Joachim Wuermeling: International cooperation in financial
regulation - between myth and reality
Speech by Prof Joachim Wuermeling, Member of the Executive Board of the Deutsche
Bundesbank, at a reception to welcome the new chief representative of Deutsche Bundesbank's
New York office Gabriele Kabelac and to bid farewell to Dr Claudia Stirböck, New York City, 11
September 2018.
* * *
1 Introduction
Ladies and gentlemen,
It is wonderful to be back in New York City, a city so rich in American and international flair.
We are here today to welcome the Bundesbank's new chief representative, Gabriele Kabelac.
For us at the Bundesbank, this event is much more than a simple changeover - it symbolises
the importance of our transatlantic partnership and friendship.
But tonight is also the final night of Rosh Hashanah, the Jewish New Year. Rosh Hashanah, I
learned, is also referred to as the Day of Remembrance. It requires an "accounting of the soul", a
deep reflection on the past year.
Before coming here, I reflected not only on my personal year, but also on the political year behind
us. I thought, for instance, about the still-looming trade war and its possible repercussions on
economic growth throughout the world. But I also thought about the negotiations over finalising
Basel III - which have been completed, thankfully, but were difficult, quite frankly - and the
deregulation debate. It became clear to me that the values of international cooperation and
multilateral alliances are being visibly threatened by growing political tensions within our nations
as well as between them.
I have reflected then on what would be necessary to enter into a healthier new year for our
transatlantic friendship and for international cooperation. Let me make a few remarks about what
- in my opinion - won't work and what can work. I will focus on banking and financial supervision,
my main responsibility as a member of the Bundesbank's Executive Board.
2 The illusion of national sovereignty
The first approach that won't work is in my opinion the illusion of national sovereignty. This
means the idea that - as the Brexit cheerleaders led the British people to believe - if you pull your
country out of the web of international agreements, you can go it alone and even be better off.
Unfortunately, reality has been demonstrating how much of a myth that is. Regarding Brexit,
many people in the UK are only now beginning to realise how dependent their economy has been
and still is on EU membership. Many problems became only obvious during the exit negotiations
- most of which were never an issue during the leave campaign.
I think that compartmentalisation helping the national economy is a dangerous illusion which
does not provide substantial solutions to serious challenges. There has never been such a
mythological nation-state, and it certainly doesn't exist in the era of the internet, smartphones and
mass air travel.
What then is sovereignty in the 21st century? It is the capacity to decide rationally about where
cooperation is, on balance, better than going it alone, even if it entails unpleasant compromises.
3 The rationale for international cooperation in financial regulation
Following that, it seems reasonable to approach many areas of the economy in an internationally
cooperative, rules-based manner. Financial regulation, in my opinion, continues to be one area
conducive to this approach, as we want to prevent a regulatory race to the bottom and to ensure
fair competition, i.e. a level playing field.
It was in that spirit that the G 20, led by the United States, spearheaded the efforts to tackle the
financial crisis.
The G 20 efforts have created a rational, viable approach to international cooperation that is in the
interest of all member states - its principles should therefore remain pillars of the regulation of
international finance.
It is built on close transatlantic and international cooperation between our central banks and our
regulators and supervisors. It also rests on the joint work in international regulatory fora to foster
our mutual understanding and the common language we have developed over the past thirty
years.
This approach also builds on a whole body of international minimum standards, like the Basel III
regime for internationally active banks that we have developed over the last ten years. The Basel
III standards have proven to be a success story, as they are the foundation for banking regulation
in more than 100 countries.
4 The illusion of the global level playing field
Ladies and gentlemen, as we strive to prevent a race to the bottom and maintain a fair, level
playing field, I am convinced that international, rules-based cooperation is - and should remain -
the method of choice not only, but in particular in the area of financial regulation.
