BaFin - Navigation & Service

Erscheinung:24.01.2017 | Topic BaFin New Year press reception

BaFin President Felix Hufeld: interest rate low, appropriate regulation and digitisation represent dominant topics in 2017

The interest rate low, the question of appropriate regulation and digitisation were the three main issues that would keep BaFin busy in 2017 as well, BaFin President Felix Hufeld told more than 50 journalists at the traditional New Year press reception in Frankfurt am Main on 10 January.

“What we euphemistically call the low level of interest rates is hitting insurers but also increasingly banks. At the same time, regulation is becoming ever more complex; and progressive digitisation in the financial sector brings with it risks as well as opportunities and places great demands on us, as supervisors and regulators.”

Low interest rates

Low interest rates were impacting ever more heavily, Hufeld said – beyond the circle of traditional victims. For life insurers, he upheld BaFin’s rating of the industry’s stability in the short to medium term as satisfactory but what was true for the industry on average need not necessarily apply to individual undertakings. “Pressure is increasing.” This meant that they needed to mobilise whatever their balance sheets and supervisory law allowed. Many owners would have to adapt to the need to strengthen the capital of their undertakings. “For us that means that we will still, and increasingly, act in ‘intensified supervision’ mode”, Hufeld explained.

Pensionskassen and Bausparkassen were in a similar situation, he added. In the current low interest rate climate, business models that were designed for the very long term and were bound by the collective ideal were under particular pressure.

But as time went by, the low interest rate environment was also becoming more and more evident in the books of the banks. The capitalisation of German banks was relatively good – for now. “The longer interest rates remain at a low level, the greater the efforts banks will have to make to operate profitably in the long term and to build up a satisfactory capital cushion.” The greatest challenge was faced by institutions that operated primarily in deposit-taking and lending business. “What are they to do? Cut costs, tap other sources of income, review their business model etc.” All this had often been said before. A state supervisor, too, was aware that the cold wind of competition was blowing outside. “Sitting it out is definitely not a solution, though”, Hufeld declared. He also referred to the increasing interest rate risk for banks and insurers.

Appropriate regulation and Basel negotiations

Regulation of the financial market as whole had been tightened considerably since the outbreak of the financial crisis in 2007/2008, said Hufeld – “with good reason”. Prior to that, large-scale deregulation had taken place, which had to be corrected. The reforms had strengthened the German banking system. Nevertheless, the question of what was the right degree of regulation had continually to be asked. Regulation had to create stability, but at a reasonable cost and while still allowing businesses the necessary freedom to act. “In short, it must be appropriate.”

That was also crucial in the current negotiations on the Basel rulebook, the BaFin President said, with a view to the postponement of the meeting of the GHOS, the Group of Central Bank Governors and Heads of Supervision. “I share the view of Mario Draghi, chairman of the Group. My objective, too, is and remains to bring Basel III to a satisfactory conclusion and find a sustainable global compromise.” Most questions had been answered. The main thing still remaining was the design and calibration of an “output floor”, which is meant to limit variability in the use of internal models.

This discussion was emphatically not about tight or less tight regulation. It was about global regulation with a relatively high degree of detail but which at the same time was meant to take due account of very different national market structures. “There cannot therefore be a compromise at any price”, Hufeld stressed. “We believe it is right to limit the risk-sensitivity of the Basel rulebook, and thus the use of internal models as well, in a sensible fashion. But we are not prepared to effectively give up risk-sensitivity as a regulatory principle.” Which did not mean that BaFin was succumbing to the siren song of the banking lobby. “Also, approaches that would in our view be open to compromise would definitely make demands of a number of banks. Demands that we as a supervisory authority consider appropriate and manageable.”

The subject of appropriateness or – to use another buzzword – proportionality is currently on the agenda in Brussels as well. “We need more proportionality. I therefore believe it is advisable that the planned revision of the regulatory framework for European banks should also involve concessions for smaller banks – on, for example, reporting requirements, disclosure obligations and remuneration”, Hufeld said. But there would be no rolling back of regulation towards pre-crisis levels.

Hufeld also touched upon Solvency II, the European rulebook for insurance supervision that came into force just over a year ago. It made risks easier to identify and thus easier to control. Undertakings had arrived in the new supervisory world. But there could be no let-up now either. “Solvency II will probably never be a piece of cake.”

