Ernst Welteke: The international financial architecture
Opening address by Mr Ernst Welteke, President of the Deutsche Bundesbank, at a
EuropeanAmerican discussion on Germany and the Deutsche Bundesbank sponsored by the American Council,
Frankfurt, 6 September 2002.
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I
Ladies and gentlemen
It is a pleasure for me to welcome you to today's conference on the international financial architecture.
This conference is a joint venture between the Deutsche Bundesbank and the American Council on
Germany. It offers an opportunity for a European-American dialogue on current financial market
issues.
Since the mid-1990s, the international community has witnessed a new wave of international financial
crises. Given the ongoing world-wide integration of financial systems, the consequences of crises are
no longer confined to a single state. Therefore international co-operation is more than ever required. A
clear concept of the international financial framework is especially warranted when we consider the
growth of the markets. For years the growth of international financial flows has far exceeded traded
goods and services as well as income figures.
Financial markets mirror closely the economic and political situation. Five days ahead of the first
anniversary of September 11 they are particularly challenged. The downgraded economic
perspectives are reflected in low asset prices at the stock markets. The current uncertainties are
reflected in high volatility. Investors worldwide take into account political tensions and impending
military conflicts. Therefore, the current concentration of threats can serve as an example for the
burden which the financial architecture must be able to bear.
II
The term "financial architecture" is intuitively associated with planning and constructing a solid
building. There are prerequisites for a stable construction. An architect has to consider the statics of
the building and its foundations. A market economy is such a foundation, along with the free
movement of capital and functioning exchange rate regimes.
A solid building rests on strong pillars to weather possible storms. One of the pillars of the financial
system is a resilient and solid banking system. It has to be able to absorb shocks - the banking system
needs "systemic stability".
A robust framework supports and enhances the pillars. International standards, like the "Cooke ratios"
of banking capital or the new Basle II accord, are part of the framework which supports and enhances
the pillars.
Even massive pillars have to be inspected by experts from time to time. It is not always obvious to
outsiders that parts of the structure have to be mended or rebuilt - the exterior facade can hide a rotten
interior. Surveillance has to play an important part in detecting weak spots in the framework. National
and international supervisors can monitor the state of the framework and should intervene if
necessary. The IMF, the BIS, and the Financial Stability Forum, together with national authorities and
private institutions, are part of the surveillance network for financial systems.
The metaphor of the International Finance Architecture could be misleading, if we take it too literally.
Unfortunately, we do not have a single architect but many would-be architects who try to stabilise a
permanently evolving and growing system. Every single bilateral contract alters the financial system.
The system needs stabilising elements from within. Built-in incentives are crucial in setting up a sound
and credible financial system. Incentives for good corporate governance and sound practices within
the financial community can discipline the market and therefore strengthen the system. The market
participants themselves bear the main responsibility for financial stability.
Transparency is another precondition for sound and healthy financial markets. To fully reap the
beneficial effects of market discipline, relevant and timely data about the financial system have to be
published. The IMF's special data dissemination standards are a good example of transparency in the
field of macroeconomics.
III
Especially in times of sluggish growth, the global financial system is vulnerable. The real economy and
the financial system are closely connected. The impact may also work the other way around: financial
crises can cause major frictions for the real economy, whether via a depression of sentiment, a credit
crunch or negative wealth effects. Therefore, monetary policy has to monitor financial market
developments closely.
Moreover, stable and well functioning financial markets are in the own interest of central banks. The
need for a proper monetary transmission process, for sound payment systems and for a stable
banking sector provide ample reason for central bankers to care about the financial architecture.
The surveillance structure in Europe is currently under review. Proposals made by the finance
ministers of Germany and the UK envisage new institutions or committees which could be seen as a
potential nucleus for a European Financial Supervision Authority.
However, they favour the so called "Lamfalussy model", which originally was intended to reform the
supervision of securities trading. This model is not easy to apply to the banking sector for at least two
reasons.
Firstly, the surveillance issue is different in the banking sector. And secondly, the harmonisation of
rules and conduct in the banking sector has already reached a high level. This is due to the fact that
the current cooperation in the field of banking supervision in Europe already covers different countries
and various sectors of the financial system. So far, cooperation has proved both worthwhile and
efficient.
Any future form of cooperation in the field of financial sector supervision should make use of central
banks' know-how in banking supervision and financial markets. All institutions involved - the finance
ministries, the supervisory authorities and central banks - should contribute to possible new
committees or fora.
IV
Ladies and gentlemen
A thorough discussion about instruments and the framework of international financial organisations
demands an atmosphere free of short-term political pressure. This a prerequisite for sensible and
sustainable crisis solutions. The discussion today is taking place in precisely such an environment: the
American Council on Germany and the Deutsche Bundesbank are providing an opportunity to discuss
current issues of the international financial architecture in a calm and rational setting.
We have invited a number of experts in the field of international financial architecture. And, indeed, it is
a pleasure for us to welcome all of you. Thank you for coming.
The conference starts with the keynote address by the Vice President of the Bundesbank Jürgen
Stark.
Afterwards, the discussion is structured in three panels. We will start with an outlook for the world
economy and its interaction with exchange rate developments. Otmar Issing, member of the Executive
Board of the European Central Bank, will chair this panel.
On this basis we can exchange views about the roles of the public sector and the private sector in the
resolution and prevention of international debt crises. The governor of the Banque de France,
Jean-Claude Trichet, is chairperson of panel B.
Finally, we shall deal with the lessons of recent financial crises and the way forward. Professor Allen
Meltzer will lead the discussion in this panel.
Thank you again for coming and taking part in this conference. Many thanks to the panelists. I wish
you a discussion which, hopefully, will lead to a better understanding of financial crises and possibly to
more efficient measures to handle them.