Mr Röseler, are smaller banks in Germany disproportionately burdened by supervision and regulation?

Such a broad generalisation cannot be made. What is true, however, is that the existing regulations are too complex, too complicated and too extensive for many small institutions.

And how does that affect them?

Some small, low-risk institutions have to fulfil requirements that are not actually relevant to them. This can be an excessive burden in some areas. Take remuneration rules for example. These are simply irrelevant for the vast majority of institutions.

What can BaFin do?

BaFin has a seat and a vote on European committees. Here we make use of our advisory role to make our views clear: regulation must not be so complex that the resulting bureaucracy brings small institutions to their knees. That said, we also have a certain amount of room for manoeuvre within the European legal framework...

...which you are now using in the supervisory statement on proportionality?

Yes, exactly. We are thus making a palpable contribution towards reducing bureaucracy. When criticising a lack of proportionality or excessive complexity, we can’t simply point the finger at Brussels. We need to find opportunities to streamline our own requirements for institutions.

Proportionality has always played a pivotal role in our supervisory practice. However, we are constantly looking for ways to do things even better. That is why communicating with the institutions is so important to us. It enables us to identify where the obstacles lie in actual practice..

When do you talk to the banks?

Our supervisors of course maintain ongoing communication with the institutions. I also frequently have discussions with them myself. Together with colleagues who are responsible for policy issues, I have visited numerous small institutions over the last two years and conducted workshops on supervisory practice with them.

I intentionally set aside a lot of time for this. It was also important to me that these workshops were attended by banking staff who deal with supervisory requirements in their day-to-day work..

What was the outcome of these workshops?

In some cases, the insights we gained were quite surprising. We learned that our publications sometimes triggered completely unintended developments. A game of “Chinese whispers” sometimes seems to take effect in communications between supervisors, associations and auditors. Some institutions have overshot the mark when implementing supervisory requirements. As a result, a number of small institutions were not applying the simplified requirements that we had already introduced for them.

Can you name an example?

The guidelines of the European Banking Authority require banks to carry out stress tests for material risks. Our Minimum Requirements for Risk Management, or MaRisk require the same.

It became clear to us that such a rule can be over-interpreted. For instance, at one workshop with a very small Volksbank – one with 15 employees – it emerged that the bank thought it needed to carry out 13 stress tests a year.

Some auditor or another – it is now unclear who – had propagated the myth that BaFin actually required all conceivable risks to be stress-tested, whether relevant or not.

So the bank had been going above and beyond its obligations for years?

That is an apt description. We wrote a letter to the bank making it clear that, in our view, three to five stress tests at most would be wholly sufficient. The bank can now show this letter to its auditor and spare itself a lot of unnecessary work. In workshops with other institutions, we identified further issues that were equally absurd in some cases. We hope we have now cleared up these matters.

Have institutions overshot the mark in any other areas?

Outsourcing management is another area where we have already given institutions a substantial degree of leeway. Not all institutions are using it though. For example, we have no objections to institutions making greater use of their group’s or network’s internal outsourcing management. Outsourcing is on the rise. Such room for manoeuvre should be of great benefit to institutions. In addition, we are also introducing new simplified requirements.

What is new?

Returning to the topic of stress tests: in future, small institutions won’t have to perform reverse stress tests – i.e. tests analysing which results could jeopardise the existence of the institution.

Any other examples?

We have repeatedly been told that risk reports – or at least parts of them – are only really written for supervisors. That’s not how I see it. Risk reports are there so that management can react to critical developments quickly. No reputable company can do without internal risk reports. That being said, we have taken a closer look at this topic.

And what was the outcome?

We are simplifying requirements for the reporting system as well. For instance, small institutions no longer have to prepare their overall risk reports on a quarterly basis if there have not been any relevant changes in the parts concerned over the last quarter. Previously, information on the monitoring and strategy for capital planning had to be included in every overall risk report. But now, small and non-complex institutions will only have to review such information every two years.

Have these examples been incorporated into the supervisory statement?

By and large, our many discussions with small institutions served as the starting point for the existing and new streamlining opportunities that we identified and compiled. The aim here is to provide quick and practical help to the whole sector. The supervisory statement is intended to be a living document, meaning that we are open to further workshops.

The clarifications and simplifications apply to small and very small institutions. How exactly is this category defined?

That is set out in the MaRisk, which already contained threshold-dependent enabling clauses for small institutions. However, these thresholds were not always the same as those under the European Capital Requirements Regulation (CRR), which institutions also have to adhere to. That was confusing.

In future, with a few exceptions, we will base our MaRisk provisions on the definitions contained in the CRR. This will make it easier for institutions to follow the various regulations without making risk management any less effective.

How many credit institutions will benefit from the supervisory statement?

We believe that around three quarters of German institutions will benefit from the simplified requirements.

Aren't you worried that BaFin might overlook problems at institutions in future?

Greater proportionality does not mean that we want to make regulation at smaller banks any laxer. We are making it clear that small institutions already have enough leeway to streamline their risk management processes. That also means that if institutions use such leeway, it will not adversely affect their risk management. The simplified requirements and room for manoeuvre provided to institutions will therefore clearly not be to the detriment of risk management.

What happens next?

I view the supervisory statement as the first step. We are of course continuing to talk to banks at their premises. I believe this will provide us with even more ideas for simplifications, which we will then take into account in a similar manner.