Regulation of conduct and product intervention

Regulation did not amount just to prudential rulebooks such as Solvency II and Basel III. Just as important was regulation of conduct. It was one of the core concerns of BaFin – for example, the collective consumer protection provisions. Quite a lot had therefore happened in recent years in this area, and further developments were on the way. “We are currently aiming for regulation that covers the whole value chain of a financial product”, said Hufeld, alluding among other things to the European Markets in Financial Instruments Directive (MiFID II).

In essence, this approach was the right one. But there might be a risk of creating a welter of rules and complexity. That could not be a rational regulatory objective. “If it is no longer a paying proposition to offer financial products, or if this involved incalculable legal risks, eventually there would not be any such products on offer anymore. Consumers would definitely not be helped by that.”

BaFin was also grappling with proportionality on a daily basis in its supervisory practice. “For that reason we use sharp instruments, such as product intervention, only after careful consideration and with a sense of proportion”, Hufeld affirmed. The industry had reacted to BaFin’s consultation on the ban on the marketing of what had been known in German as Bonitätsanleihen (credit-linked notes) with an extensive self-commitment. Inexperienced and retail investors must no longer be offered such notes in future. “That is precisely what we wanted. We wanted to protect less experienced buyers and retail investors.” BaFin was watching to see whether the self-commitment was having the desired effect. In addition, it was now turning its attention to contracts for difference (CFDs) (see BaFinJournal December 2016, only available in German). “The first reactions to our consultation – including those from the industry itself – confirm that there is clearly a need for action here”, Hufeld reported.

Digitisation

The BaFin President also broached the subject of progressive digitisation. “It is frequently described as destructive; but it is a creative destruction, and for that reason it also offers opportunities”, said Hufeld. It would be exciting to watch what this creative destruction would do to the business models of banks and insurers. For instance, insurers might in future be able, thanks to the amounts of data that can be collected and analysed, to tailor their premium scales ever more precisely. However, what was perfectly sensible and desirable from a regulatory perspective might ultimately put the concept of the community of the insured to the test.

And then there was the new competition: innovative and nimble fintechs were entering the market in large numbers. “Although they are not rendering established banks superfluous – at least, not all of them – they are challenging them”, said Hufeld. “And challenging us as supervisors as well, by the way. We are taking this challenge seriously. We shape our supervisory administrative procedures according to specific target groups – not by throwing our rules and principles overboard but by applying them appropriately to fintechs as well. What we do is supervision, not business development.” But in the longer term it might not be just small fintechs and established financial sector undertakings that changed the shape of the industry on the digitisation ticket. “There are large companies outside the financial industry that hold huge amounts of customer data. What is to prevent them from running financial services as a sideline?”

The BaFin President also mentioned the risks attaching to digitisation: it created a huge target. Hufeld said that what worried him was that IT security was frequently considered only from a cost angle. But confidence in financial services providers today meant above all confidence in the security of IT and the protection of personal data. Guaranteeing this security on a lasting basis was an immense challenge. “For what is considered secure today may be a gateway for cyber-attacks tomorrow.” BaFin insisted on this security and demanded that undertakings also insist on it from their IT services providers and suppliers.

Brexit

In closing his speech, Hufeld also said a few words about Brexit, the forthcoming exit of the UK from the EU. “We are being approached by banks who are considering moving their headquarters or their business from London to Germany.”

It was still not known how soft or hard Brexit would be. “But undertakings need clarity as soon as possible. We offer this clarity if we are asked.” Hufeld made it clear that BaFin was not on a poaching expedition. As the German supervisory authority it wanted to offer providers from other countries a reliable framework that enabled them to provide financial services in the new political circumstances – in Germany and in other countries of the EU.

Personal discussions

The representatives of the media then had an opportunity to engage in personal exchanges with Hufeld and his Executive Board colleagues Raimund Röseler (Banking Supervision), Elisabeth Roegele (Securities Supervision), Dr Frank Grund (Insurance and Pension Fund Supervision) and Béatrice Freiwald (Internal Administration and Legal Affairs). They were particularly interested in the negotiations on the Basel rulebook and the consequences of Brexit.

Please note

This article reflects the situation at the time of publication and will not be updated subsequently. Please take note of the Standard Terms and Conditions of Use.

Did you find this article helpful?

We appreciate your feedback

Your feedback helps us to continuously improve the website and to keep it up to date. If you have any questions and would like us to contact you, please use our contact form. Please send any disclosures about actual or suspected violations of supervisory provisions to our contact point for whistleblowers.

We appreciate your feedback

* Mandatory field