BaFin President Cautions Against Trying to Pay for Green and Digital Transformation of European Economy by Easing Capital Requirements

Mark Branson, President of the German Federal Financial Supervisory Authority (BaFin), warns against trying to pay for the green and digital transformation of the European economy by weakening capital requirements.

Branson said at the BaFin’s conference in Frankfurt am Main on 14 May:

“Otherwise we will be paving the way for the next financial crisis,”

Instead, Branson called for European regulations to be “systematically simplified.”

Branson added:

“How we in Europe perform globally depends on how our financial system develops.”

In his view, the success of a future pan-European financial system will be determined “by its capacity to prove its integrity and stability and to retain the trust of all market participants. Branson named three critical points in this context:”

Firstly, he explained, Europe cannot “relax the calibration of its financial regulation.”

Secondly, he says “we need less complexity in our regulation and more proportionality.”

Thirdly, Branson called for pan-European supervisory convergence “with uniformly high standards.”

BaFin’s President thus rejected demands “to weaken solvency requirements.”

Instead, Branson called for European regulations “to be systematically simplified and streamlined, and for overlapping rules to be eliminated.”

He sees the need for change “not only at the European level, though, but also within Germany and at BaFin.”

While BaFin has little direct responsibility for regulation, he acknowledged “that the rules issued by BaFin “do not always make things easier to digest.”

Branson is certain:

“We can document our supervisory practice more concisely and streamline our processes even further, all without reducing the level of security.”

Branson also argued that complex regulation “must be simplified precisely because it has a discriminatory effect.”

“Complexity makes it difficult for young companies to enter the market, and it is particularly onerous for small companies in general.”

He suggested that the EU take inspiration from other countries in this regard, such as the United Kingdom and its “strong and simple” regime.

According to Branson, principle-based regulation that is “less detailed also has the advantage of enabling supervisors to react more flexibly to new developments and risks, since they have a wider scope for discretion.”

He added:

“In turn, this can only work if everyone across Europe has the same understanding of how we use this discretion.”

Branson also warned that supervisory authorities “must not stoke competition between marketplaces by luring companies with particularly tolerant supervision.”

“We need uniformly high standards of quality in supervision.”

He also called on the European supervisory authorities “to take action in this context, arguing that they should point out the shortcomings of national supervisory authorities more often.”

In Branson’s view, a further centralization of supervision “would make sense if tasks can be handled more effectively and efficiently” at EU level:

“Centralized European prudential supervision is beneficial for systemically important companies that are active in multiple countries and highly interconnected.”

In this context, he stresses the “importance of supervision, resolution and the costs of crisis management being on the same level.”

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