In the past, he could have imagined becoming an architect. And in a way, Rupert Schaefer has become one – in banking supervision. As the Executive Director of BaFin for the Department of Strategy, Policy, and Control, he is at the center of the transformation of the authority following the Wirecard scandal. "We are the driving force behind the transformation and cultural change," describes Schaefer the self-image of the new unit.

The crucial point is that modernization needs to be shaped from within and not imposed by external consultants. "Transformation is to be seen as an ongoing task that doesn't simply stop," he emphasizes. And the 43-year-old is the one overseeing the process. He recently moved his office to the new location of the authority on Justus-von-Liebig-Strasse in Bonn, a building that accommodates 450 employees.

The department itself represents the changes that have affected the authority since the German Federal Ministry of Finance declared a new beginning two and a half years ago. It was newly created in April 2022, expanding the directorate to six persons. Until Schaefer's transition from the Swiss Financial Market Supervisory Authority (Finma) to BaFin in November, Silke Deppmeyer temporarily managed the affairs, who now acts as Executive Director of Internal Administration.

Personnel changes like these, especially the appointment of Mark Branson as President in August 2021, along with structural reforms and an intended cultural change, have been shaping and transforming BaFin ever since. Schaefer is well acquainted with Branson from their joint time at Finma; they worked in Bern from 2010 to 2021.

Executive Director Schaefer has taken over areas that were previously under the President's purview and is also responsible for newly established ones, such as the Data Intelligence Unit, the Central Analytics Unit, or the department "Coordination Focus Supervision and Taskforce." While the focus supervision addresses banks, insurance companies, payment service providers, and fund management companies with very complex business models and high risks, the task force serves as a rapid response unit that examines institutions on-site in case of emergencies.

The Transformation Management Office is responsible for driving the actual modernization and cultural change within the authority, but it also critically evaluates processes for organizational improvements.

Furthermore, his department includes the legal department, communication, international affairs, and the field of sustainability. "It makes sense to have a central unit that takes on a think tank perspective and represents an overarching policy consciously going beyond individual sectors," Schaefer outlines the strategic tasks of the department. The transformation of the organization is progressing, he says. Much has been achieved, but there is still much to be done, especially in terms of digitization, big data, and artificial intelligence (AI). The complexity of the task does not diminish the high expectations: "We aim to be pioneers in digitization," Schaefer states as a goal. After all, the authority's work involves a lot of data and its analysis, and various areas can be standardized and digitized. "That's where we focus our efforts."

The question arises of how the collected data should be utilized. "Where does it help us, and where does it form a risk of becoming a mere self-serving purpose? We consider large data pools that lie dormant with us to be of little value," states Schaefer.

In this context, the Data Intelligence Unit is tasked with analyzing and evaluating large datasets using quantitative analysis tools. The unit also experiments with AI. "Not everything will work in the end or will be adopted," Schaefer asserts. However, it is essential to actively engage with these technologies.

Sustainability is one of ten medium-term goals, which are on equal terms, defined by BaFin, which determine its actions until 2025. In early July, the authority presented a Sustainable Finance Strategy bearing Schaefer's mark. It was developed by the six-member team of the "Sustainable Finance Center," which is under his supervision, in collaboration with the specialized departments within the organization. In the strategy, BaFin tackles greenwashing and demands appropriate risk management from supervised institutions for sustainability risks. "Not everything in the strategy is new, but we provide clarity and set accents with it," Schaefer comments on the strategy paper.

With that BaFin also emphasizes the conviction that green loans and investments are not inherently less risky. Unlike representatives of the European Central Bank (ECB) and some politicians, BaFin clarified that special treatments such as a Green Supporting Factor or a Brown Penalizing Factor, which reward green financings with reductions in capital requirements or punish brown financings, are not desirable in their opinion.

"A very important basic principle of our work is to pursue a policy goal only with an instrument and not to use one instrument for two purposes," says Schaefer. According to him, if the goal is to ensure that banks manage risks correctly and have sufficient capital buffers, environmental goals such as non-risk-appropriate intensification of green loans should not be added. "For our statutory mandate, we want to send a clear signal: environmental policy is not our responsibility."

Even if some argue that combating the climate crisis should take precedence over everything else, Schaefer believes that there are better instruments for which there is also democratic legitimacy. "We, on the other hand, lack the mandate, expertise, and legitimacy for environmental policy measures. Otherwise, we risk getting on a slippery slope," Schaefer warns.

Similar to the Sustainable Finance Strategy, the financial supervisory authority does not treat ESG risks as a separate risk category but addresses them similar to traditional risks such as credit, liquidity, or operational risks. Nevertheless, BaFin acknowledges that sustainability risks pose specific challenges for risk management and it is not entirely clear how they can be transferred into established risk categories. But the basic principle is clear: "Inadequate risk management is always a reason to intervene."

Regarding ESG risk management, BaFin has a message for banks: "We do not expect perfect solutions right away. Above all, we do not want to dictate a one-size-fits-all solution for managing ESG risks." Various approaches are possible, unlike with classical credit risks, where a clear best practice has been established. "However, what we demand is continuous engagement with and improvement in risk management."

Instead of setting a standard, regulators examine whether the approaches chosen by supervised institutions are convincing. They inquire, among other things, why an institution follows a specific approach with its business model and whether it is continuously striving to improve. Regarding the availability and quality of sustainability data, Schaefer is optimistic. "The data foundation is gradually improving, thanks to regulation, and each year brings a bit more certainty."

Transition risks, which may arise during the transition to a low-carbon economy, are, in his opinion, covered by existing supervisory instruments. "In the macroprudential area, we also have appropriate instruments, such as the Systemic Risk Buffer. But at the moment, we do not see any evidence that corresponding climate risks are so significant that they need to be addressed with measures," he states.

He hopes that supervised banks can openly discuss topics and issues and accept that there is not always alignment of interests in all areas. "It's about enduring tensions, having open discussions, and either finding a consensus solution or not hesitating to make well-founded, interventionist decisions in the end."

The authority emphasizes more transparency and communication to be accountable and to explain why regulators do what they do and to contextualize the impact of measures. It is evident in the frequency with which supervisory measures, such as imposing fines, sending special representatives, or identifying deficiencies in banks, are published. "It's not about naming and shaming, using communication as an end in itself, or self-promotion of the authority. We can only build trust sustainably if the outside world understands what we, as supervisors, are doing."