Priorities of banking supervision in 2020

Every year, BaFin and the Bundesbank define their priorities for supervising less significant institutions (LSIs) in Germany. After first specifying the main risks to LSIs they proceed to determine supervisory measures to address these risks in line with a risk-oriented supervision. In the case of significant institutions (SIs), which are supervised directly by the ECB, supervisory priorities are determined by the Single Supervisory Mechanism (SSM). These are also taken into account when determining LSI priorities.

For 2020, BaFin and the Bundesbank have identified a total of six key risks to Germany’s LSI sector:

  • Interest rate risk
  • Business model risk
  • IT risk
  • Credit risk (including risks arising from developments in the real estate sector)
  • Country risk
  • Legal, reputational and compliance risk

Against this backdrop, BaFin and the Bundesbank have specified the following two supervisory priorities in terms of the supervision of German LSIs:

  • Follow-up on the 2019 stress tests for LSIs and building and loan associations and on the surveys on real estate financing and credit underwriting standards
  • Dealing in detail with and addressing IT risk at institutions

These priorities will be duly considered when dealing with the areas for action listed below, in particular.

Banking supervision will monitor institutions’ profitability and resilience and will, to this end, carry out the following activities.

  • Banking supervision will evaluate the results of the survey on how German credit institutions are coping in the low interest rate environment (the 2019 LSI stress test), an exercise that included almost all German LSIs. It will use single-entity and cross-institutional (peer group) analyses to identify conspicuous institutions and, where necessary, initiate prudential measures.
  • At the same time, the focus is also on developments in real estate financing and on credit underwriting standards. Banking supervisors have already carried out first surveys and analyses to identify potential risks in these areas. They will pay particular attention to adequate credit risk management and assessment. Banking supervisors will use prudential inspections to obtain in-depth insights.
  • Another issue to be examined is the pressure to alter business models and work processes in the light of, amongst other factors, digitalisation and the new competitors this attracts as well as demographic change.

Banking supervision will continue to monitor the institutions' IT and cyber security. Besides having appropriate technical and organisational resources in terms of their IT systems as well as adequate IT risk management, institutions must also ensure that (potential) IT security incidents at service providers are recognised, processed and followed up on properly. Banking supervision will set appropriate priorities in its inspections in 2020. Joint meetings with institutions’ management will be held to establish what measures LSIs have taken to bring their work processes and business models into line with the ongoing trend towards digitalisation.

In addition, BaFin and the Bundesbank have specified additional measures to address key risks. Banking supervisors are to focus more on sustainability and climate risks, to name just two, and how institutions deal with these issues.