Many things have changed since the outbreak of the coronavirus pandemic. Even BaFin’s press conference was different this year, as it was held over the phone. The main focus was on (but not limited to) the coronavirus pandemic.
Tuesday 12 May, shortly before 9:30 am: BaFin President Felix Hufeld dials into the BaFin press conference call from his office in Bonn. Due to the coronavirus pandemic, the event had to be held over the phone this year. Beside the President sat his spokesperson, Dr Sabine Reimer. Hufeld’s colleagues on the Executive Board, Béatrice Freiwald, Elisabeth Roegele, Dr Frank Grund, Dr Thorsten Pötzsch and Raimund Röseler, also attended the conference remotely. Around 50 journalists were on the phone, too.
Right at the start of his statement, Hufeld noted that a press conference over the phone is not “the ideal format for a lengthy statement” and went straight to the point: BaFin has adapted its supervisory requirements in light of the coronavirus crisis. To give one of many examples, BaFin has allowed banks and Sparkassen to make use of capital buffers that “they are required to build in good times for hard times” – which is an important point for Hufeld. With these and other temporary measures, BaFin is seeking to strengthen banks and Sparkassen and offer them relief during the crisis, among other things. This is to ensure “that they can rapidly allocate their own funds and the public funds that have been made available to those who need it“, Hufeld explained.
Two institutions in the intensive care unit
Hufeld is aware that banks are currently in a difficult situation. “Earnings have been weak for years, interest rates are low, digital competition is continuing apace – and now the coronavirus crisis has hit.“ In response to a query, Chief Executive Director Raimund Röseler reported that two institutions had already landed in BaFin’s intensive care as a result of the coronavirus crisis.
However, Hufeld claimed that the German banking sector is still relatively resilient and continues to function. He then explained why: in this new crisis, he said, we are now reaping the rewards of the regulatory reforms introduced after the 2007/2008 crisis. These rewards include more stability thanks to more and better capital as well as more liquidity.
Both Hufeld and Röseler are still aware that the situation today would be bleaker if the German government, the European Central Bank and BaFin had not taken extensive measures. Röseler made it clear that the coronavirus crisis has not hit the banks’ balance sheets with full force just yet. In addition, BaFin cannot rule out the possibility that some will default on their loans despite the billions in aid provided to the real economy. Röseler even reckons that “we will see significantly higher impairments on the whole over the next few quarters.” For this reason, BaFin has already urged banks multiple times not to weaken their capital base during the crisis by paying out dividends or distributing profits. This message has been heard by the vast majority – and was emphasised once again at the press conference.
Although no one can reliably predict how the coronavirus crisis will evolve, Hufeld believes that there is no risk of a systemic crisis based on the current situation. He pointed out that he would not stake his life on every single bank and “wouldn’t do so even if there wasn’t a crisis“. Nevertheless, he still considers that the banking sector has what it takes to survive the crisis – even if it will be affected to some extent.
Life insurers in the low interest rate environment
The persistently low interest rate environment remains the biggest problem for life insurers. And the coronavirus crisis is placing an additional burden on the investments of these undertakings. But is the situation a threat to their continued existence? Not as things stand today. According to a BaFin survey that was conducted at a selected number of life insurers, solvency ratios will drop. But the good news is that this will not lead to underfunding for any of these undertakings. “This is also thanks to the flexibility offered by Solvency II“, Hufeld noted.
There is also a lot of uncertainty surrounding the question of how the situation for insurers will evolve. On balance, BaFin considers the industry to be resilient. But “we don’t know yet whether the turbulence we are currently seeing, particularly on the assets side, will continue for some time,” Hufeld pointed out. It is also not yet clear how quickly assets will stabilise.
Who should foot the bill when businesses shut down?
Should insurers be forced to cover losses caused by the crisis – e.g. due to businesses shutting down – even if this is definitely not covered in the contract terms? Chief Executive Director Dr Frank Grund still does not see why they should. “In our view, the community of policyholders should not be the ones to bear the burden in cases that are clearly not covered.“ According to Grund, insurers are footing the bill in cases that are clearly covered on the other hand. But what happens when things are not so clear-cut? Grund stated there are certainly a number of grey areas that could be discussed on a case-by-case basis. In such unclear circumstances, the parties involved should seek a reasonable solution wherever possible. From a supervisory perspective, he said, it is completely understandable for insurers to offer to make a payment without prejudice in order to avoid a costly legal dispute. He also stated that it is important not to forget that companies have to keep their reputation in mind.
When asked about the situation for Pensionskassen (occupational pension schemes), Grund said that their situation was already difficult before the coronavirus pandemic. “Employers and sponsoring undertakings still need to support Pensionskassen.” He then added that the likelihood that support measures will be implemented in the next few years has certainly grown as a result of the coronavirus crisis. For this reason, BaFin is maintaining regular contact with Pensionskassen; and around 35 of them are currently subject to more intensive supervision. Grund described offers involving technical interest rates of 0.9% as too high and unsustainable. “When approving rates – which we do in the case of regulated Pensionskassen – we have made it very clear that we will no longer indefinitely approve technical interest rates exceeding 0.25%.”
In Hufeld’s view, the fund industry has so far made it through the coronavirus crisis with little damage despite considerable outflows. By and large, investors were able to sell their shares without any problems, Hufeld continued. He also said that an amendment that legislators introduced for open-ended investment funds before the crisis, which entered into force on 28 March, should at least provide some relief if further liquidity outflows were to arise. Thanks to three new tools, this should enable asset management companies to improve their liquidity management.
