Dr König, your predecessor Jochen Sanio called for supervision with teeth. How do you think BaFin should act towards the financial industry?

BaFin will continue to be a strong and effective supervisory authority that fulfils its functions with a due sense of proportion and deals with the institutions under its supervision on an equal footing. In banking supervision, in which we collaborate very well with the Bundesbank, the banking industry should view both institutions as a dynamic single whole.

My objective is for BaFin to be regarded as a benchmark in Europe and in international bodies. After all, Germany is a major financial market. For that reason we want to participate closely in the shaping of European and global supervisory standards. A lot of new things are currently coming together. We should look on that as an opportunity.

What topics are you thinking of in particular, and where do you see the biggest challenges in the months ahead?

First of all would come the three European Supervisory Authorities. We must be careful to adopt the right position in the new European System of Financial Supervisors. At the same time we are faced with the implementation of various regulatory packages such as, for example, Basel III by CRD IV and Solvency II. In addition, in no circumstances we must lose sight of regulation of the shadow banking sector.

Let us just take a closer look at the first item. What does it mean for BaFin to adopt the right position in mutual relations with the EBA, EIOPA and ESMA?

Let us be clear about one thing: there is no alternative to the European System of Financial Supervisors. Europe is a common economic area for which we will in due course need a common rule book. This is also in the interests of the German financial industry. When I say “adopt the right position”, I mean above all participating in the formulation of the European rules for the financial sector. In this connection it is important for us to bring our influence to bear in all ways and to contribute our expertise: for example in the Boards of Supervisors, through working together in the working groups in which the technical standards are developed, by occupying top positions and by providing the best possible advice to the chief political negotiators in the Council.

BaFin will assist the work of the ESAs and the ESRB , but will also keep a critical eye on them. The EU Commission will present a first experience report on the activity of the three authorities in early 2014. The ESAs’ founding Regulations might then have to be improved upon here and there.

Especially since everything did not run smoothly at the EBA last year.

I file that under the heading of start-up difficulties. You also have to recognise that the EBA had to take on a huge job from a standing start in 2011. Since the next stress test is not scheduled to take place until 2013, there is now sufficient time for it to take a new direction, for example beyond focusing on the potential need for more capital to analysing how and in what areas banks are reacting to adverse market situations. BaFin will make its views on this issue very clear in the EBA.

You had just mentioned the CRD IV regulation package.

Yes, that is currently one of the most important topics in banking supervision. In the years ahead the EBA will be having to draft technical standards for all the supervisory requirements and processes – for the Capital Requirements Regulation alone, there will be more than 100 of these. We must ensure that legitimate German interests remain safeguarded here.

What other topics will be keeping banking supervisors particularly busy in the months ahead?

Maybe the question of how we supervise systemically important banks. By now, 29 institutions have been classified as G SIBs. Special rules will apply to such institutions in future. For example, there will be a capital surcharge. The next thing we will have to sort out is the question of how we deal with the banks that are systemically important at the national level. How are they to be defined? What requirements are to be imposed on them? That is a fascinating discussion, which is still only just beginning, though.

How should we deal with national banking giants?

Unlike G-SIBs, with domestics the focus cannot be on higher capital requirements alone. In my opinion, in this case the intensity of supervision is critical: for certain important banks we need particularly intensive supervision. By concentrating on the whole subject of capital, sight is frequently lost of the fact that risk management, the nature of the business that an undertaking conducts and the organisational set-up put in place for this are far more important. Capital must always be the last line of defence – but not the only one.

There is also much discussion internationally of the question of how in emergency situations large institutions can be helped to recover, or even be resolved, across national borders. When do you expect agreement to be reached on this?

The subject of cross-border restructuring is a very complicated one. Although our German Restructuring Act means that we do not need to fear comparison at the moment, the effect of national legislation simply ends at national borders, which is a problem when it comes to G SIBs. For that reason, in October 2011 the FSB adopted principles for the recovery and resolution of G-SIFIs. They are meant to facilitate the orderly resolution of such institutions. A significant component of the FSB requirements is recovery and resolution plans. The FSB is keeping a very close eye on whether national supervisory authorities have been presented with such plans for their G-SIFIs. BaFin is responsible for the two German G SIFIs, Deutsche Bank and Commerzbank.

