Axel A Weber: Progress on the G20 agenda
Speech by Professor Axel A Weber, President of the Deutsche Bundesbank, at the
International Capital Markets and Emerging Markets Roundtable, Institute of International
Finance (IIF), Washington DC, 25 April 2010.
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1. Introduction
Ladies and gentlemen
The financial crisis has certainly been a devastating event. But it also set in motion a process
that will lead to the creation of a more stable and more resilient financial system in the future.
As warranted by the global character of the crisis, this process has found a sound
international basis in the G20, bringing together major advanced as well as emerging
economies. Nevertheless, the G20 Agenda is not just a response to the financial crisis but
also a response to the needs of a globalised world. Consequently, the agenda covers a
broad range of topics such as the realisation of a more balanced pattern of global economic
growth, the reform of the international financial institutions, and the strengthening of financial
regulation. Whereas a lot could be said about the first part and the sometimes overly
ambitious and activist policy recommendations associated with it, I would like to focus on the
last-named aspect for the remainder of my speech.
2. Major issues in the reform process
With regard to financial regulation, a comprehensive reform agenda was set in train by the
G20 summits in Washington, London and Pittsburgh. The envisaged reforms aim at creating
a strong regulatory framework that ensures financial stability and supports steady and
sustainable economic growth. Although significant progress has already been made, much
remains to be done. As the implementation of the agreed rules is what finally counts, 2010
and 2011 will prove to be crucial years.
What have been the main achievements up to now? The major step has been the reform of
the Basel II framework for capital and liquidity regulation. Relevant proposals were put
forward in December 2009, including, among other things, measures to raise the quality,
consistency and transparency of the capital base, a global standard for funding liquidity as
well as the introduction of a leverage ratio. Throughout 2010 the proposed measures will be
calibrated on the basis of an extensive quantitative impact study. The fully calibrated set of
measures will then be issued by the end of 2010 and the new standards will be phased in by
the end of 2012 provided that economic recovery is assured.
Other major elements of reform centre on the problem of systemically important financial
institutions. Here, the reform of the Basel framework is part of the solution, too, as it will help
to improve the capacity of such institutions to absorb losses. However, what is required is a
more comprehensive approach which specifically ensures that accountability is brought back
into the game. Necessary proposals that go beyond the reformed capital and liquidity
framework include capital surcharges for systemically important institutions, better resolution
regimes and a strengthening of the financial infrastructure. Commissioned by the G20, the
FSB is already working towards that goal. Nevertheless, some thorny issues are still waiting
to be resolved, such as the calibration of measures to assess systemic relevance.
While traditional microprudential supervision is still important, the crisis has taught us that it
is far from being sufficient for effective crisis prevention. Thus, the microprudential approach
has to be supplemented by macroprudential supervision that takes due account of systemic
risk and the overall stability of the financial system. Towards that end, material progress has
been made on the European level by establishing the European Systemic Risk Board and
the European System of Financial Supervisors. Yet again, further efforts are required.
3. The role of the private sector
The few remarks I have just made show that the agenda set by the G20 is an ambitious
endeavour for governments and regulatory authorities. Even so, it is important not to leave
the private sector on the sidelines. Market participants are also in charge and have to
contribute to the reform process. This is all the more true since the reform agenda also
strives to strengthen or re-establish the disciplining effect of market forces.
Hence, despite the fact that markets are stabilising and recovery is lingering on the doorstep,
going back to "business as usual" cannot be the way forward. Rather, market participants
should seize the opportunity provided by the current favourable times to strengthen their
risk-bearing capacities and to build up adequate buffers. This is especially important as
regulatory changes such as higher capital and liquidity requirements, while still to be phased
in, are definitely on the way.
In this context, I can assure you that recent complaints about regulatory uncertainty posing a
major downside risk to financial institutions are being taken seriously. However, as the
decisions to be taken will shape the financial system for years to come, accuracy is more
important than speed. We have to be careful not to implement oversimplistic solutions.
Regarding the required complexity of regulatory measures, potential interactions have to be
taken into account as, otherwise, the danger of unintended consequences grows. At the
same time, the cumulative effect of new measures has to be considered, which makes
thorough impact assessments necessary. Also, actions have to be sufficiently coordinated on
the global level in order to maintain a level playing field and to reduce the risks stemming
from a fragmented and piecemeal regulatory response. Even so, policy development is
proceeding to agreed - and very ambitious - timelines, thereby reducing regulatory
uncertainty as far as possible.
4. Conclusion
Ladies and gentlemen
Given the magnitude of the challenges that lie ahead of us, it seems fair to say that we have
come a good distance already. However, there are a couple of things we have to be aware
of: first of all, it is essential that the process of reform remains an international endeavour
and is not hampered by unilateralist leanings. Also, as we are now hopefully entering better
times, there is a certain danger that some major issues on the reform agenda might fall prey
to dwindling commitment and political interests. This must not be allowed to happen as only
a coordinated and harmonised effort will enable us to ensure financial stability and thus pave
the way for steady and sustainable global development.
Thank you for your attention.