Andreas Dombret: Regulatory reforms between ambitions and reality
Introductory statement by Dr Andreas Dombret, Member of the Executive Board of the
Deutsche Bundesbank, at the Alpbach Financial Market Symposium, Alpbach, 30 August
2013.
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Ladies and gentlemen
It's a pleasure to be in Alpbach today to discuss with you the crucial topic of regulatory
reforms. Thank you for inviting me to these beautiful surroundings!
Ambitions meet reality - let me start with a dire reality. The recent financial crisis highlighted
weaknesses that prevailed in the financial system. Ever since, the financial sector has been
undergoing ambitious regulatory change. Even though regulation is no panacea, it is a good
measure to be applied wherever weaknesses are concentrated. To tackle these weaknesses
at an international level, the G20 are pursuing a comprehensive and ambitious regulatory
reform agenda. I believe it is vital to mitigate the main weaknesses of the financial system.
The new rules for banks' capital and liquidity cushions, for example, are a good start in this
respect.
However, this is by no means enough. Tougher regulation for banks might lead to regulatory
arbitrage. And in this regard, there is one place to focus on: the so-called shadow banking
system. The shadow banking system comprises activities that are conducted outside the
sphere of regular banking. I do not favour the commonly used expression of shadow
banking, since the activities of the shadow banking system are not bad per se. Thus, I would
prefer to call it "non-bank banking".
But still, it is a place where systemic risks can easily emerge because of unregulated liquidity
and maturity transformation, because of the build-up of leverage, and because of
procyclicality. In order to prevent the emergence of systemic risks in the shadow banking system
it is therefore essential to ensure that measures are implemented consistently across
sectors. And this may well include regulation.
Furthermore, adequately capturing these risks presupposes that they are identified and
measured. Shadow banking activities, however, are beyond the reach of bank reporting
requirements. As a result, data availability posed and continues to pose a serious challenge.
But at least we now have a regular monitoring of shadow banking activities.
Yesterday, the Financial Stability Board published recommendations on the shadow banking
system. These recommendations represent another milestone but they do not represent the
end of the way. In my view the topic of shadow banking should play an important role at the
G20-Summit in St. Petersburg.
However, one thing should be clear: when we develop regulatory proposals, we need a
thorough understanding of their implications. Let me briefly touch upon repo markets, an
important source of leverage and pro-cyclicality. In order to thoroughly assess the effects of
envisaged numerical floors on haircuts for the securities lending and repo market, a
quantitative impact study is just being launched. I strongly support this approach. It facilitates
early recognition of inadequate measures and unintended side-effects. It therefore allows us
to introduce effective measures.
The shadow banking system will constantly challenge policy makers because it adapts very
quickly in order to evade regulatory measures. Regulatory arbitrage is a reality we have to
face. It is therefore essential that we make sure regulatory measures are consistent - not
only across sectors as I already pointed out but also across jurisdictions. Regulatory
measures must be developed and agreed upon in international cooperation. In addition, I
expect the financial industry to set in train a rethinking towards more risk awareness. Only in
this way can the weaknesses that were exposed in the financial system be remedied in the
long run, and the financial system be made more resistant to future crises.
My brief excursion into the shadow banking sector and the challenges it presents for
regulators illustrates that the elimination of systemic risks is not easy. And in doing so, we
face obstacles and challenges. Thus, I end almost where I began: reality requires ambition.
Thank you very much for your attention.