Against the backdrop of Wirecard and rapidly increasing digitalisation accelerated by the pandemic, the classic indicators such as capital and liquidity ratios are no longer sufficient to identify all risks: this was the conclusion offered by Raimund Röseler at BaFin’s Annual Press Conference in May 2021. For Executive Director Röseler, this means that BaFin has to pay more attention to the business models of companies and take a closer look behind their façades. A few days later, the pilot phase for BaFin’s focused supervision, which serves precisely this purpose, was launched.

Focused supervision examines the inner lives of banks and other companies with business models that appear very complex or innovative, that are highly interconnected at an international level, or that have distinct risk profiles. “With these companies, we want to know more quickly, more precisely and at first hand where their profits come from, because where a company earns its money is also where the risks lie,” explained Röseler. “If we encounter a lack of transparency and are unable to obtain clarity, we will take action – if necessary restricting the business activities in question,” he continued.

Focused supervision was established as a result of BaFin’s extensive modernisation project which, up until the end of 2021, involved a team of around 100 project members from the Federal Ministry of Finance and BaFin, alongside external experts. Expert articles have already been published on the BaFin website on two aspects of this modernisation project: financial reporting enforcement and mystery shopping.

Focused supervision in operation since August

BaFin has been conducting focused supervision since August 2021. So far, 21 banks, insurers, investment firms and payment service providers have been placed under focused supervision. For BaFin President Mark Branson, by introducing the concept of focused supervision, BaFin has taken an important step towards achieving the aims of its modernisation process. “We have realised that there are companies that require closer supervision even if, on the surface, they appear to be doing well. We want to examine every aspect of these companies.” All entities supervised by BaFin will be regularly examined in order to determine whether they should be placed under focused supervision. Branson explained that the fundamental aim is to take greater account of the differences between supervised entities in terms of their individual risks, and to apply the range of supervisory tools available more selectively. “We want to develop a better understanding of products and risks and to see through business models and group structures more clearly," said Branson.

Focused supervision coordinated by Directorate SPS

The focused supervision of entities is carried out in BaFin’s various supervisory units and is coordinated by the KFT office, which forms part of the Strategy, Policy and Control Directorate (SPS). KFT stands for “Coordination of Focused Supervision and Task Force” (Koordination Fokusaufsicht & Taskforce). The Task Force serves as a kind of rapid response team that can provide on-site assistance, where necessary also making use of forensic methods.

Reporting to the Executive Board

One of the KFT office’s core tasks is to provide the President and Executive Board with regular reports regarding focused supervision carried out across BaFin. In turn, the KFT office communicates the expectations set out by the President and the Executive Board to the Focus Units across BaFin’s supervisory sectors and ensures that these specifications are implemented. The KFT office also sets out uniform standards and is responsible for quality assurance. Furthermore, it coordinates the selection of companies to be placed under, and taken out of, focused supervision.

The KFT office also analyses all of the information available in the Focus Units and identifies risks and patterns together with the staff of the Focus Units. In addition, the KFT office is in close contact with other organisational units, such as the Contact Point for Whistleblowers, which is the subject of an upcoming expert article on the BaFin website, and with the Financial Reporting Enforcement and Consumer Protection Directorates. According to Branson, it is essential that the different supervisory areas are more closely interconnected. “We have a great deal of knowledge and information at our disposal, we need to link this together more effectively and make sure it can be utilised in our supervisory activities,” he added.

Distinction between focused and intensified supervision

For Branson, it is important that focused supervision is not mistaken for intensified supervision, which has been applied in BaFin’s various supervisory sectors for some time. “Companies that require very close supervision for a wide range of reasons are placed under intensified supervision. This constitutes comprehensive crisis management,” explained Branson. Focused supervision, in contrast, is for companies that require particular monitoring. If a supervised entity is subject to focused supervision, this does not automatically mean the company in question is in a crisis situation; it simply means BaFin is taking a closer look.