30 Pensionskassen, all of which are burdened by guarantees made on older policies.

If interest rates were to be raised as a result of increasing inflation, this would lead to higher ongoing investment income in new investments and reinvestments in the medium term. But in the short term, high inflation will present a challenge for all insurance undertakings: claims expenditures and costs are likely to rise, and at least a temporary fall in new business in life insurance is to be expected as the spending power of households diminishes.

The persistently low interest rates have also taken their toll on German banks, Sparkassen and Bausparkassen, since net interest income has traditionally made up a significant portion of their income.

On the other hand there´s the growing interest rate risk as a result of inflation: a sharp and abrupt interest rate increase could cause difficulties for banks. Their short-term refinancing would suddenly get more expensive, while interest income would rise more slowly due to long durations. Which German banks would find this particularly challenging? That is something we are looking into at the moment. Together with the Deutsche Bundesbank, we have been subjecting the institutions under our direct supervision to a stress test, running through various interest rate scenarios.

Risks have also built up in the real estate markets. The demand for residential mortgages has further increased – primarily as a result of low interest rates. What could happen? If interest rates rise, the demand for residential real estate will fall. As a result, residential real estate prices might also fall – thus reducing the value of collateral. The Deutsche Bundesbank estimates that residential property in Germany is overvalued by around 20 to 35%.

The war may also prompt an economic downturn – and with it a rise in unemployment. The credit default risk would increase – possibly also resulting in an increased need for write-downs.

The high prices on the commercial real estate market could also fall. The COVID-19 pandemic has intensified the trend away from in-store shopping to online shopping, and some sectors have been severely affected by the restrictions imposed in connection with the pandemic. Now companies are being weakened further by the war in Ukraine and by the sanctions imposed.

A few months ago, in order to make the German banking system more resilient – particularly in respect of risks on the residential property market – we issued two macroprudential measures based on proposals set forth by the Financial Stability Committee, of which BaFin is a member.

As expected, these measures were not met with unanimous applause. But we are certain of their worth. They bring added stability, and the worry that these measures would lead straight to a credit crunch will hardly materialise. Financing conditions are much more dependent on long-term market interest rates and on central bank monetary policy.

Is there a need for further action at the macro- or rather micro-prudential level? That needs further analysis. For example, we are continuously monitoring the credit standards of banks and insurers. We are also reviewing the valuation of collateral at selected banks. And we are using scenario analyses to examine the effects of real estate price decreases on the risk-bearing capacity of insurers. Depending on the results, we can intervene with capital requirements or other measures.

The current situation on the international capital markets also carries the risk of significant corrections. The low interest rates and high liquidity on the markets have allowed prices on the stock and bond markets to rise for years. While there have been certain corrections, particularly in the technology sector and the bond market, the risk to the downside clearly remains.

What can we do here? We will use scenario analyses to examine the impact of bond downgrades on the risk-bearing capacity of insurance companies. In addition, we will make sure that, where necessary, asset managers make use of the liquidity instruments provided for by law in order to protect investor interests.

There is also the problem of hidden leverage: companies’ leverage has increased in recent years – particularly through complex capital market products. Credit risks are therefore located in less transparent parts of the financial system that are subject to less or even no regulation.

The fact that banks’ direct involvement in such actvities has been relatively low up to now is partially thanks to re-regulation following the 2007/2008 financial crisis. But there are links between the regulated banking sector and the NBFI¹ sector. We need only think of Archegos, or the speculation on nickel prices on the London Metal Exchange.

Here risks were taken that backfired, or nearly did, on regulated market players. At the interface to the world of shadow banking, we are taking rigorous action to monitor concentration risks.

One risk that has been troubling us for some time relates to the health of corporate loan portfolios. Parts of the German economy are still suffering the effects of the COVID-19 pandemic. While the anticipated wave of insolvencies has been avoided thanks to unprecedented levels of state aid, the situation remains challenging: alongside the war in Ukraine, the effects of China’s zero-COVID policy are also being felt. We are therefore continuing to very closely monitor the credit risks of banks and Sparkassen. Now, however, we are looking at energy-intensive sectors and industries that are highly dependent on commodities.

