Axel A Weber: Enhancing stability - current issues in financial regulation
Keynote speech by Professor Axel A Weber, President of the Deutsche Bundesbank,
at the Frankfurt Finance Summit, "Financial market regulation, supervision and the role
of the central banks: uniform regulation and subsidiary supervision", Frankfurt am Main,
23 March 2011.
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1. Introduction
Ladies and gentlemen
First, I would like to thank you for the opportunity to speak here today. We are now in the
fourth year of a crisis that originated in the US housing market but eventually spread
throughout the financial system. It led to a worldwide slump in economic activity and, in 2010,
sparked a serious sovereign debt crisis in some euro-area member countries. This course of
events demonstrated the global character of the financial system - crises are no longer a
purely national issue - and therefore underscored the need for an internationally coordinated
reform of regulatory and supervisory frameworks. Let me very briefly discuss the issue of
globalising regulation and supervision from a European perspective.
2. Reforming the regulatory framework
The regulatory reform has three main building blocks: first, Basel III as an enhanced
regulatory framework for banks. Second, new rules for systemically important financial
institutions (SIFIs) and, third, adequate regulation of the shadow banking sector. The G20
endorsed Basel III in November 2010. As regards the other two areas, intensive discussions
are ongoing, and results should emerge later this year. At a general level, there is no doubt
that an internationally harmonised approach is necessary in all three areas. Given the global
nature of the financial system, a fragmented approach would invite regulatory arbitrage and
thus provoke the renewed build-up of systemic risk in less regulated jurisdictions.
Nonetheless, uniform international principles have to be adapted to heterogeneous national
structures. Specific national legislation typically takes better account of national
particularities, for example in terms of market structure or modes of refinancing. The
challenge is therefore to strike the right balance between ensuring a level international
playing field and avoiding a one-size-fits-all approach that places an unnecessarily onerous,
or even harmful, burden of adjustment on national financial systems. Whether this would be
the case in the EU if the Basel III framework is implemented through the instrument of a
regulation rather than a directive is currently a hotly debated issue. For the European
Commission, it would definitely be easier to enforce common standards through a regulation,
but this approach would leave only very limited leeway for member states to accommodate
country-level differences or to deal with any unintended consequences that emerge after the
rules have come into effect.
3. Reforming the supervisory framework
The reform of supervisory structures involves a similar trade-off, though it is tilted somewhat
more in favour of national particularities; national supervisors naturally have a more intimate
knowledge of local financial institutions than supranational supervisors. Nevertheless, it is
clear from the experiences of the crisis that financial supervision requires a higher degree of
international cooperation: firstly because international banks operate and are supervised in
different jurisdictions; and secondly because of potential systemic risks, which are
predominantly a cross-border phenomenon.
To facilitate the supervision of international banks, the European System of Financial
Supervisors (ESFS) has been set up. Part of this system is the European Banking Authority
(EBA), which is responsible for supervising the banking sector. To allow for adequate
subsidiarity, the EBA follows a members-based approach where national supervisors are
members of boards and working groups.
With regard to systemic risk, establishing international cooperation is particularly important.
To strengthen the macroprudential approach which supplements the traditional
microprudential approach, the focus of supervision has to be broadened from the level of the
individual bank to the systemic level. This can and will be achieved by various means.
Institutionally, an important element is the European Systemic Risk Board (ESRB), which has
been created as part of the ESFS. Its task is to detect systemic risks early on and to issue
individual member states with warnings and recommendations. Nevertheless, as the ESRB
has no powers to enforce its recommendations, it remains the responsibility of national
governments to ensure that recommendations are followed.
4. The role of central banks
Now, as a last point, let me say a few words on the role of central banks in this new
regulatory and supervisory framework. Naturally, central banks have a strong interest in
financial stability, as only a stable financial system allows monetary policy measures to be
implemented efficiently. At the same time, central banks have great expertise in all matters
concerning the financial system. Consequently, they already play, and should continue to
play, a prominent role in safeguarding financial stability at the microprudential as well as at
the macroprudential level. At the microprudential level, central banks in many countries are
involved in the supervision of individual banks. In addition, they naturally analyse
developments at the macroprudential level extensively and consequently play a major role in
the ESRB. However, wherever central banks are involved in financial supervision, it is
imperative that this does not compromise their independence and their primary objective,
which is to maintain price stability.
5. Conclusion
Ladies and gentlemen
There is no doubt that the regulatory and supervisory framework has to reflect the global
nature of the financial system. Nonetheless, heterogeneous national structures make it
imperative to maintain a certain degree of flexibility when reforming regulation and
supervision. To strike the balance between uniformity and subsidiarity is certainly a
formidable challenge but I am confident that we will eventually succeed and create a more
stable and more resilient financial system.
Thank you for your attention.