Check against delivery!

Second: we can show that Europe is an increasingly attractive financial and investment centre. Not only because the relative attractiveness is increasing, but also if we

• systematically reduce unnecessary complexity in regulation,
• cultivate a supervisory culture that is characterised by clarity, speed and responsiveness,
• and remove the barriers that stand in the way of a deeper, more liquid, integrated single financial market.

These two priorities – stability and resilience on the one hand and clarity, speed and integration on the other – are not contradictory. The combination of high standards, strong institutions and intelligent, maximally rationalised regulation and supervisory practice can make Europe a winner in these dynamic and difficult times. Winston Churchill said it best: “Never let a good crisis go to waste.”

I observed in January that a kind of party mood was developing in certain parts of the financial markets. And I warned then: the bigger the party, the bigger the hangover. The stock market party came to an end in April, and some investors are likely to have woken up with a major headache. Old certainties evaporated on the financial markets. For example, the conventional wisdom that investors always flee into US government bonds in the face of volatility. In past crises, they were considered a safe haven. That was not necessarily the case this time. The yields on 10- and 30-year treasuries rose significantly at the same time that stocks were sliding. There was a pronounced shift into shorter maturities. The "flight to quality" played out differently this time because the market has a different understanding of quality than before. This marks a paradigm shift.

The situation has calmed down somewhat in the meantime. On the positive side: markets have worked well so far. Price formation was possible at all times. There were no liquidity issues. Margin calls were fulfilled. Financial institutions did not run into difficulties. We experienced a kind of “orderly disorder”. Here in Germany, however, certain trading platforms for private investors were not continuously available during periods of peak volume. That is an issue for us: there’s nothing wrong with lower costs, but a service should not go offline precisely when users need it the most.

Where do things go from here? Are escalations going to spiral further? Is the United States trying to structurally weaken the US dollar? And what would it mean for the stability of the financial sector if investors worldwide were to have less confidence in the United States than in the past?

We don't know. This much is certain, though: the US dollar is the anchor of the global monetary system today. Many things would not work without the dollar. The US Federal Reserve has proven time and again that it is the world’s most important guarantor of stability in our current market structure. Decoupling from the US financial market is simply not feasible in the short term.

There is still considerable potential for setbacks on the markets. For setbacks with potentially widespread impact. Uncertainty is extremely high and will remain so. Market stability is not infinite. The possibility that problems in the non-banking sector have an impact on banks cannot be ruled out just because we have weathered the turbulence well so far. Nevertheless, I am confident that we in Europe can see the current situation as an opportunity – if we set the right priorities.

So what is the next step? For us as supervisors? And for everyone who helps shape the European system of financial supervision and regulation?

Financial institutions are generally currently in a strong position – also thanks to sound regulation. However, the situation could become more difficult. In the banking sector, interest rate margins will fall again. At the same time, credit default risks are growing. It may also become more difficult again for insurers to achieve attractive returns on their investments. This makes it all the more important for financial institutions to proceed with caution and continue to strengthen their resilience. That is what we expect from them.

We are monitoring the situation very closely. Which institutions are particularly exposed to sectors that are significantly affected by an economic downturn and geopolitical tensions? We look at several factors: How are credit standards developing? What about credit default rates? And what about the value of the collateral?

On the topic of liquidity we have analysed potential currency mismatches, particularly in banks. It is permissible under current regulation to compensate for liquidity shortfalls in one currency with excess liquidity in another currency. This approach facilitates the role of financial companies in allocating capital across borders. However, it is based on the assumption that currency markets remain liquid. And it presupposes that liquidity assistance in any currency is guaranteed in an emergency, regardless of domicile. We will be taking a closer look at this topic at larger German banks.

In times like these, outflows and inflows in the fund sector can also reverse and intensify very quickly. Asset management companies therefore need an appropriate liquidity management system. This allows them to react appropriately to market fluctuations and increased redemption requests – making them more resilient. And this also helps keep the financial system stable. It minimises the risk of fire sales. Liquidity management tools play a key role here. They help to make liquidity management more robust and thus maintain the functioning of the market as a whole. Especially in times of crisis. In future, asset managers will be legally required to implement at least two such tools in their liquidity management system for the open-ended investment funds they manage. We see this as a very positive development. We are monitoring asset managers in this process and liaising closely with them on an ongoing basis.

There’s another point I consider crucial: Particularly in the current shifting environment, companies in the financial sector need to be managed competently. Recently, however, a number of small banks, insurers and investment companies have run into difficulties. You are all aware of at least the prominent examples. The problems were not so much caused by the general economic environment we are currently facing. These companies were conducting some parts of their business without fully understanding the risks. They sometimes tried to do too many things at once or drifted away from their core business. And they were able to do so because their management and supervisory bodies did not live up to expectations. Long story short: they had poor governance. In smaller companies in particular, there is a high risk of individual managers taking on a dominant role. The qualifications of these individuals then often determine whether a company remains stable or needs to be restructured. For this reason, our supervision cannot consist solely of quantitative balance sheet and risk analyses. We also have to deal with the human factor in our ongoing supervisory work.

We keep an eye on the main risks from a macro-prudential perspective as well. A few days ago, we announced that we are reducing the sectoral systemic risk buffer for residential mortgage loans from two percent to one percent. We are doing this because the situation on the German residential real estate market has significantly stabilised – unlike the market for commercial real estate. But we are not going down to zero. Because of the general uncertainty and also because the data quality in this sector is still not sufficient. The reduction from two to one percent will release around 2 to 2.5 billion euros in capital. This constitutes only around 0.4 percent of the Core Tier 1 capital in the banking sector. There will be virtually no impact on the resilience of the system as a whole.

