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In the foreword, German Finance Minister, Dr Wolfgang Schäuble, writes: "There will be no shortage of challenges for BaFin in the future. We are still a long way from meeting our goal of ensuring that no financial product, no financial market and no financial market operator should remain unregulated. More steps must be taken to strengthen the supervisory and regulatory framework in Europe. In so doing, we should never forget that the role of financial markets is ultimately to serve the real economy, both retail and professional investors, and to make a positive contribution to social welfare."
Annual press conference: German banking system comparatively robust
The sovereign debt crisis, the prolonged period of low interest rates, the regulation of central counterparties: in her speech at BaFin’s annual press conference on 5 June 2012, BaFin President Dr Elke König addressed a number of issues of current interest.
“In the second half of last year, the sovereign debt crisis developed into one of the main risks for financial stability in Europe”, König said. She would not engage in speculation about the future fiscal policy of Greece. “But I am sure that German credit institutions are by now prepared for all possible scenarios.” Their exposures to Greece were in any event limited. According to Chief Executive Director Röseler, they were in “low double-digit billions”.
The German banking system was comparatively robust, but could not of course seal itself off entirely from developments in the environment either, König said, alluding to the more difficult funding conditions of some eurozone banks. The European Central Bank (ECB)’s two three-year tenders served first and foremost to buy the banks time – time that they needed to use to solve their problems and to regain the confidence of the markets. “However, it’s not just the banks that need to act, but also – and especially – the highly-indebted countries”, König added.
On the question of banking union, the BaFin President said that for her the subject came under the heading of fiscal union. “Mightn’t it be taking the second step before the first? Shouldn’t we just wait and see whether the measures that have been decided have the desired effect before launching the next idea?” she asked.
Low exposure of German insurers to periphery countries
The sovereign debt crisis wasn’t a walk in the park for German insurers either, König said. They also had eurozone periphery country bonds in their portfolios – and, of course, bonds issued by the banks of those countries. But the exposure of German insurers to these bonds lay within manageable limits.
One problem that was still a cause of great concern for the insurance sector was the prolonged period of low interest rates. Life insurers were being particularly affected by this. “Although the earnings power of their investment portfolios will be sufficient to meet their commitments for quite a few more years yet”, said König, “new investment has been proving a problem for some considerable time". So far, there had been no sign of any marked changes in the hitherto conservative investment policy of German life insurers towards riskier investments.
“As supervisors, we must accept the capital market as it is”, said König. But on both the banking and insurance fronts BaFin was spending a great deal of time and effort on capital requirement, the validity of the business model and risk management. It had either tightened the requirements significantly in these areas or would still do so. The statutorily prescribed supplementary premium reserve (Zinszusatzreserve), which had been in force since financial year 2011, and the change in the rules governing policyholders sharing in the valuation reserves, as planned by the lawmakers, would in future help to cushion the impact of low interest rates on life insurers, König explained. Further steps were needed.
Regulation of central counterparties
The BaFin President also went into the question of the regulation of central counterparties (CCPs). Since CCPs were being assigned a particularly important role in the management of the financial crisis – in accordance with the decisions of the G20 countries all standardised derivatives are to be cleared through a CCP in future – they had to have a good credit rating and be financially strong. For that reason central counterparties would be regulated more comprehensively and more strictly in future, said König, alluding to the international Principles for Financial Markets Infrastructures and the proposed European Market Infrastructure Regulation (EMIR).
These regulations made a lot of sense, but were not a cure-all. “Central clearing will help to contain contagion risks and prevent markets from drying up. But above all, derivatives trading will become more transparent”, said König. But greater transparency would not come about unless switching into non-standardised derivatives contracts could be successfully prevented. CCPs were a sensible way to create more transparency and security in the derivatives market, König summed up. “But they also hold risks themselves: because of their size and complexity and because derivatives business will be concentrated there. ‘Too big to fail’ is a problem here as well.”
Solvency II and consumer protection
The new European rulebook for insurance supervision, Solvency II, also aroused great interest among the journalists. Regarding the future risk-based supervision, Chief Executive Director Hahn reported that BaFin was already examining the internal risk models of six insurers; examinations were planned for another seven. BaFin was engaged in intensive discussions with another 11 undertakings on this subject.
In response to enquiries about consumer protection, König reminded her audience that as part of its solvency and market supervision, BaFin’s consumer protection role extended only to collective but not to individual consumer protection. Her Executive Board colleague Caspari also reported on the shortcomings that BaFin had identified in product information brochures (PIBs) provided by investment firms, and announced a new Circular. On this matter, he does not expect that BaFin will have to deploy its entire panoply of sanctions options: “The firms concerned are mostly well-disposed towards improving their PIBs accordingly”, Caspari said.