Asset management companies may now introduce redemption notice periods, for instance. This means that investors would be required to give advance notice if they wish to make a redemption request. Another option involves redemption gates once a certain threshold has been reached. If investors wish to redeem a number of units in excess of a specified threshold, the company may decide not to fulfil these redemption requests initially. With the third tool, the transaction costs associated with the redemption or subscription of units can be passed on to those who have caused these costs. These costs can be taken into account when calculating the net asset value of a fund.
The objective of this amendment is to prevent funds from having to close down. “As financial supervisors, we therefore expect that asset management companies will rapidly assess whether they will make use of these new tools, and if so, which ones“, Hufeld made clear. Although fund investors will have to face some constraints, the new tools will only apply for a limited amount of time and should be easier to deal with than a fund closure. Chief Executive Director Elisabeth Roegele is even convinced that “the new liquidity tools will help protect investors.”
Back to normal
When asked about the milestones of an exit strategy, Hufeld did not want to set anything in stone but still promised the following: “After the crisis, we will go back to normal supervisory activities – within a reasonable amount of time, step by step.” BaFin’s President is aware of the concerns that many bankers have: “We will not impose any sanctions on banks that are playing their part to help stabilise the economy,” he asserted once again. He also said that particular attention needs to be paid to regulatory issues, too. In the European Union, various simplified requirements from the 2019 banking package are to become applicable sooner than originally planned. On the other hand, the leverage ratio buffer for global systemically important institutions is to be postponed by a year. “This is a reasonable decision that had already been reached in Basel,” said Hufeld. Once again, he left no room for any misunderstandings: those who see this “and the temporary measures we have taken as the gateway for a new wave of deregulation cannot see the bigger picture.”
Money laundering prevention in a time of pandemic
In light of the coronavirus crisis, there are concerns that criminals could take advantage of this exceptional situation to engage in more money laundering activity. For this reason, the global regulatory institution in charge of money laundering prevention – the Financial Action Task Force (FATF) – warned in early May, alongside supervisory authorities and banks, that it is necessary to be even more vigilant than usual.
Chief Executive Director Dr Thorsten Pötzsch shares these concerns. But he warned against making any generalisations, adding that not every fraud attempt is a money laundering crime. In his view, the reforms that have been made in the area of money laundering prevention are bearing fruit. “The systems in place are working,” he noted. The Financial Intelligence Unit (FIU) has already received thousands of coronavirus-related suspicious transaction reports.
However, Pötzsch still sees room for improvement at the European level in particular. This is why the Chief Executive Director welcomes the European Commission’s action plan aimed at preventing money laundering, presented on 7 May. Pötzsch is in favour of setting out provisions aimed at combating money laundering in the form of an EU Regulation. The advantage is that EU Regulations are directly applicable, meaning that the requirements would be applied consistently across Europe. Pötzsch is also in favour of a central European authority, although he considers the European Banking Authority (EBA) to be less suitable for this purpose. A new authority would be ideal in his view.
Is the resolution regime on shaky ground in light of the crisis?
Several journalists wanted to know whether the European resolution regime is being called into question in light of the coronavirus crisis. Hufeld and Pötzsch unanimously said no. According to them, the Single Resolution Mechanism (SRM) for large institutions and groups of institutions operating across borders is robust and has proven its worth. Although they did not deny that the SRM might be facing more challenges than ever before due to the coronavirus crisis, they reported that there are no plans to significantly restructure the SRM. No one wants a system “that is keeping zombie banks alive forever,” to quote Hufeld’s words.
Independently of this, there have been discussions for a while now on whether to apply the principles of the SRM to medium-sized institutions. The European Bank Recovery and Resolution Directive (BRRD) sets out a specific framework for each resolution case. Determining whether a resolution is in the public interest is a key aspect of the BRRD. This is done as part of a public interest assessment (PIA). If an institution does not meet the criteria of this assessment, national insolvency law becomes applicable immediately – and the situation is still very different from one EU Member State to another.
Pötzsch believes this is a real problem and called for a “light” version of the resolution regime for medium-sized banks. Solutions need to be found for institutions that have so far been too small for a resolution within the European context but “too big to fail” within the national context, Hufeld added. “If we can come out of such all-or-nothing situations and achieve more uniformity at the European level, then I welcome this.”
When asked about plans to set up a pan-European bad bank, Hufeld replied that it is no surprise that strategic discussions in this regard are being held behind closed doors. “We simply have to wait and see how things will evolve over the next 6, 12, 18 or 24 months and determine the extent to which we will need to think about more radical crisis management measures for entire banking systems or parts of banking systems in Europe,” said Hufeld.
Focus on Wirecard AG
Wirecard AG is still a hot topic in the media. “Of course, we are taking a close look at Wirecard,” said Hufeld. BaFin has been doing this for a while now – within the scope of its mandate. “As a listed company, Wirecard AG is not subject to BaFin’s ongoing supervision, which means that we do not have the powers to approve or object to appointments to the management board,” Roegele added. At the moment, BaFin is urgently analysing KPMG’s special audit report. In addition, BaFin is specifically examining whether the report contradicts what Wirecard AG declared about the report. It is also focusing on whether the report shows whether Wirecard kept information that had to be published or provided false information. Roegele made the following clear: “If we find any information indicating that this is the case, we will immediately report this to the public prosecutor’s office.” She went on to say that BaFin will also take such action if its own investigation powers are not extensive enough to clarify any unresolved questions.
Tuesday 12 May, just after 11:00 am: BaFin’s press conference has come to an end – after a brief introduction and many questions. A press conference over the phone may not be the ideal format for lengthy statements – but it still offered the chance to discuss a variety of interesting topics.