Andreas Dombret: Back home - making the G20 Summit commitments
work
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the 14th Euro Finance Week, Frankfurt am Main, 15 November 2011.
* * *
1 Introduction
Ladies and gentlemen,
The recent G20 Summit in Cannes was another decisive step towards a more resilient
international financial system. The work to develop a new regulatory framework is slowly but
surely nearing completion.
Nevertheless, we still have a long way to go to make the commitments work back home.
Ultimately, it is the globally consistent implementation and transposition of the agreed policy
measures into national laws and regulations that will count. In terms of effectiveness and
consistency of these internationally agreed reforms and standards, it is therefore a great plus
for the international community that the FSB is strengthening its implementation monitoring.
I would like to focus on three key areas where consistent implementation is most critical:
1. addressing the risks posed by systemically important financial institutions (SIFIs for
short),
2. strengthening oversight and regulation of the shadow banking system and
3. putting into effect the new capital and liquidity standards for banks, known as
Basel III.
I would now like to briefly discuss these areas in more detail.
2 Dealing with SIFIs
The past few months have witnessed substantial progress in tackling the SIFI problem. In
Cannes, the G20 endorsed the comprehensive policy framework presented to them by the
Financial Stability Board (FSB). The requirement for SIFIs to hold additional capital above
the Basel III minimum standards - which was specified by the Basel Committee on Banking
Supervision - lies at the heart of this concept. To this end, an initial set of 29 global
systemically important banks has been identified. To take account of dynamics within the
financial system, the set will be updated annually with respect to its number as well as its
composition.
SIFIs will have to meet the additional loss absorbency requirements with common tier 1
capital, which is a particularly good buffer for covering losses. The specific amount will be
determined on the basis of each SIFI's systemic importance, currently ranging from 1.0% to
2.5% of risk-weighted assets.
I very much appreciate the FSB's recommendations, as such capital add-ons are an
appropriate measure for improving the resilience of SIFIs, forcing their owners to take greater
responsibility for their actions. Moreover, they put a price tag on the implicit government
guarantee that SIFIs enjoy, thereby reducing misguided incentives to take excessive risks
and countering competitive distortions.
Nevertheless, it was clear from the outset that strengthening SIFIs' loss absorbing capacity
would not be enough. We should remember and be very clear that failures are part and
parcel of a market economy. Unfortunately, the crisis has revealed a significant lack of
suitable instruments for effectively dealing with failing financial institutions. These gaps in
legal frameworks must be addressed. SIFIs, too, must be able to exit the market in an orderly
manner that does not expose taxpayers to the risk of loss.
A number of jurisdictions have already adopted legislation to improve their resolution
regimes. For instance, the German Restructuring Act, which came into effect at the
beginning of this year, includes a significant extension of supervisory powers, allowing
authorities to restructure and resolve banks. Yet, despite the progress made at national level,
obstacles to the effective resolution of financial institutions remain. National resolution
regimes are clearly stretched to their limits when it comes to globally operating SIFIs. One of
our main tasks in the coming months will therefore be to ensure mutual compatibility between
different national resolution regimes.
In this regard, the FSB Key Attributes of Effective Resolution Regimes for Financial
Institutions, which were also endorsed by the G20 in Cannes, represent a major leap
forward.1 The Key Attributes constitute a new international standard and serve as a point of
reference for the overhaul of national resolution regimes, setting out elements needed for
enabling the orderly resolution of financial institutions, irrespective of their size or importance.
The Key Attributes require jurisdictions to have a designated resolution authority in place that
possesses all necessary powers to intervene in and resolve financial institutions that are no
longer viable. This includes specific legal powers as well as the operational capacity to
implement orderly resolutions. In addition, for internationally active firms, institution-specific
cross-border cooperation agreements should and will be established. The Key Attributes also
call for the establishment of Recovery and Resolution Plans (RRPs) for global SIFIs,
supported by resolvability assessments to evaluate the feasibility of resolution strategies.
The objective of these plans is to organise the recovery or resolution ex ante in such a way
that systemically important units or functions can be maintained without systemic disruptions.
Following their endorsement by the G20, the Key Attributes now have to be put into effect
across jurisdictions. This will require substantial efforts by both national authorities and
financial institutions. Legislative changes will be needed in many jurisdictions to ensure that
national authorities can exert all necessary powers. Recovery and resolution plans must be
developed and, finally, financial institutions may need to change their structure and
operations to ensure their resolvability.
Looking ahead, the FSB framework will be extended from global to other SIFIs. In Cannes,
the G20 called on the FSB to deliver, by April 2012, possible ways to broaden the framework
to include banks that are systemically important at national rather than international level.
