Financial supervision BaFin: The paper tiger now has teeth

The financial supervisory authority BaFin, once ridiculed as the “toothless tiger”, is promoting trust with a new boss, more staff and expanded responsibilities. The renovation is not yet complete. From Lothar Gries.

In the Wirecard scandal, the German financial supervisory authority BaFin obviously failed – its officials preferred to denounce journalists than to investigate the dubious machinations of the Munich group. Now the Bonn authority is facing a fresh start. Under the direction of Finance State Secretary Jörg Kukies, legislative changes were worked out up to the summer, which have now come into force. At the same time, at the beginning of August, the authority got a new boss in Mark Branson, the long-time head of the Swiss financial regulator Finma.

Is this the end of the reconstruction and realignment of BaFin? Not at all. “I am impressed by the speed of implementation and the breadth of the BaFin reform,” said Mark Branson at a press conference with State Secretary Kukies today. But that is only the beginning of a long-term further development of financial supervision. “It takes several years before we are everywhere at the level that we are striving for.”

Conversion as a “long-distance run”

Two thirds of the measures identified in the course of the reform have already been implemented, with one third this is imminent. Of the approximately 150 newly created positions, 80 percent are filled or are about to be selected, according to Branson in an initial interim assessment. He spoke of a “long-distance run.” The expectations of the supervisory authority are clear: “Decisions of the highest quality, clear, ambitious goals and a modern, digital way of working.”

In fact, BaFin now has more responsibilities than it did before the Wirecard crisis. She is now allowed to carry out searches herself, seize evidence, issue subpoenas and conduct interrogations. Before that, she had to leave this work to the – often overwhelmed – public prosecutor’s office. Because of its limited competencies and the focus on formal legal controls of stock market prospectuses and balance sheets, BaFin was mocked as a “toothless tiger”.

In addition, the Wirecard case showed that supervision had been overwhelmed by technical progress and internationalization in the financial business. Although Wirecard processed a huge amount of payments, the group was considered a technology and not a financial company. As a result, BaFin only had direct access to the relatively small Wirecard bank, while the rest of the company was beyond its control. Here too, the legislature has provided a remedy. Since July, BaFin has had the right to audit all capital market-oriented companies, not just banks.

Rapid reaction force should also examine listed companies

BaFin now also has more powers to review business balance sheets. In this way, it can take immediate action if there is a suspicion of violations, and the authority may inform the public earlier than before about its approach to auditing the balance sheet. In August, a “rapid reaction force” was even set up to examine companies quickly and on site. “Especially when things have to be done quickly, we don’t want to have to start a time-consuming award procedure in order to hire an auditor,” the authority says. The task force will check on its own and also carry out forensic checks – new territory for BaFin. Starting next year, it will also take care of the control of the balance sheets of listed companies, with which the “balance sheet police” DPR, which is considered to be inefficient, was previously charged.

BaFin keeps an eye on a total of 17 large, complex banks, insurers, securities firms and payment processors with what is known as “focus supervision”. This should also be done with its own staff on site, where the supervisory authority was previously dependent on the help of the Bundesbank.

Experts skeptical

So is the German financial supervisory authority on the way to becoming a powerful force that can do its job just as confidently and efficiently as the supervisory authorities abroad? Experts are skeptical. The new boss Mark Branson is facing a difficult task, says banking professor Hans-Peter Burghof from the University of Hohenheim. Above all, the “legal culture” in the authority will be difficult to crack. BaFin needs more financial experts instead of lawyers – otherwise Branson would be in a losing position. So the authority still has some catching up to do.

Jan Pieter Krahnen from the Leibnitz Institute for Financial Market Research (Safe) criticizes BaFin’s continued dependence on the Federal Ministry of Finance. It is a gateway for political influence that runs counter to the purposes of supervision and undermines its credibility. The example of the USA shows how things can be done better. There, the government has no legal opportunity to influence individual proceedings or decisions by the SEC.

“BaFin must have courage”

The financial expert of the Greens in the European Parliament, Sven Giegold, relies above all on the determination and experience of the new boss Mark Branson. From his point of view, he embodies the cultural change credibly. Branson is confident. “BaFin must have the courage to make unpleasant decisions, even if we do not have perfect information and if this involves certain risks,” he said in a recent interview. “Because not deciding and waiting is often even more risky for customers and for the stability of the financial system. What matters is that we achieve an impact – and not just present brilliant analyzes.”

Branson is also ready to “test the limits”. If there is a grievance, the supervisory authority has to act – even if this issue is not clearly regulated in the law.