Andreas Dombret: Competition policy and regulation in a global
economic order
Welcome address by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the reception given by the Deutsche Bundesbank at the Annual Congress of
the Verein für Socialpolitik, Düsseldorf, 5 September 2013.
* * *
1. Welcome
Mr Burda
Members of the Verein für Socialpolitik
Ladies and gentlemen
On behalf of the Deutsche Bundesbank, I would like to warmly welcome you to this
reception. It gives me great pleasure to be your host again this year.
As you will all be aware, the Verein für Socialpolitik and the Bundesbank have enjoyed very
close relations for many years now, and it is a relationship that is fruitful for both sides.
Academic study and research are indispensable foundations underpinning the work of
central banks. And central banks offer an attractive research environment. Added to this, the
issues facing central banks often stimulate new research projects.
However, research conducted by members of the Verein für Socialpolitik is not only relevant
to central banks, as your annual congresses clearly demonstrate. Competition policy and
regulation are topical issues which have attracted broad public attention.
The ongoing negotiations between the European Union and the USA over a transatlantic free
trade area are a case in point. This agreement could herald the creation of the largest free
trade area in the world, which is something I would warmly welcome.
As for the topic of regulation, I'm sure I'm not alone in thinking first and foremost of financial
sector regulation. As it happens, the G20 heads of state and government are debating
reforms to financial sector regulation this very day at their St Petersburg summit.
And yet competition policy and regulation not only matter to policymakers and the public at
large; they are equally relevant to all kinds of sub-genres of the economic sciences, as we
can see from the impressive range of topics covered by today's annual congress.
Let's now take a brief look at the relationship between competition policy and regulation in
the financial sector.
2. Competition policy in the financial sector
The political order envisages a clear-cut relationship between state and market: the state
creates a setting in which market forces can thrive. Hence, the state's role in competition
policy is to ensure effective competition. It sets the rules of the game but stays off the playing
field.
There have always been instances where reality has failed to live up to this ideal. All along,
politicians have enjoyed having a stake in the game; the Landesbanken are just one example
of this.
But one thing became clear when the crisis began - if not before: the financial sector setting
was only partially suited to ensuring a competitive environment that was consistent with
market economy principles.
In retrospect, a great deal of trust, probably too much at times, was invested in market forces
and market discipline. After the crisis erupted, there was a sharp increase in government
interventions to stabilise the financial system. In many countries, banks were propped up by
the state or even taken into national ownership.
This government response was motivated, among other things, by a distinctive feature of the
financial sector. Relative to other industries, players in the financial sector are very highly
interconnected.
This high degree of interconnectedness means that if one participant exits the market, it can
potentially bring down others as well. In extremis, this might cause the entire market to
collapse and endanger financial stability. What this means, therefore, is that the financial
sector is lacking a key aspect of an effective competitive environment - the possibility of
businesses exiting the market.
A major financial institution exiting the market can ignite a systemic crisis, leaving the state
with little choice but to intervene in order to prevent matters going from bad to worse. And
then the taxpayer is left to foot the bill. The no bail-out principle has lost all effect. As Walter
Eucken might have put it, those who benefited did not bear the costs.
This very phenomenon has come into play during the crisis. The state no longer merely sets
the rules, it has also joined the game, whether by choice or otherwise, because the markets
anticipated that it would be forced to intervene in an emergency. Naturally, this no longer fits
the ideal of the state envisaged in our political order.
If the state wants to get back off the playing field, it will have to adapt the rules of the game.
What we need is improved financial sector regulation.
3. Financial sector regulation
However, as I see it, we should not go from occasionally placing too much trust in market
forces to making excessive demands of state regulation. Regulation is designed to prevent
market failure, but it shouldn't put market mechanisms out of action.
Our aim should still be to use regulation to create an appropriate setting which provides the
right incentives for risk-aware behaviour. So the key question should be this: how can
regulatory measures help to reassert fundamental market economy principles, first and
foremost the no bail-out principle?
How, for instance, can we make it possible for financial institutions to exit the market without
endangering systemic stability and without the taxpayer having to foot the bill? What we need
are insolvency frameworks that are in tune with the interconnectedness and complexity of the
financial sector. Even large and complex institutions need to be able to fail without bringing
down the entire system. Only when that is possible will the state no longer be forced to
intervene at the taxpayer's expense. Thus, setting up a credible resolution mechanism for
financial institutions can help to strengthen the no bail-out principle within the financial sector.
Major steps have already been taken in this regard at the international level. The Financial
Stability Board has already presented key attributes of effective resolution regimes for
financial institutions, which were endorsed by the G20 heads of state and government in
November 2011.
Since then, work has been under way to transpose this new international standard into
national law. A draft directive for the recovery and resolution of credit institutions has now
been presented at the EU level. This proposal clearly sets forth the sequence of liability for
failing financial institutions - shareholders and creditors are now first in line, and rightly so.
So we're on track to reassert the no bail-out principle in the financial sector. But being on
track doesn't mean that we've already reached our final destination.
The design phase of the regulatory reform has been concluded; now it's time for us to put the
reforms into practice. That means following the path we've taken right through to the very
end.
First and foremost - and this is a crucial point as far as I'm concerned - all countries need to
follow this path together. Players in the financial sector operate in global markets, in
integrated markets, so we need to make sure our regulation takes account of any
crossborder interaction and coordinate regulatory measures internationally. In global markets, the
rules of the game need to be global, too.
The reforms endorsed by the G20 can only have the intended impact if they are fully and
consistently transposed into national regimes. Otherwise, evasive action or regulatory
arbitrage might endanger their success.
That's why we will need to devote even more attention to the question of consistency going
forward, particularly so given the impact of the rules across national borders.The Financial
Stability Board's stringent oversight and regular reporting to the G20 will play a key role in
this regard.
4. Conclusion
Ladies and gentlemen
The good news, as far as I'm concerned, is that the path we have taken to regulate the
financial sector is the right one. Now we need to stick to this path until we reach our
destination. And I think a somewhat brisker pace would certainly not go amiss.
As for my speech here today, I would now like to return to my introductory remarks on the
Verein für Socialpolitik and on academic study.
Sound regulation is built on robust scholarly foundations. And these, in turn, are the outcome
of academic discourse - exchanging ideas means disseminating them; discussing ideas
means refining them.
Gustav Schmoller, one of the co-founders of the Verein für Socialpolitik, once said that a
frank debate on conflicting convictions and principles cannot harm a cause; it can only
benefit it.
On that note, I hope to see many more lively debates in the future, and the Verein für
Socialpolitik provides an ideal platform for such academic discourse to thrive.
And I am delighted that we will be awarding the Gustav Stolper Prize this evening to an
outstanding scholar - one who does not shy away from debate, a quality which has enabled
him time and again to provide important input for policymakers, notably so in the prevailing
crisis but at other times as well.
But I do not wish to pre-empt the awards ceremony itself and therefore thank you for your
attention.