German Banks Traffic Light is Flashing Yellow

The head of banking supervision at the German federal financial supervisory authority, or BaFin, talks to Handelsblatt about the dangers of low interest rates, reforms to banker bonuses and his secret wish to dish out larger penalties for wrongdoing.
Guarding Germany's banks. Raimund Röseler of BaFin.

Germany's financial regulator BaFin is still in the process of finding its place. The European Central Bank in November took over responsibility for supervising the largest banks in Europe. About 40 regulators from BaFin moved to the ECB as a result. Raimund Röseler, the head of banking supervision for BaFin, says he never considered making the move. "I'm happy here," he tells Handelsblatt.

In an exclusive interview, Mr. Röseler warned that the danger has grown that Germany's banks will take unnecessary risks to keep up their profit margins. While BaFin sees no signs of this just yet, he argues this is only likely to get worse as the European Central Bank embarks on a massive bond-buying program designed to lower interest rates even further.

Mr. Röseler also spoke of BaFin's progress in investigating a number of allegations of wrongdoing by banks during the financial crisis. He said BaFin is close to completing an investigation into banks' alleged manipulation of the benchmark market interest rate known as LIBOR, and suggests that the alleged conclusion in foreign exchange  markets wasn't system-wide but was led by greedy individuals. He also gave the all-clear on the alleged manipulation of gold prices - a likely relief for Deutsche Bank, Germany's largest bank.


Handelsblatt: Last week the European Central Bank announced a bon-buying program that will expand the money supply even further. How well prepared are the banks for that?

Mr. Röseler: That's a good question. It certainly affects the interest-rate environment, where rates are already extremely low. We already have a lot of liquidity in the market. Now we need to look very closely at where this liquidity is going.

In what sense?

The banks could begin searching for riskier sources of revenue to generate higher returns.

Do you see signs that this is already happening?

No, not yet, but we do see pressure on margins. Just think of the Mittelstand sector. Many banks are crowding into this business, but there aren't all that many companies that qualify as Mittelstand [German small and medium-sized businesses]. One wonders whether all banks are still charging prices that are in line with risks in the lending business. If this isn't the case and there is an economic downturn, it could mean that prices are no longer high enough to offset the losses incurred.

Isn’t financial regulation contributing to the shrinking margins of banks? It has left Mittelstand and retail banking customers as the only "good and decent" clients a bank is allowed to go after. Certain capital market operations, such as proprietary trading, are simply no longer very attractive.

It's true that proprietary trading is not. But banks also perform an economic function. They accept deposits and provide the economy with credit. In the past, some banks have moved very far away from this classic function, but now they are focusing on it once again. Regulation certainly serves as an impetus in this respect, but that isn't a negative thing.

Where does your hazard traffic light stand at the moment? Is it green, yellow or flashing red?

I would say it's yellow.

A few banks in Germany have started charging their larger customers a penalty interest for large deposits. Do you expect a larger number of banks to start charging retail customers penalty interest?

No, I don't think so. It's also a strategic issue. Private deposits have always proven to be a stable source of refinancing. That means banks still want to keep private deposits as a basis for refinancing.

Is the pressure on earnings leading to a wave of mergers?

I don't know if mergers are necessary, but banks should certainly consolidate by increasingly focusing on their core business. Mergers are not a tool to make the banking world generally healthier and more stable.

What are the chances of a European consolidation?

After the [ECB] stress test, I no longer felt it was out of the question that foreign investors could be interested in acquiring German banks. But so far only a few investors seem to be interested in buying small banks. The big wave hasn’t materialized yet.

Doesn't focusing on core business come with its own risks?

In general, regulators are fundamentally in favor of banks being diversified and having a broad revenue base. In this sense, the universal banking model has proven to be resilient in the past.

Doesn't regulation automatically force banks into mergers, as a result of more and increasingly complex rules?

I haven't given up hope that we will manage to simplify regulation once again. This goal is very high up on the agenda of the Basel Committee on Banking Supervision, and I hope that this will soon be realized throughout Europe.

But that hasn't been the case so far.

We have since recognized that regulation is too complicated in its current form. It's time for regulators to consider their own actions. The same applies to lawmakers and lobbyists who have tried to advance specific interests.

You spoke very derisively about bankers’ bonuses last year, after conducting a review of their compensation practices. Have the banks since learned their lesson?

Many things have changed, and in that sense our review was a complete success. Banks that are fine-tuning their compensation models now contact us first to ask for our opinion. This is much easier than fixing the models after the fact. This is where banks have learned something.

Speaking of cultural change, where are you in your investigations into the banks’ alleged manipulations of trading operations?

We are about to complete our examination of the LIBOR benchmark interest rate. The investigation of the manipulation of the foreign exchange rate market is still underway.

What about gold?

We found no signs of manipulation. If we do not find any additional evidence that manipulation occurred, we will consider the subject of gold settled.

The LIBOR investigation has been going on for quite a while… What lessons have you learned from it?

That you always find new cases when you conduct a forensic investigation in which millions of emails, chat logs and recorded telephone conversations are examined. It's difficult to plan this sort of thing in advance.

What will you do differently in the future?

Our approach in the future will be to emphasize internal bank audits much more heavily. We will urge bank executives to conduct more comprehensive internal audits instead of conducting our own forensic investigations. Of course, if we discover that an internal audit is deficient, we will have to conduct our own audit.

Could you reveal the current status of the investigations into foreign exchange manipulations?

We don’t have the impression that there is a system behind the manipulations. It was simply a matter of greed on the part of individuals or groups. They are located in various places. There are some in South America and in Poland, as well as in Russia and Singapore.

Have the banks reacted to the foreign currency scandals by making internal changes?

Yes, they have all introduced new monitoring processes. They have also significantly strengthened compliance departments, which monitor compliance with regulations. This doesn't apply to foreign currency alone, but also to trading as a whole. But the most important thing is that banks are also implementing an internal zero tolerance policy.

There was a certain inflation of penalties with U.S. authorities. Does this pose a threat to the stability of banks?

It's true that penalties have increased in the United States. But the truly large amounts have mostly applied to money-laundering cases. I don't think this poses much of a threat to German banks.

Did the American authorities take things too far in some cases?

The United States has a completely different system. There is certainly some competition among different agencies there. But I can also understand that there were reasons that the penalties were so high. However, German banks are fully cooperating with the authorities. This will probably lead to lower penalties in the end.

Regulators in other countries are often surprised to find that BaFin only has the power to impose relatively small fines. Shouldn't you be able to impose larger fines?

I don't think that exorbitantly high penalties, imposed for the sake of publicity, are a sign of better supervision. We have a different approach to supervision, but it's at least as effective. It is true, however, that we lack the ability to draw attention to our activities with large fines. And there are some cases in which I would say that it's a shame.

Mr. Röseler, thank you for this interview.


Peter Köhler leads banking coverage for Handelsblatt and Yasmin Osman has taken the lead on banking supervision. Daniel Schäfer has been the head of Handelsblatt's finance pages since January. To contact the authors: [email protected], [email protected] and [email protected]