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Untangling Wirecard case will take years, BaFin president says

German regulators will need at least two to three years to understand all aspects of the fraud case of collapsed payments company Wirecard AG, Felix Hufeld, president of the German financial supervisory authority BaFin, said Oct. 1.

"We are faced ... with a probably unprecedented case of balance sheet fraud and criminal activity ... and we have only scraped the surface of understanding what actually happened," Hufeld said during an interview at S&P Global's Banking Horizons Europe 2020 Virtual Conference.

Wirecard filed for insolvency in June after its 2019 audit found €1.9 billion of missing cash balances on its books. Numerous probes launched in the wake of its collapse have discovered the German company was using a wide network of international subsidiaries to conduct various fraudulent activities. Its former CEO Markus Braun and several other former executives are facing charges of fraud and embezzlement.

Need for reforms

The case has not only put pressure on accounting firm Ernst & Young, which had been Wirecard's external auditor for a decade, but also called into question the role of German financial regulators. Hufeld has previously said the foreign business of Wirecard did not fall into BaFin's regulatory remit because the group was treated as a technology company and only a German banking subsidiary was supervised directly.

It may be difficult for the authorities to figure out exactly "who betrayed whom" in the Wirecard case, but that should never serve as an excuse "to not try everything we can on the public side," Hufeld told the conference.

The regulatory toolbox needs to be "sharpened" and the scope of regulation and supervision should be expanded to cover the areas where traditional banking meets technology services, he said, adding that Wirecard is further proof that supervision of the payments services sector should be enhanced.

The existing German system of corporate balance sheet control and enforcement should also be reformed, the BaFin chief added. The German government is currently looking into that topic specifically and is coming up with ideas for potential reforms "as we speak," Hufeld said.

In September, German Finance Minister Olaf Scholz said the Wirecard case opens a window of opportunity for reform in Germany that should not be missed.

COVID-19 no reason to loosen bank rules

Speaking about regulation more broadly, Hufeld said the temporary easing of some bank rules due to the COVID-19 pandemic should not lead to a permanent loosening of requirements. Measures that have been taken to combat "a massive crisis" should not lead to a wave of deregulation, which would be a big mistake, he said.

Tighter rules following the 2008 financial crisis helped to strengthen the banking industry, and the industry's ability to withstand severe shocks so far is "exactly based on the resiliency we have enforced based on 10 years of stronger regulation," he said.

Hufeld cautioned against a fragmentation of financial regulation amid rising geopolitical tensions.

"I very much hope we can keep up the good spirit to establish common rules on a global scale," he said. It is a matter of political will to stick to compromises, multilateral agreements and global standards that have been set, the BaFin president said.

"A more fragmented world of financial regulation ... should be prevented by all means," he said.

Commenting on the impact of the pandemic, Hufeld said it is too early to assess the full hit to bank balance sheets and advised lenders "to keep as much cash in that box as they can" to be prepared for potential future shocks.

The impact to balance sheets will likely happen in a number of waves going forward, so banks should aim not to pay dividends in order to have sufficient capital reserves.

This report is based on an interview at S&P Global's Banking Horizons Europe 2020 conference on October 1, 2020. For more news and insights from the conference, click here.