Banking supervision priorities in 2022

The war in Ukraine has brought with it new geopolitical risks and great uncertainty concerning future economic and political developments. This is affecting institutions’ risk situations. At the same time, banks play an important role in the implementation of sanctions. BaFin and the Deutsche Bundesbank are therefore engaging closely with the affected institutions, monitoring developments in great detail and taking appropriate action as and where needed. Both the aforementioned effects and the approach to these specific risks will be major topics at meetings with management this year.

Alongside these current developments, BaFin and the Bundesbank have set further supervisory priorities for 2022 for the supervision of institutions subject to national supervision (primarily less significant institutions – LSIs) in Germany. These supervisory priorities are set out below. They use as their starting point the identified main risks and the supervisory measures for addressing these risks. Supervisory priorities for significant institutions (SIs), supervised directly by the European Central Bank (ECB), are set by the Single Supervisory Mechanism (SSM). These are taken into account when determining national priorities.

In 2022, the effects of the COVID-19 pandemic on institutions will continue to be a supervisory priority. Here, the focus is on credit risk in particular, as loan defaults due to business insolvencies are still conceivable in economic sectors hit hard by the pandemic.

The COVID-19 pandemic was, however, also a material driver of digital transformation in the banking sector. Institutions need to have powerful, state-of-the-art IT systems and be highly resilient to cyberattacks in order to keep operations running smoothly. The associated costs and competitive pressures, especially in conjunction with the prevailing low interest rate environment, are also creating headwinds for the viability of banks’ and savings banks’ business models.

In the medium and long term, the increasing importance of sustainability (environmental, social and governance – ESG) aspects likely heralds a far-reaching transformation of the economy, with momentous effects on the financial sector. This means that institutions, too, must deal with sustainability risk on a larger scale than before.

Building on these considerations, BaFin and the Bundesbank have set three supervisory priorities for 2022:

  • supervise institutions closely in terms of the impact of the coronavirus pandemic;
  • scrutinise and address cyber/IT risk in detail;
  • conduct in-depth analysis of institutions’ business models.

The following core supervisory measures are derived from these priorities.

To monitor institutions’ resilience to the fallout from the COVID-19 pandemic, supervisory measures will include the following:

  • where necessary, request and analyse internal risk reports from individual credit institutions;
  • conduct a stress test including various interest rate scenarios at directly supervised institutions and check whether supervisory action is needed;
  • carry out impairment tests at selected banks.

To review institutions’ IT and cybersecurity, supervisory measures will include the following:

  • increase monitoring of cyber and IT risks during both off-site supervision of institutions and on-site inspections;
  • increase monitoring of payment and e-money institutions and operators of crypto custody business;
  • analyse institutions’ relationships with outsourcing and multi-client service providers.

To monitor business model risk and how institutions address sustainability risk, supervisory measures will include the following:

  • conduct in-depth analyses of supervised institutions’ business models (with a focus on the appropriateness of governance arrangements);
  • carry out more meetings with management at institutions and associations on the topic of sustainability risk.

The supervisory activities described above are always contingent on developments during the course of the year. Adjustments by BaFin and Bundesbank are possible.