On Feb. 3, 2025, Reg-Track expanded summary with detail on action to counter risks.
On Jan. 28, GE BaFin updated on climate change, geopolitics, AML.
GE BaFin issued Risks in BaFin's focus 2025 covering climate change, geopolitics and weak economy, all of which could put pressure on Germany's financial system.
Also issued statement by President M. Branson delivered at press conference on topic.
Natural disasters caused by climate change, international tensions and weakness of the national economy could create new risks for German financial system/exacerbate risks.
Risk management will be more challenging for companies in 2025 because looking at historical experience is sometimes no longer helpful, explains Risks in Focus 2025.
Companies in German financial sector should include consequences of climate change even more comprehensively in their risk models in 2025.
Physical risks such as extreme weather or natural disasters in form of major fires, droughts or floods could have a much greater impact on banks' loan portfolios and insurance companies' loss amounts in the future.
2025's Risks in Focus describes increasing physical risks as relevant trend for sector.
Environment in which companies in financial sector have to work is very demanding.
The said environment lacks historical experience for many risk drivers such as climate change, geopolitical upheavals or technological quantum leaps.
Very important companies in financial sector think in scenarios, manage risks wisely and arm themselves against possible shocks with well-filled capital, liquidity buffers.
Risks in Focus
Risk outlook explains where financial system in Germany is particularly vulnerable, which risks could most endanger financial stability/integrity of local financial markets.
Highlights trends considered relevant companies in financial sector should be aware of.
For companies, Risks in Focus are a good guideline for their own risk management.
At same time, provide outlook on BaFin's supervisory priorities for the current year.
In total, GE BaFin focuses on 6 risks and 3 trends for the German financial sector.
Details provided re opportunities and risks from 3 trends, digitalization and geopolitics.
For each risk focus, BaFin included a section on how it will proceed to tackle each risk.
Real Estate Markets
In 2025, BaFin will continue to carry out cross-sectional analyses to better assess risks from corrections in commercial real estate markets; monitor concentrations and defaults in this segment and (new) lending of commercial real estate financing.
BaFin continues to analyze whether credit institutions rate commercial real estate financing at an appropriate frequency, and increasingly carrying out impairment tests.
BaFin carries out special audits of institutions that have high risks in commercial real estate financing and an increased need for depreciation of real estate in depot A.
In 2024, BaFin examined investment behavior of insurers and pension funds, and will carry out an individual analysis at company level for conspicuous companies in 2025.
One goal is to examine the risk management of companies with a significant proportion of alternative investments. This also includes real estate exposures.
In 2025, BaFin will focus on the audit of the balance sheet in random audits of the Impairment of financial and non-financial assets focus: this audit focus also extends to the impairment of receivables portfolios at credit institutions.
BaFin continues to keep a close eye on the valuation of significant real estate portfolios of companies outside the banking industry in its balance sheet control audits.
Will also continue to closely supervise mutual funds with a particular liquidity situation.
International Financial Markets
In 2025, GE BaFin will support the capital management companies in the risk-appropriate further implementation of liquidity management tools (LMTs).
The amendment to the Alternative Investment Fund Managers Directive (AIFMD II) and the European Directive on Undertakings for Collective Investment in Transferable Securities (UCITS) obliges fund managers to implement at least two instruments.
Money market funds are an exception, they only have to implement an LMT.
BaFin will develop Solvency II component in its forecast calculation for life insurers to assess how capital market changes during the year will affect solvency of life insurers.
Corporate Loan Defaults
BaFin will closely support credit institutions that have a significant exposure to sectors that could be particularly affected by an economic slump or geopolitical tensions.
BaFin will intensify its targeted special audits of the lending business as well as impairment tests, including with a focus on the general economic environment.
BaFin closely monitors development of private debt market and investment behavior of insurers and will review the risk management of alternative investments in 2025.
It will also examine whether companies are taking into account the principle of prudence; the basis for this is a BaFin survey on the investment behavior of insurers and pension funds from 2024, in which conspicuous companies had been identified.
Cyber Incidents
From 2025 onwards, BaFin will gradually implement the Systemic Cyber Incident Coordination Framework (EU-SCICF) together with the other national supervisory authorities in Europe and the European supervisory authorities EBA, ESMA and EIOPA.
In the case of cyber incidents that pose a risk to financial stability, this framework is intended to facilitate communication and coordination between authorities.
BaFin established a cyber roundtable in 2024 to exchange information with companies in the financial sector about threats and the current situation quickly and in a familiar setting in the event of a crisis; it will intensify this in 2025; medium-sized companies are also to be involved and the dialogue is no longer limited to crisis situations.
BaFin conducts cross-sectoral crisis management, emergency exercises with simulated cyber attacks; checks whether firms carry out threat-driven penetration tests.
Measures intended to ensure all parties involved react quickly and in a coordinated manner in an emergency so the stability of the financial system is not jeopardised.
BaFin is involved in the National Cyber Defence Centre (NCAZ) and also exchanges information closely with other national and international authorities and institutions.
Will survey insurers on development of cyber insurance business segment to gain a better overview of this business, preparing companies for future regulatory reporting.
Money Laundering Prevention
In 2025, will carry out at least 75 special audits in banking and non-banking sectors.
In a field analysis, BaFin will determine how often and for what purposes vIBANs are used in Germany, to identify business models with a high risk of money laundering.
BaFin will use results to derive targeted supervisory measures and conduct an analysis of how to deal with business models particularly critical from a money laundering perspective; in doing so, it focuses in particular on the topic of payment methods.
BaFin will examine whether these business models are subject to authorisation.
Outsourcing of IT Services
BaFin continues to analyze which activities and processes the companies in the financial sector have outsourced to which service providers; will also use information registers of financial companies on all ICT contractual relationships for its analyses.
Based on its interdependence analyses, BaFin will carry out more monitoring measures at sector-wide multi-client service providers in 2025; from questionnaires on special topics to monitoring interviews and audits of service provider lasting several weeks.
BaFin continues to use the outsourcing database as early warning system: if serious incidents occur at (multi-client) service providers, BaFin warns the companies in the financial sector that use this service provider (according to the outsourcing database).
BaFin will continue to meet with cloud service providers on a regular basis about their technical developments and the associated supervisory expectations.
Feb. 3, 2025 Editorial Update
On Feb. 3, 2025, Reg-Track expanded summary with detail on action to counter risks.
