Andreas Dombret: Sino-German Financial Stability Forum - concluding
remarks
Concluding remarks by Dr Andreas Dombret, Member of the Executive Board of the
Deutsche Bundesbank, at the Sino-German High Level Workshop, Frankfurt am Main,
11 July 2011.
* * *
Dear Mr YI Gang, dear guests, after a long day of intensive discussion, concluding remarks
should be short. So let me only briefly point to some consensus and challenges ahead.
Despite different stages of development of both countries, the discussion at the workshop
has shown a broad consensus on the importance of price stability as the primary objective of
monetary policy, that fiscal stability is not only a prerequisite for a balanced and sustained
economic growth but also for national and global financial stability and that a sound and a
stable banking system is the first line of defense against financial crisis.
But the discussion has also highlighted and underlined important challenges ahead. I will
briefly go through some of these challenges and structure my further remarks by the main
surprises during the financial crisis:

The dynamic of contagions and market dynamics,

the spillovers into the real economy and

the vulnerability of countries.
Turning to the first point, the financial crisis has shown an unexpected strong and fast
transmission of the US sectoral financial shock around the globe. Despite the fact that
significant progress has been achieved to measure and identify risk exposures of globally
acting banks and the shadow banking system, for example, by enhanced network analysis,
important challenges remain. Beyond an intensified monitoring of these risk exposures on
this more microprudential level, global monitoring of capital flows and changing financial
transmission channels of external shocks have to be enhanced. Moreover, we should not
only focus our monitoring on the ups and downs of exchange rates, interest rates and CDS,
but even more on the underlying reasons for these movements. Therefore, an extended
monitoring should also have a close eye on the significant structural changes of the financial
markets and systems, which build the most important base for different response patterns to
financial crises across time and countries.
In my view, it might also be fruitful to intensify the discussion about an appropriate
assignment of roles in this regard on a global, regional and national level. There are no
doubts that the IMF has a significant comparative advantage on the global level, due to its
broad country coverage. The IMF should use this potential in an intensified bottom-up and
top-down approach in collecting relevant data and information and using this kind of
information for enhanced in-depth analysis - in close cooperation with the BIS. The
European Systemic Risk Board and the Asian+3 Macroeconomic Research Office with a
Chinese official as a first head of this office will play a significant role on the regional level.
And of course, the national monitoring and assessment of risks by the People's Bank of
China and the Deutsche Bundesbank in their own countries remain the first and most
important pool of information on financial stability.
This broad variety of institutions in evaluating financial stability raises the question, whether
and to what extent there is a necessity for international cooperation in the communication of
these assessments. Two different aspects have to be balanced in future discussions:
Conflicting views and comments could confuse markets more than contribute to its
stabilization. On the other hand, it is important to guarantee independent analysis and
communication in financial stability.
The second challenge I would like to highlight, is the unexpected strength of spillovers into
the real economy around the globe. Nearly all international financial institutions and national
research institutes underestimated the dampening effects of the financial crisis on the real
economy. I support all efforts which are focused on a better capturing of financial structural
changes in macroeconomic models. Some commentators are rightly pointing to the fact that
textbooks and models are lagging behind reality. But it appears that the distance has
become too large.
Moreover, in further developing macro-stress tests we currently need to incorporate these
financial changes. Only some years ago, macro-stress tests were pre-dominantly focused on
real shocks and its impacts on the stability of the banking system, while now most shocks
have been stemming from the financial sector.
My third brief remark is focused on the unexpected and high vulnerability of countries. This
has been also true for those countries with a stable and sound macroeconomic framework. If
macrostability is an important necessary condition, but not sufficient to weather the initial
financial shock, what then should be the appropriate response to this experience? How could
we enhance the protection against these shocks? This is still a quite open question.
In my view, we should put our focus more on effective prevention than on building safety
nets, which is more an element of crisis management than of prevention and could enhance
excessive risk taking and moral hazard. The more the risks of individual decisions in the
financial sector are backed by the state or global safety nets, the higher is the probability of a
misallocation of financial resources by individual investors. We need just the opposite, a
greater sensitivity of the individual manager to financial risks, to bring financial markets back
to its important role of being an efficient judge and jury of misguided macropolicy. Since
political mechanisms failed to be this kind of an effective mechanism of sanctions - the
Stability and Growth Pact is only one example - then it is even more important to strengthen
market disciplining forces.
Again, what we need first are in-depth analysis on the underlying reasons of significantly
changing transmission mechanism which effect even countries with sound and stable
macroeconomic frameworks. The IMF in close cooperation with other relevant financial
institutions can play an important role also in this regard. The so called "Issing Committee"
- advising the German Government on financial stability issues - has pointed to the
necessity to build up a global risk map, which would be an important element of an extended
global monitoring by the IMF and other relevant institutions. Professor Issing, former member
of the executive board of the European Central Bank is heading this Committee and we feel
much honored that he has accepted our invitation to present an overview of the
recommendations of this Committee this evening.
But let me first hand over to Mr YI Gang and his concluding remarks with the perspective of
the People's Bank of China.