BaFin
Wirecard immune failure: BaFin banned short-sellers instead of investigating €1.9B fraud. Post-scandal reform gave teeth, but epistemic problem—believing companies over critics—persists.
BaFin's Wirecard failure is a textbook case of immune system misdirection. When the Financial Times and short-sellers flagged €1.9 billion in phantom assets, BaFin didn't investigate Wirecard—it banned short-selling, treating critics as the threat rather than the fraud they exposed. This wasn't just regulatory capture; it was the institution defending a national champion that had achieved DAX-30 status, replacing Commerzbank. The scandal cost Germany's financial center credibility and both BaFin's president and vice president their jobs. The institutional response followed a familiar pattern: new legislation (FISG 2021), expanded powers, abolished the separate Financial Reporting Enforcement Panel, and banned staff from trading German securities. Mark Branson, imported from Swiss regulator FINMA, now leads a 2026-2029 strategy emphasizing early risk detection and AML enforcement. But the deeper lesson remains unlearned: BaFin's failure wasn't lack of powers—it was epistemic. The regulator believed company management over external signals because investigating a DAX company carries political costs that ignoring warnings does not. Until the incentive structure changes, expanded powers may simply mean more confident misdirection.
BaFin staff were actively trading the stocks of companies they supervised until 2021—the FISG reform banned personal trading only after the Wirecard scandal revealed the obvious conflict of interest.
Key Facts
Power Dynamics
Supervises ~2,700 banks, 700 insurers, and thousands of securities firms; can issue fines, revoke licenses, and refer for criminal prosecution
Investigating a DAX-30 company creates political friction; ignoring external warnings (journalists, short-sellers) carries no immediate cost until scandal erupts
- BaFin President (sets enforcement priorities)
- Federal Ministry of Finance (legal and budgetary oversight)
- ECB (takes over significant banks under SSM)
- ESMA (can conduct peer reviews, issue findings)
- ECB/SSM (supervises largest German banks directly)
- Deutsche Bundesbank (joint examination teams)
- ESMA (securities market coordination)
- Federal Ministry of Finance (political oversight)
Revenue Structure
BaFin Revenue Sources
- Contributions from supervised institutions (based on size/risk) 90% →
- Fees for authorization and approval processes 8% ↻
- Fines and penalties 2%
Funding from supervised entities creates structural tension; post-Wirecard criticism of regulatory capture
Unlike US regulators with enforcement fine revenue, BaFin's enforcement has historically been light—FISG aimed to change this
Decision Dynamics at BaFin
COVID-19 loan moratorium guidance: issued within weeks in March 2020
Wirecard: Financial Times raised concerns in 2015, company collapsed in 2020—five years of missed signals
Political sensitivity of investigating prominent German companies; ESMA peer review found coordination failures
Failure Modes of BaFin
- Wirecard 2020: €1.9B fraud undetected for years; BaFin banned short-sellers instead of investigating
- Greensill 2021: Bremen-based Greensill Bank collapse shortly after Wirecard raised questions about supervisory capacity
- Cum-Ex scandal: Tax fraud schemes involving major banks; BaFin's role in detection limited
- Epistemic capture: tendency to believe regulated companies over external critics
- Split supervision: largest banks under ECB/SSM, leaving BaFin with medium-tier oversight
- Dual headquarters (Frankfurt and Bonn) creates coordination overhead
Another fintech/payment company fraud could prove reforms cosmetic if political incentives to protect national champions remain unchanged
Biological Parallel
BaFin's Wirecard response resembled autoimmune disease: the regulatory immune system attacked the wrong target (short-sellers and journalists raising alarms) while ignoring the actual pathogen (accounting fraud). Healthy immune systems distinguish self from threat; BaFin classified external warnings as attacks on Germany's financial ecosystem rather than diagnostic signals. Post-scandal reforms aim to recalibrate threat detection, but institutional antibodies against investigating national champions may persist.