“Coronavirus poses a considerable risk to the financial sector”

Felix Hufeld calls for vigilance: “The coronavirus is currently putting a considerable strain on the financial sector”, said BaFin’s President, although he pointed out that it does not pose a systemic risk at this point in time. Nevertheless, Germany’s financial supervisory authority is preparing itself for the potential consequences of the coronavirus pandemic. For example, Hufeld has appointed an internal coronavirus task force, the aim of which is to slow down the spread of the virus within the authority. Hufeld added: “We want to protect our employees and help prevent the healthcare system from being overwhelmed, and we want to continue our operations so that we can ensure that stable conditions are maintained on the financial market.”

BaFin’s Executive Board is taking the risk situation very seriously and is regularly communicating with institutions about their contingency plans, Hufeld noted. In addition, BaFin is working closely with the Federal Ministry of Finance, the Deutsche Bundesbank, the European Central Bank and other European and international partner authorities in the coronavirus crisis. Together, they have introduced actions to mitigate the impact of the coronavirus crisis on financial institutions. For example, the EU-wide stress test for banks has been postponed to 2021, and banks will benefit from relief in the composition of capital under the Pillar 2 Guidance.

BaFin supports SSM relief measures

The Single Supervisory Mechanism (SSM), which is based at the ECB and is supported by BaFin, announced a number of key measures on 12 March 2020 aimed at providing banks operational relief in light of the coronavirus pandemic (see ECB press release). For the time being, BaFin will also apply these measures to less significant institutions (LSIs), which are subject exclusively to national supervision. “We as supervisors can and will respond with a high degree of flexibility”, stressed Hufeld. However, he added that the SSM does not see “any need to relax the regulatory requirements”.

Germany’s financial institutions are therefore allowed to operate temporarily below the level of capital defined by the Pillar 2 Guidance (P2G), the capital conservation buffer (CCB) and the liquidity coverage ratio (LCR). To meet the Pillar 2 Requirements (P2R), the significant institutions (SIs) will now also be allowed – as the LSIs have already been doing so far – to partially use capital instruments that do not qualify as Common Equity Tier 1 (CET1) capital, for example Additional Tier 1 or Tier 2 instruments. BaFin expects that banks will use the positive effects coming from these measures to support the economy and not, for example, to increase dividend distributions or variable remuneration to management.

Bank employees are also allowed to conduct trading activities while working from home during the coronavirus crisis (see BaFin FAQs). BaFin has decided to allow this in order to help institutions mitigate the impact of the crisis. Under normal circumstances, strict requirements must be fulfilled in order for trading activities to be conducted outside the institutions’ business premises. However, BaFin considers that, in the current situation, conducting trading activities while working from home does not constitute a breach of the Minimum Requirements for Risk Management (Mindestanforderungen an das Risikomanagement – MaRisk).

BaFin events cancelled

The coronavirus poses a challenge for BaFin not only in its role as a supervisory authority but also as an employer and event host. Its primary objective is to minimise the risk of infection for those attending BaFin events. This can also result in the cancellation of key industry events that had been planned well in advance. The event on the status and future of BaFin’s supervisory activities in the area of payment transactions (“Zwei Jahre neues ZAG – Stand und Zukunft der BaFin-Aufsicht im Zahlungsverkehr”) that was scheduled for 31 March 2020 in Frankfurt has been postponed to a later date still to be determined. The BaFin workshop on the interest rate benchmark reform (“Reform der Referenzzinssätze – Überleitung und Notfallpläne der Verwender”) in Frankfurt will not be held on 28 April as planned. At the end of February, BaFin had already cancelled three committee meetings of the International Association of Insurance Supervisors (IAIS) scheduled for March.

BaFin protects its employees

To protect its employees, the BaFin Executive Board has decided to suspend on-site inspections at institutions until further notice. Instead, BaFin supervisors are to hold telephone or video conferences to enable them to continue their supervisory activities. BaFin has developed a comprehensive policy to allow all employees to work from home if they wish. BaFin will decide on a case-by-case basis whether to carry out ad hoc inspections due to significant infringements committed by supervised institutions. Business trips and meetings involving contact with other people are to be replaced by telephone calls or video conferences, where possible.

The virus has spread to all federal states and the risk to the health of the German population overall is now considered high according to the Robert Koch Institute. In addition, a first case of infection among the BaFin workforce was reported in mid-March. BaFin took immediate action by informing the colleagues of the person who had tested positive and by allowing them to work from home as a precautionary measure. BaFin will take comprehensive measures of this kind again if there are further cases of infection and is continually adapting its protective measures to prevent the spread of coronavirus.