Andreas Dombret and Felix Hufeld: The Bundesbank and BaFin - "The
two organisations benefit from each other's specific expertise"
Interview with Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, and Felix Hufeld, Chief Executive Director of BaFin, by the "BaFin Magazin"
published on 1 August 2013.
* * *
The Bundesbank and BaFin are collaborating closely in insurance supervision. In an
interview, Bundesbank Executive Board member Andreas Dombret and BaFin Chief
Executive Director Felix Hufeld explain how that collaboration benefits both organisations as
well as Germany as a financial centre.
Dr Dombret, Mr Hufeld, under the Financial Stability Act (Finanzstabilitätsgesetz), the
Bundesbank and BaFin will now also cooperate in supervising insurance companies.
How will the supervisory tasks be divided up?
Hufeld: I can answer that question quickly: microprudential insurance supervision, ie the
supervision of individual insurers, insurance groups and pension funds, will remain the sole
responsibility of BaFin. The Bundesbank is not involved. That is thus a different situation than
in banking supervision.
Dombret: The Financial Stability Act mandates the Bundesbank to help ensure that the
financial system remains stable. It is responsible for macroprudential oversight of all sectors
of the financial system - which includes insurers. The act assigns analytical tasks, in
particular, to the Bundesbank. It is our job to identify potential dangers and assess
constellations that could impact financial stability as a whole. These analyses form the basis
for the discussions within the Financial Stability Committee, where the Federal Ministry of
Finance, BaFin and the Federal Agency for Financial Market Stabilisation add their own
input. Building on this risk analysis, the Financial Stability Committee may then issue
warnings and recommendations.
That means that BaFin and the Bundesbank exchange more information nowadays
than they used to.
Dombret: Yes, the Financial Stability Act clearly stipulates that we share all observations,
conclusions and assessments required to fulfil our respective tasks. The two authorities will
mutually benefit from the information and the special expertise that they exchange. The
express legislative intent underlying the act is for us to work hand in hand and swap notes
regarding relevant data, facts and evaluations. And we will jointly ensure that this is the case.
What does that mean in concrete terms?
Hufeld: We have laid down the details in a joint administrative agreement, which at BaFin
applies to all areas of supervision. The need now is to breathe life into that agreement. We
have looked at all the data that we or the Bundesbank collect to determine for what
prudential perspective they are relevant. Certain data that are collected on a regular basis
are exchanged continuously. BaFin has access to all Bundesbank data and information
- and vice versa - to the extent necessary for each institution to fulfil its respective mandate.
We will now work out how best to proceed in practice.
Should insurers fear that the exchange of information will be to their disadvantage?
Dombret: On the contrary. It is in their own best interests that we seek to maintain a stable
financial system. The experience of recent years has clearly demonstrated the dangers
associated with systemic risks and cross-sector contagion.
Hufeld: I agree. And what Mr Dombret just said of course applies equally to microprudential
supervision. If the Bundesbank shares valuable macroprudential insights with us, insurers
and their policyholders will be the first to benefit. Another advantage for insurers is that they
will not need to establish a separate regular reporting channel to the Bundesbank as we
forward the data that we receive to the Bundesbank. It goes without saying that the
forwarded data will be treated confidentially since the Bundesbank, just like BaFin, is sworn
to secrecy.
What do the Bundesbank and BaFin do with the information?
Dombret: That is laid down in the legal provisions: we use the information to fulfil our
respective mandates. For us, that means that we use the data provided by BaFin to assess
the stability of the financial system as a whole from a macroprudential view. BaFin, in turn,
uses our data and insights to effectively supervise insurers and thus ensure that they can
honour their contracts on a long-term basis. As I mentioned earlier, the insights gained also
feed into the consultations of the Financial Stability Committee.
Hufeld: There are many ways in which the Bundesbank's macroeconomic and
macroprudential expertise will be valuable to us. Take the issue of the current low-interest
rate phase. The Bundesbank analyses and evaluates the information that we provide. We, in
turn, can use the results for our microprudential supervision. The exchange of information is
not, therefore, a one-way street; it results in a beneficial symbiosis of macroprudential and
microprudential knowhow, which will strengthen Germany as a financial centre.
Regarding the low-interest rate setting: how will you collaborate specifically on this
issue?
Hufeld: This issue demonstrates the importance of our cooperation. We can draw a reliable
and comprehensive picture of the situation only if we take due account of both the relevant
macroeconomic and macroprudential factors and the individual insurers' particular
circumstances. And the ongoing period of low interest rates naturally also plays an important
role in the Financial Stability Committee. We must, therefore, grapple with a difficult subject
at the very outset of our collaboration. However, I am sure that will only strengthen our
cooperation.
Dombret: The current low-interest rate setting is making itself felt in all financial sectors.
Credit institutions and insurers must take this into account in their business plans. As the
Bundesbank has, for some years, been observing the effects of the low-interest rate
environment on the financial system and, not least of course, on life insurers, I expect our
cooperation with BaFin to prove fruitful in this field, too.
Another key issue from both a macroprudential and a microprudential perspective is
that of systemic relevance. The Financial Stability Board (FSB) recently ranked nine
insurers as global systemically important insurers (see link below). How important do
you think this step is?
Dombret: The publication of this first list of global systemically important insurers marks
another step on the path towards a more stable financial system. Banks are not the only
entities that can be systemically important - market infrastructures and insurers can be, too.
The main factors determining an insurer's systemic importance are, first and foremost, its
interconnectedness within the financial system and the size of its non-traditional and
non-insurance business. I therefore fully support the FSB's recent move. However, it is clear
that we still have a considerable way to go. We must now specify and finalise the regulatory
consequences associated with this ranking. That will not be easy. Just think of the challenge
of creating, for the first time, a harmonised international basis for imposing potential capital
surcharges in the insurance sector.
Hufeld: It is good that we now know where we stand. Insurers are systemically important in a
different way than, say, banks, as they do not trade with one another. Nonetheless,
identifying global systemically important insurers is a key step towards maintaining financial
stability and protecting policyholders. I believe that the best way of protecting policyholders is
to establish effective recovery and resolution plans and to tailor supervision to the complexity
of the business. As I said earlier, we now need to spell out the regulatory consequences.
May I just add that the fact that the list features no reinsurers does not mean that this group
of insurance companies is not considered systemically relevant. A decision on this issue will
be taken next year.