In contrast, we decided to keep the countercyclical capital buffer at 0.75 percent. Cyclical risks have eased due to the subdued loan dynamics, but they are still relevant. Again, this is compounded by the heightened uncertainty regarding economic developments and the specific risks for the export-dependent German economy. Non-performing loans and insolvencies in the corporate sector have been increasing significantly.

The banking system needs to stay resilient. As a result of the reduced sectoral systemic risk buffer and the unchanged countercyclical capital buffer, the banking sector has additional capital buffers of more than 20 billion euros in total. We can release these funds in a crisis. This would enable institutions to absorb losses and ensure that they are not forced to unduly restrict their loan supply.

As you can see: we are focussed on securing the stability and resilience of the German financial sector. That is our mandate. However, we need to do more to ensure that the European financial sector emerges stronger from the current situation. That goes for us at BaFin and for everyone else who is responsible for shaping European financial regulation and supervision. We need to make this system as effective and as efficient as possible. Therein lies an opportunity for Europe.

All in all, regulation and supervision in Europe have worked well in recent years. We have to preserve these strengths. Europe also needs to stay strong in supervision. Otherwise we will pave the way for the next financial crisis. Regulation that has proven to be so effective must remain in place. This is especially true for the capital and liquidity requirements under Basel III and Solvency II. We have the right calibration in our regulation. It has given us stability in turbulent times. We should not change it.
But we need to make our European system of regulation and supervision much more efficient – without lowering the level of security.

This means, for example, that we should reduce the complexity of our regulation. Refrain from setting requirements for everything down to the last detail. Wherever we do not need detailed, rules-based regulation, we should use a principles-based approach. This provides room for manoeuvre – for the companies, but also for us as supervisors. We can then react far more quickly to new developments. I already argued in favour of this last year – and I will continue to do so in the future.

Greater efficiency also means that we should make regulation and supervision more proportionate, meaning appropriate and manageable for companies of any size.

Of course, we also need to review our own administrative practice. I already stated at our press conference last year: “We at BaFin also need to take a critical look in the mirror.” This means reducing the complexity of our own practice and ensuring greater proportionality and clarity. We have taken some important steps towards this goal in the past twelve months.

In November, we introduced simplified requirements for small credit institutions relating to stress tests and reporting, for example. In addition, we showed institutions the leeway they themselves can take advantage of – which many had not done previously. Many banks and savings banks can simplify their risk management processes without reducing their effectiveness. Around 950 credit institutions are expected to benefit from these simplified requirements and clarifications. So three quarters of the institutions in Germany.
That was an important first step. More will follow. We will continue to take a critical look at our own rules. This year, we are planning a review of our Minimum Requirements for Risk Management for Banks (MaRisk). We will look at the existing rules and ask ourselves: Which aspects can we simplify? Where can we ensure even more proportionality?

More proportionality – this is also one of our objectives in insurance supervision. Our staff have worked towards this in the Solvency II review. Low-risk insurance undertakings¹ .will be able to take advantage of numerous simplifications in future. For example, one person will be able to take on several functions. And firms will be able to submit some reports to BaFin at longer intervals. The Directive is now being transposed into national law.

In addition, last year we submitted specific proposals to German lawmakers for amending national and European law. Several of our proposals were incorporated into the draft of the Financing for the Future Act II (Zukunftsfinanzierungsgesetz II). For example, eliminating the employee and complaints register or doing away with the requirement to submit land registry certificates for real estate funds. In these cases, the considerable resources needed by the firms provided little added supervisory value. Our clear recommendation was therefore to get rid of them. It is always better to eliminate unnecessary requirements than to tweak them. Unfortunately, the old Bundestag was no longer able to pass the law. However, we will also advocate for the new Federal Government to reduce complexity and increase proportionality in regulation. And we will certainly do so in the committees of the European Supervisory Authorities as well.

If we are not successful there, we would be prepared to not fully implement some European guidelines here in Germany. In our view, some of the guidelines are too granular for our small banks. For example, the new ESG guidelines from the European Banking Authority (EBA). We will only be partially compliant here. We will not fully apply the guidelines to less significant institutions. However, they are quite appropriate for larger institutions. For the others we already have an appropriate principles-based approach in our MaRisk. We will not win the battle against climate change with reports from small banks.

We will also not completely adopt the EBA Guidelines on processes and controls for monitoring financial sanctions. Of course, we are in favour of strict controls for financial sanctions. But we have a tried and tested system for this: foreign trade law and the monitoring of payments by the Deutsche Bundesbank. Some of the EBA's rules could therefore be redundant in Germany.

There are also many opportunities to significantly reduce the burden of bureaucracy in the ongoing Solvency II review in Level 2 and Level 3. The reporting system can be streamlined, for example. We have introduced specific proposals on this topic.

Our objective: we want to keep making progress in terms of proportionality and reducing bureaucracy. Significantly reducing bureaucracy, enabling more proportionality – this is an ongoing mission. We will regularly review our own rules and procedures. And we will continue to make suggestions to national and European legislators as to where rules could be adapted or withdrawn.

Ladies and gentlemen,

I am convinced: Europe’s financial sector can emerge stronger from these turbulent times. If we continue to reinforce the stability and resilience of the financial sector. And if – at the same time – we reduce the complexity of regulation, make supervision quicker and more responsive, and drive integration towards a deeper and more liquid single financial market. Upheaval brings opportunities and risks. It is up to us to decide what we make of them.
And now I look forward to your questions.

1 Small and non-complex undertakings.