BaFin Ties Proportionality Relief to Strong Risk Management as New MaRisk Takes Effect

Key Takeaways

• BaFin's Executive Director of Banking Supervision said that simpler, more proportionate regulation for small, non-complex institutions depends on demonstrably sound risk management and governance.
• The speech reviews relief measures already delivered, including a 30 percent leaner MaRisk, a streamlined LSI stress test, and KWG threshold changes.
• It also signals that BaFin will not answer many MaRisk interpretation questions and expects institutions to exercise their own judgment.

Deep Dive

BaFin's Executive Director of Banking Supervision said that simpler, more proportionate regulation for small, non-complex institutions depends on demonstrably sound risk management and governance. The speech reviews relief measures already delivered, including a 30 percent leaner MaRisk, a streamlined LSI stress test, and KWG threshold changes. It also signals that BaFin will not answer many MaRisk interpretation questions and expects institutions to exercise their own judgment.

Several changes are already in effect or underway. The revised MaRisk has been in use for about three months and is roughly 30 percent leaner, with a stronger principles-based focus. BaFin said it will generally not answer interpretation questions, so institutions must document and defend their own interpretations rather than seek supervisory approval. The LSI stress test has been simplified with the Deutsche Bundesbank. Data collection falls by at least one-third for all institutions and by more than 60 percent versus 2024 for very small institutions and well-capitalized SNCIs. About 500 of roughly 1,100 institutions are expected to benefit. Capital recommendations will go only to institutions whose capital ratios fall below a threshold in the stress scenario, and no P2G will be set for the others. Under the amended KWG, in force since April, de minimis thresholds for transactions with governing body members were raised, and disclosure of financial circumstances is now required only above EUR $1.5 Million. National loan reporting of millions of euros will end at year-end in favor of AnaCredit. BaFin also noted that it helped secure a more pragmatic approach to the EBA's ESG reporting templates.

Further relief is under development but not yet final. BaFin is working on proposals to simplify the Examination Regulations (PrüfungsbV) to give auditors more flexibility. It also intends to review the risk-bearing capacity guidelines and Pillar 2 more broadly, including potential relief in ICAAP and SREP for small institutions. About 20 BaFin legislative proposals have been implemented or are in process, and more than 70 further ideas were submitted recently. At the European level, the EU Commission's competitiveness report broadly agrees with BaFin's diagnosis. However, it stops short of BaFin's proposed separate small bank regime without risk-based own funds requirements and keeps RWA-based capital requirements. It does call for fewer and simpler CRR requirements and for more differentiated treatment at Levels 2 and 3. No firm timelines were given for these items.

Recommended actions: (1) reassess internal MaRisk implementation, document risk-based interpretations, and record the rationale for using new freedoms; (2) test governance effectiveness, including board challenge, separation of duties in practice, and escalation channels for internal dissent; (3) review stress testing, CRE valuation, and capital planning assumptions against persistent price uncertainty; (4) update cyber and AI risk assessments; (5) adjust reporting processes for the AnaCredit transition and the revised KWG thresholds; and (6) engage through industry associations and the conference dialogue on ICAAP/SREP and PrüfungsbV reforms. The main risk is that greater discretion, with less supervisory guidance, raises the cost of weak judgment. Institutions that fail to show control may face prompt supervisory action and could undermine the case for wider proportionality relief.

Source: Federal Financial Supervisory Authority