Furthermore, there are concrete plans to include, in the medium term, other financial market
players such as insurers, financial market infrastructures and non-bank financial institutions.
3 Illuminating the shadow banking system
The next challenge I would like to address is the need to look beyond the banking system
and to illuminate what is known as the shadow banking system. We should bear in mind that
the shadow banking system is not a new, autonomous part of the financial system. Most
entities and activities ascribed to it are already subject to some kind of monitoring and
regulation.
Yet the crisis has made it painfully clear that the shadow banking system can become a
source of systemic risks and endanger the entire financial system. To reduce these risks,
gaps and loopholes in the existing regulatory framework need to be closed. Undoubtedly, we
have to act fast, as the stricter rules imposed on banks via Basel III and the rules for SIFIs
clearly pose the risk of activities being shifted to less regulated areas. We must not allow
risky behaviour previously taken on by banks to be pushed into the dark.
Much work has already been done in this respect. In Cannes, the G20 endorsed a
comprehensive set of recommendations put forward by the FSB. These recommendations
call for both an effective monitoring of the shadow banking system and, where necessary,
regulatory measures.2 To improve monitoring, the FSB has set out high-level principles for
the relevant authorities and a stylised monitoring process. The FSB will conduct annual
monitoring exercises to assess global trends and risks in the future. The results of these
global assessments will be reported to the G20.
Getting back again to national authorities: their main task is now to implement the FSB's
recommendations for effective monitoring in a timely and internationally consistent manner.
In order to gain a comprehensive picture of the shadow banking system and the risks it
poses, authorities must put in place an appropriate system-wide oversight framework.
Ensuring that national authorities have sufficient powers to collect all necessary data at an
adequate frequency is of utmost importance in this context.
Yet improving data availability will require substantial efforts. For instance, in order to obtain
a picture of the shadow banking system's scale, national authorities must be able to draw on
high quality, consistent data on financial sectors' assets and liabilities - this is known as Flow
of Funds data. Unfortunately, in many countries a number of limitations in the Flow of Funds
statistics have come to light. Aggregating or comparing these data across jurisdictions has
proven to be especially difficult.
Furthermore, better monitoring of the shadow banking system will not be enough; better
regulation will be needed too. This could be achieved either by regulating banks' interactions
with the shadow banking system or by regulating activities and participants in the shadow
banking system themselves.
The FSB has already initiated work to assess the potential case for regulatory actions. It has
set out general principles for designing and implementing regulatory measures in order to
strengthen international consistency and to reduce opportunities for regulatory arbitrage.
Over the coming months, the FSB, together with competent standard setting bodies, will
issue a series of studies and recommendations for regulatory actions which will deal with
identified gaps and with inconsistencies in national regulatory approaches. These
recommendations will then, once again, have to be implemented at regional and national
level, calling for further substantial changes in laws and regulations.
We should keep in mind that, when designing new monitoring and regulatory measures, our
actions must be forward-looking and we must be mindful of unintended consequences. Given
the fluid, evolutionary nature of the shadow banking system, we should not focus solely on
risks which have come to light during the current crisis. We have to be sufficiently flexible to
capture future developments as well. In this respect, exchanging information across
jurisdictions on a regular basis is crucial.
4 Implementing Basel III
I would like to finish with a few words about the new capital and liquidity standards for the
banking sector, commonly known as Basel III. The new rules represent one of the key pillars
of financial sector reform as they will significantly strengthen banks' resilience by raising
quality, quantity and international consistency of bank capital and introducing global liquidity
standards. Last year, at their Summit in Seoul, the G20 committed themselves to
implementing the new framework.
Unfortunately, over the last months, some market participants have raised fears that Basel III
might hamper economic recovery or would damage national interests. Yet this is not the
case. The new rules are indispensable for improving banks' resilience and will generate
substantial benefits by reducing the likelihood of financial crises as well the output losses
associated with such crises in the future.
I therefore warmly welcome the fact that, in Cannes, the G20 leaders took the opportunity to
call on jurisdictions to meet their commitments to fully and consistently implement the new
Basel framework within the agreed timeframe. Individual countries should not seek to gain
advantages by watering down or reluctantly implementing internationally agreed reforms.
5 Conclusion
Ladies and gentlemen,
To sum up:
The cornerstones for making the financial system more resilient are now in place.
Nevertheless, much remains to be done. We must put our commitments into practice and
translate the agreed reforms into national laws and regulations. In particular, we need
 to ensure that all financial institutions can be resolved without destabilising the
financial system,
 to better illuminate the shadow banking system and put in place regulatory
measures where necessary and
 to implement the new Basel framework consistently across jurisdictions.
Thank you for your attention.