Check against delivery.

Ladies and Gentlemen,

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.

Since March, the global financial system has been going through a kind of stress test in real time. While it has always been clear that an end to low interest rates would result in turbulence, this seems to have come as a surprise to some market participants. Still, the global financial system has so far proven stable. This is in part due to the fact that we have another regulation than before the 2007/2008 financial crisis.

But we cannot be certain that this difficult period is behind us. Periods of stress often come in waves. Further increases in rates cannot be ruled out. At the same time, the full effects of the recent increases are not yet clear. In many markets, valuations only correct with a time delay.

The important thing is that we learn lessons – the right lessons – from the events of recent months. We must examine very carefully whether and in what areas regulation, supervision and resolution planning need to be sharpened.

Let’s take a brief look back: how did the turbulence arise? And what does it mean for the German banking market? We have observed four different phenomena:

Firstly, interest rate risks have crystallised. We have seen from the USA that these risks are not just theoretical. They have affected several medium-sized banks. These institutions were not well known in Germany, but two of them were ranked among the 20 largest financial institutions in the USA.

German institutions, too, have been exposed to risks arising from significant and abrupt increases in interest rates. These risks have been in our focus for a long time now. Institutions with effective risk management have had, and continue to have, their interest rate risks under control. They are in fact relatively well positioned. They are benefiting from higher interest margins and are already posting higher revenues.

Several smaller German institutions had, however, larger interest rate risk exposures. The increase in interest rates resulted in considerable writedowns in their investment portfolios. In total, this amounted to almost 13 billion euros across the smaller institutions. These institutions had sufficiently high reserves or capital buffers to absorb losses incurred as a result of the interest rate shock last year. But their hidden reserves have now been used up.

We are closely monitoring a handful of small institutions that have low reserves and capital buffers in addition to currently high interest rate risks. So far, however, we see here no danger of a systemic crisis. Nonetheless, we should think about how to better mitigate these risks in future.

The fact is that there are no obligatory minimum capital requirements for interest rate risk in Pillar I of the regulatory framework for banks. While it is true that these risks can be handled with the supervisory tools under Pillar II, I think we should make improvements here.

A few years ago, the Basel Committee considered the question of capital requirements for interest rate risk as part of Pillar I, but this idea was rejected. In light of recent developments, maybe it would have better chances now.

Now to the second phenomenon: nowadays, bank runs and liquidity crises can arise much more quickly than in the past. In the 2007/2008 financial crisis, the liquidity outflow took place over several months. Now this can happen in a matter of hours.

Information and rumours can be spread via social media within seconds. And with online banking, deposits can also be withdrawn in seconds – at any time of the day and from anywhere in the world. As a result, some banks have very quickly found themselves in a liquidity crisis.

There are no rational grounds for a liquidity crisis at German institutions. However, there are also irrational fears, and these psychological factors must not be underestimated. Around the world, there is not a single banking market where depositors and counterparties are immune from such factors. Increased liquidity risks in the banking sector are a global phenomenon.

We must find a regulatory solution to this issue. In my view, this cannot involve providing broad guarantees for uninsured deposits. The deposit guarantee schemes cannot afford that. In the end, the state would have to back up such guarantees. The risk of moral hazard would be enormous. If part of a business model only works with state guarantees, then one should first question that part of the business model.

But how should we deal with the risk of accelerated liquidity outflows? The liquidity coverage ratio (LCR) is intended to protect institutions from sudden outflows. This ratio measures the amount of highly liquid assets that institutions must hold in order to meet their net payment obligations over a 30-day period of severe stress.

The problem is that deposits can be withdrawn much more quickly now than we assumed when the liquidity coverage ratio was introduced following the financial crisis.

Uninsured deposits are by no means as stable as they were previously believed to be. Some are particularly volatile, as the Silicon Valley Bank case has shown. For this reason, we must examine very carefully in what areas rules on liquidity need to be tightened. And this should be done in Pillar I of the regulatory framework, rather than in Pillar II.

We should also analyse the net stable funding ratio. This sets out the required amount of stable funding for each type of asset. For this ratio, too, deposits – particularly from private customers – are classified as very stable. But what happens when irrational fears come into play?

Psychological factors also play a crucial role when banks fail. If we allow one institution to become insolvent, can we be sure there are no risks of contagion to other institutions? Or will the fears of depositors and counterparties trigger a domino effect? This brings me to the third phenomenon: in crisis situations, relatively small banks have been treated as systemically important. The reason for this is clear: in a crisis, nobody wants to put financial stability on the line, and time is of the essence. In such situations, it seems safer to take a quick decision to reduce the threshold for systemic importance and declare the bank in question systemically important. And this can lead to somewhat improvised rescue missions.

We must get to a point where difficulties experienced by a small or medium-sized institution do not trigger needless fears of contagion. That is no simple task. If a bank experiences difficulties, the market seems to believe that inevitably other banks will follow.

It is for this reason, among others, that the European Commission has been reviewing the crisis management and deposit insurance framework. This deals with the question of whether the legal framework provided by the Bank Recovery and Resolution Directive and the Deposit Guarantee Schemes Directive is sufficient to allow for an adequate response to difficulties experienced by small and medium-sized institutions, and in particular institutions with high deposit volumes.

Expensive, improvised government rescue missions cannot be the right approach. But on the other hand, planning for the resolution of all institutions in crisis situations would likely be too expensive. It should still be possible for smaller institutions to quickly exit the market.
In the same way that resolving all small institutions is not the right way forward, failing to resolve systemically important institutions is also not an option. And that brings me to our fourth topic: the credibility of the global resolution regime. Certain critics have called parts of this regime into question following the rescue of Credit Suisse.

But questioning the regime as a whole would be wrong: we must be able to resolve systemically important institutions. This was one of the key concerns of the reforms following the 2007/2008 crisis. Never again should an institution be too big to fail. We must not abandon this goal.

We need a resolution regime in which we can all place our trust and which will then be used by all. The resolution standards for large banks have still not been implemented in full all over the world.

Liquidity backstops are one good example. These backstops are essential when a large bank gets into difficulty, because in such situations, institutions need liquidity fast. In a crisis scenario, the need for liquidity increases exponentially. To date, the state has almost always had to step in with liquidity guarantees. This was also the case in Switzerland recently.

In the EU, the European Stability Mechanism’s (ESM) planned backstop has unfortunately not yet entered into force. It is also in part unclear when and under what conditions central banks can provide liquidity in crisis situations. This needs to be addressed, including here in Europe.

There are also concerns about whether resolution measures at one bank could unsettle customers and counterparties of other banks around the world. We should look into how we could remove these concerns.

Transparency for all market participants is key. It must be clear for everyone which banks are planned to be resolved. In addition, it must not only be clear when and how they are to be recapitalised, but also what liquidity assistance is to be provided. And finally, the future of the restructured bank should be presented clearly, openly and credibly to everyone.

Allow me to summarise: the German banking system has so far proven to be stable and resilient. The increase in interest rates was long awaited, and it is having a very positive impact on earnings. We must, however, remain vigilant: the impacts of interest rate increases will continue to be felt over the coming quarters and years. It would be absolutely wrong to have a carefree attitude based on the idea that “nothing like that could happen here”.

We have been working on creating a more stable financial system since the 2007/2008 financial crisis. While we have achieved a great deal already, the task is far from complete. The events of recent months have made this strikingly clear.