The question of burden-sharing is also playing a prominent role. National interests very quickly manifest themselves at the international level: every country wants to protect its taxpayers and its depositors. We need to be realistic here.

How is the EU dealing with this?

A Crisis Management Directive is planned. Consideration is being given not only to implementing the FSB requirements and introducing a burden-sharing scheme. There is also talk of a creditors loss-sharing scheme, commonly referred to as debt write-down. By the time we have such a Directive at the latest, the recovery and resolution of institutions should be easier to plan and to manage, for the European area at least.

In order to prevent things getting that far at all, the FSB is closely examining the recapitalisation plans which six German banks (among others) have submitted following the EBA recapitalisation survey. Are you expecting any unpleasant surprises?

On the contrary. It is clear from the plans of the German banks involved that not one of them will have to call on the State to manage their recapitalisation. In principle, the EBA has already accepted the plans. The respective international supervisory colleges have discussed the plans. In my eyes, that is also the only proper process for informing the host country supervisors of these plans in good time and adequately. It now remains to be seen whether they work out.

What will change for the banks if or when the plans are put into effect?

Our analysis of the plans has revealed that none of the German institutions involved will change its behaviour in its core business. The fact that banks are reducing their risk positions, also known as deleveraging, is not a bad thing in and of itself. It’s just that deleveraging is one of the instruments available for recapitalisation. A supervisory authority can find nothing wrong in that, in the sense of a return to core competences and business. It would become dangerous only if it took on excessive proportions and resulted in a credit squeeze. But that is not the case in Germany at present.

Are you afraid that the criteria that the banks must meet might be eased again?

I don’t think so. We will of course have to discuss in due course whether the sovereign buffer introduced in the course of the survey needs to be applied. One might even hope that the idea may be dropped some time. But I cannot imagine that we will deviate from a capital requirement that has only just been decided in the very near future. Furthermore, Basel III – and CRD IV – do not require any lower capital resources in the final expansion stage in 2018 than the EBA’s recapitalisation recommendation. The EBA’s recommendation can therefore also be interpreted as a major intermediate step towards Basel III and CRD IV.

While a lot has been done internationally on the regulation of banks since the outbreak of the financial crisis, the same cannot be claimed regarding the shadow banking sector. You have already mentioned the subject as one of the biggest challenges.

It is very important that we don’t get bogged down on this. So far the various FSB working groups have merely been gathering the facts. In so doing, we are defining quite wonderfully everything there is, in order then to continually identify and add new points. But we urgently need to move from description to action on this subject. Otherwise we’ll be regulating the banking market while the risks are being created next door.

The next step must therefore be to make the connections between regulated banks and shadow banks transparent. We must then regulate these connections if need be. But the regulation of shadow banks themselves is also something we should push ahead with straight away. That’s the only way dangerous arbitrage can be stopped.

Why do you think it is that the negotiations are faltering?

The problem is that by now national interests are diverging relatively widely again. Unfortunately, a good many countries appear to be focusing more on short-term market advantage than on long-term stability. I also have the impression overall that the enthusiasm for this topic is waning. During the financial crisis the pressure to do something was very high.

Attention was focused on developing new capital and liquidity rules. Although at that time there were fears that funds might shift into the shadow banking market, the problem itself was not tackled at first. Now that it is possible to tell in which direction the markets are changing, we must on no account take even more time on regulating shadow banks. If we don’t make significant progress soon, it is only a question of time before we are hit by unpleasant surprises from this area.

How do you intend to ensure that the topic is given renewed impetus?

By keeping on raising it in international bodies, by trying to win support for it and by finding allies so as to form majorities. Of late, I have gained the impression that some countries who have up to now been stonewalling are shifting ground a little. In any event, I remain optimistic – after all, I am a Rhinelander.

We have spoken a lot about banking matters, but there is also a project of great importance in insurance supervision: the European rulebook Solvency II.

We and also EIOPA are being asked to take on quite a lot with the development of the technical standards for this rulebook. My biggest concern is that proportionality is preserved. Small and medium-sized insurers cannot be asked to meet the same requirements as large ones.

I’m not particularly concerned about the capital requirements – in principle the basic model applies to all, although smaller insurers will hardly want to devise internal models because the cost is simply too great. But the reporting and disclosure requirements will need to be looked at closely, to see who really needs what information.