At the same time, I am less convinced that Basel III is a "one size fits all" approach and that
adherence to international standards makes national supervision redundant. Basel standards are
minimum standards that cannot cover each and every national specificity - in these few selected
areas, national authorities need to fil these gaps, and adjust the standards accordingly. Another
legitimate, but limited deviation concerns the reduction of administrative burdens for smaller
institutions - like they are currently pursued in the US and the EU. Further, if a non-EU bank has
substantial activities in the EU, it should have a consolidated subsidiary that is supervised in that
jurisdiction. An internationally active bank cannot have core capacities of risk management,
capital and liquidity only in one spot.
We have seen that the Intermediate Holding Corporation laws in the US work quite well; and the
same will be true of the forthcoming EU equivalent, the Intermediate Parent Undertaking
Regulation. The subsidiarisation requirement will also enhance the systemic stability of the
financial ties between the UK and the EU after Brexit. Generally speaking, it is also a useful
backstop against a regulatory race to the bottom, as it will make it difficult to provide cross-border
services from less well-regulated locations.
So I do understand that in light of Brexit and the end of London's direct access to the EU single
market fears of regulatory fragmentation are worsening and leading to more calls to maintain a
global level playing field.
That's why the important achievements of non-discrimination against foreign firms on the one
hand and the G 20's minimum standards should be upheld.
However, our approach to international cooperation is to make sure that every supervisor can
oversee the entities active in its jurisdiction.
5 Conclusion
Ladies and gentlemen,
Simple answers to complex problems are comforting, but they divert our attention from the real
issues.
The concept of splendid isolation is a myth; it solves no problems.
If the transatlantic partnership and close multilateral cooperation are to be resilient cornerstones
of the world economy, we need rational, careful decision-making, policy case by policy case;
where some cases will be better dealt with in the national realm, while others will turn out to
require coordinated or even cooperative approaches.
The Bundesbank has a reputation as being principles-oriented - sometimes maybe even too
much so. We will continue to seek our US partners' advice and work towards mutually beneficial
solutions, where cooperation is rational and viable.
Our New York representative office plays an important role in those efforts, and to end my
remarks, I want to introduce four persons who play important roles in furthering cooperation.
Let me start with the Executive Board member inter alia responsible for our New York office
since September 1: Burkhard Balz. With twenty years of banking and regulatory experience, he
will be an understanding partner for discussions on any financial topic. And, as a former member
of the European Parliament, he is internationally well connected and speaks the language of
diplomacy. At the Bundesbank, he will not only be responsible for our representatives abroad -
and therefore the New York office - but also for the important area of payment and settlements
systems.
We are both grateful for the excellent job that Ms Claudia Stirböck has done over the past five
years as our chief representative in New York: she played a vital role in the exchange between
the Bundesbank and the Federal Reserve and was instrumental in shaping our understanding of
US regulatory policy during her tenure. I am pleased that she will continue to apply her broad
expertise back home at the Directorate General Economics in our Central Office.
Ms Stirböck leaving our New York office is a loss, but I am confident that Ms Gabriele Kabelac will
be an excellent successor. Coming from our Directorate General Economics, she brings
profound financial sector knowledge with her. Moreover, with her experience in coordinating the
Bundesbank's participation in international forums, she will not only be a highly effective and
creative contact to all of you, but will also be a joy to work with.
Our new team now has the honour of welcoming - and I have the pleasure of introducing -
tonight's keynote speaker: Professor Stanley Fischer.
What is there to say about a man who has served as Governor of the Central Bank of Israel -
where he successfully guided the country through the global financial crisis of 2008 - but also
Vice Chair of the Federal Reserve? And all that after having been the World Bank's Chief
Economist, the IMF's Deputy Managing Director, and Vice Chairman of Citigroup.
The most fascinating item, to me, on his CV is that he was professor at the MIT Department of
Economics, where he was the Ph.D. thesis advisor not only to Ben Bernanke, but also to - you
guessed it - Mario Draghi.
I have therefore decided to let someone else find the right words: former US President Barack
Obama. Four years ago, he said that Stanley Fischer would "bring decades of leadership and
expertise" with him, and that he was "widely acknowledged as one of the world's leading and
most experienced economic policy minds." I have nothing more to add, and I am honoured to
give the floor to Professor Fischer.