There is a very large and imminent risk that companies in the financial sector could become the victims of cyber attacks or that they could experience internal IT security incidents. In extreme cases, such incidents could damage the stability of the financial system. Are we prepared for a really severe security incident? The honest answer is that we don’t know. The war has also increased the likelihood of cyber attacks against the German financial sector.

We are working closely with companies, the Federal Office for Information Security (Bundesamt für Sicherheit in der Informationstechnik), and other relevant institutions in order to keep the threat of cyber attacks under control. For example, since the beginning of the war, we have been analysing information provided by Germany’s National Cyber Defence Centre (Nationales Cyber-Abwehrzentrum) on a daily basis and informing the financial industry about potential patterns of attack. And we are conducting special IT-focused inspections.

I think we are on the right path with our supervisory requirements for IT and our risk-based approach to supervision. But cyber risks are set to increase rather than decrease. I am impressed by the professionalism of the various authorities involved and of the major financial companies. But we have not yet really been put to the test.

The sixth primary risk we are closely following is that of money laundering. When a financial company’s preventive measures are too lax, the financial consequences and reputational damage can be immense, and may even jeopardise the company’s continued existence. It is our duty to ensure that the companies under our supervision are adequately equipped to combat money laundering.

We are aware that we have a great deal of responsibility in this area, which is why we are currently recruiting additional staff in the area of money laundering prevention. We want to direct more resources towards operational money laundering supervision and pay particularly close attention to those companies that, in our assessment, are the most problematic. Where necessary, we will intervene.

Ladies and gentlemen, as I mentioned earlier, we have identified two future risks in addition to the six near-term risks. We refer to these as future risks not because we intend to deal with them later on, but because they are risks that will develop over a longer period of time. This includes the risks of digitalisation. As supervisors, we can see the opportunities offered by digitalisation, and we view this positively. However, we also know that the fragmentation of value chains, which is something we have been witnessing for a while now, is changing companies’ risk profiles.

Important processes are being outsourced, and these are sometimes concentrated in a small number of service providers. This gives rise to dependencies and creates new risks. At the same time, we now also have the supervisory tools to better assess and control these risks. We will have the opportunity to discuss this at BaFinTech, which we will be hosting together with the Deutsche Bundesbank on 18 and 19 May.

Another issue we will be focussing on for many years to come is sustainability. The financial industry will have a major role to play here. New opportunities for generating income are emerging, as are new risks. What is our role as supervisors? It is not within our statutory mandate to pursue environmental policy objectives. That is a political issue.

It is our duty to ensure that companies have their sustainability risks under control.

We are interested in financial risks, such as stranded assets on a bank’s balance sheet or in an insurer’s investment portfolio. We also advocate transparency and monitor the quality of sustainability-related disclosures. Furthermore, in the interests of consumer protection, we want to prevent misleading marketing practices.

In view of the dynamic situation with regard to regulation, energy supply and geopolitics, we have decided to postpone our planned guidelines on sustainable investment funds. The current environment is not stable enough for permanent regulation.

Of course, asset management companies can still launch and market sustainable investment funds. We will apply certain principles in our supervisory practice that were drafted in our consultation paper. For example, sustainable investments must either make up at least 75% of investments by sustainable funds, or the investment fund must follow a sustainable investment strategy or track a sustainable index with at least 75% of its assets. Through these stricter authorisation practices, we will protect fund investors from greenwashing.

Ladies and gentlemen, BaFin was established a little over 20 years ago on 1 May 2002 as Germany’s integrated financial supervisory authority. I am told that some of you have been following BaFin ever since. Now is not the right time to celebrate this anniversary with a detailed retrospective. At the moment we first need to show what we are made of. The expectations towards BaFin are high – and with good reason. Over the past 20 years, BaFin hasn’t always lived up to these expectations. In 2021, we therefore undertook to be more forward-looking, resolute, risk-based and modern in the way we work.

We have reformed BaFin. We have clear objectives and priorities, and we are more transparent. Does that mean we can prevent all damage to the financial system?

No, supervision cannot guarantee 100% protection and nor should that be our goal. But we are doing everything in our power to ensure that the risks in the financial system are well managed – so that the German financial system remains stable.

Thank you for your attention. I look forward to your questions.

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