Solvency II is supposed to come into effect in 2013 and to be applied in full from 1 January 2014. In view of the discussions on the supplementary Omnibus II Directive, is this timetable still realistic?

I think so, even if it is very challenging. There must be no further delays, though, otherwise it will become a problem for supervisors and undertakings to prepare for the changes in good time. Many of the rules that we need in practice have simply not yet reached a point where undertakings can align their organisational processes with them and adapt their IT systems. And we also need a certain lead-time in order to prepare ourselves for analysing the data.

I am generally of the opinion that one must set oneself ambitious deadlines. There are of course still some things that need to be improved in Solvency II. But a start must be made on the implementation some time. But then in three or five years’ time we should also have the courage to say: “That’s worked out well and that hasn’t, so that’s where improvements need to be made.” After all, we’re not creating a system that’s got to remain exactly as it is for the next 30 years. What is certain is that we need a reform now. At present we have a solvency system for insurers that urgently needs to be put on a new footing.

Small and medium-sized insurers in particular are rather sceptical on this issue.

For many smaller undertakings the switchover to Solvency II is a major challenge. The big insurers are coping better with the whole process because they have the appropriate resources. We take the concerns of small insurers very seriously and are arguing in EIOPA for a further reduction in the complexity of the rulebook in the interests of proportionality. But in my opinion, an association such as the GDV is also playing a major role in preparing undertakings for Solvency II. I’m sure small insurers in particular can make good use of the support of the Association.

Let us turn from small to really large insurance undertakings. Do you think it is also possible to identify global systemically important institutions in the insurance sector, as in the banking sector?

There you are opening another important line of questioning. I believe that the considerations that apply to banks cannot simply be transferred to insurers. The risks of a run or domino effects are unlikely in the insurance sector. Quite different mechanisms come into play there. Life insurance is a mainstay, a primary pillar, so to speak, of pension provision. If this pillar wobbles, that is a social problem on a national scale.

But there is hardly one single undertaking that would bring the whole pillar tumbling down. The danger that I see lies rather in the largely similar structure of the investments of all life insurers. If one of the building blocks that go to make up the investments falls dramatically in value or is lost altogether, then it won’t be just one insurer that collapses – many may fall. This means that just one issue – not one undertaking – causes the whole pillar to teeter on the brink without the undertakings being directly linked to each other. For that reason capital alone will not help in these circumstances either.

Instead, our focus must be on risk management, on (among other things) the most appropriate mix and diversification of investments. This also applies under the Solvency II regime.

Another major difference from the banking system is that if problems arise in the insurance sector there is more time to restructure, transfer portfolios or find other solutions. Although it is repeatedly argued that the US insurance group AIG had to be rescued in the financial crisis, the reason for this lay not its insurance business but in the fact that the company also provided financial guarantees, i.e. ultimately it was operating in the shadow banking sector.

BaFin’s low interest rate enquiry recently revealed that German insurers are well placed. Does that mean that there is no reason to fear any problems?

The results of the enquiry don’t mean that we can now sit back and take it easy. If interest rates remain low for a long time, this will have a severe impact on undertakings in the medium term. The next few years will weigh heavily on insurers because they will have to build up an urgently needed addition to their premium reserve. That will have to be financed first. Even if insurers have made preparations – that won’t be good enough without support from changed framework conditions. For that reason we welcome the fact in the government’s Bill for the Amendment of the Insurance Super-vision Act the arrangements governing sharing in valuation reserves are being amended, something we have been calling for for a long time. This is a first step in the right direction.

What are the main items still high on the agenda in 2012?

Above all, there would be the international regulation of derivatives trading. This subject is making slower progress than hoped. I think this is due, firstly, to the fact that things are enormously complex. More and more very different players are involved in such trans-actions. Secondly, the industry must of course be given the chance to implement everything that is agreed, and there the devil is in the detail.

But we need this regulation urgently; I see no alternative – even though there will of course never be a completely watertight solution. The subject will raise entirely new questions: What happens if a Central Counterparty fails? Or how can we make it possible for supervisors to have access to data available on global transactions registers? But transparency in this market, which is after all closely linked with the shadow banking sector, is absolutely imperative.

Dr König, thank you for granting us this interview.