Axel A Weber: Institutional responses to the crisis and thoughts on
regulatory issues
Introductory remarks by Professor Axel A Weber, President of the Deutsche Bundesbank, at
the Central Bank of Luxembourg conference "Financial Stability and Banking Regulation in
Germany and Turkey", Luxembourg, 3 November 2009.
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1 Introduction
President Mersch
President Yilmaz
Ladies and Gentlemen
First of all, I would like to thank you for the opportunity to speak to you here today on
financial stability and banking regulation from both a German and a euro-area perspective. I
would like to focus on two issues. First, the institutional responses to the crisis, especially
from a central banker's perspective, and second some thoughts on the regulatory issues
currently being debated, in particular capital requirements.
2 Institutional implications of the financial crisis
One of the lessons of the financial crisis is that a more systemic approach to financial
markets is needed. But what does that mean for central banks? I would like to raise three
topics.
Firstly, the pursuit of financial stability will have to be taken into greater consideration in the
operation of monetary policy. The mandate of central banks is usually to maintain price
stability. In the case of the Eurosystem, this is our primary objective. The same applies to the
Central Bank of the Republic of Turkey. However, price stability and financial stability are
interconnected. Disruptions to the financial markets have negative implications for price
stability as they have adverse effects on the economic cycle and distort the monetary
transmission mechanism.
That is not to say that financial stability should become an explicit target of monetary policy.
It is still true that monetary policy is a rather blunt tool when it comes to combating asset
price bubbles. Furthermore, one should not over-estimate central bankers' ability to identify
asset price bubbles in advance and to determine whether asset price booms have benign or
malign reasons. However, financial market developments should be given greater weight
when assessing risks to price stability. Financial crises increase the volatility of
macroeconomic variables such as inflation and growth. For this reason, it is of the essence to use a
suitable analytical framework. The two-pillar strategy of the Eurosystem's monetary policy
with its prominent role for long-term-oriented monetary analysis is certainly a good basis.
Especially during the financial crisis the often-criticised and sometimes ridiculed monetary
and credit analysis has proved valuable in monetary policy analysis.
Nevertheless, the analysis of monetary and credit aggregates must be developed further in
order to identify undesirable developments on financial markets. Eurosystem staff are
currently working towards this goal. Recent IMF research, for example, has shown that, since
1985, house price busts have typically been preceded by significant upward deviations of the
credit-to-GDP ratio from its long-term moving average.
Monetary policymakers should also consider the impact their actions have on financial
market participants' appetite for risk. This is why I have repeatedly called for a more
symmetrical approach that would treat boom and bust episodes not as isolated events but
would try to look through the financial cycle in order to steady policy.
While I am opposed to enhancing the mandate of monetary policy and setting financial
stability as an additional and independent target, I am in favour of strengthening the role of
central banks in this area. This is the second topic I would like to raise. Calls for a more
systemic approach are mainly addressed to central banks. Taking into account the wide
range of information and data central banks collect in fulfilling their mandate, no other
institution is better suited for taking the systemic macro-prudential view. Central banks
combine macroeconomic analysis with deep insights into the financial markets stemming
from monetary policy as well as payment operations and - in many cases - data from
banking supervision. It is therefore obvious that central banks are key when it comes to
macro-prudential supervision.
In the Bundesbank, we have decided - as have many other central banks - to establish a
financial stability department in order to give this area of increased importance an
organisational home. The new department commenced its work in the middle of this year.
Reflecting the pivotal part central banks play in macro-prudential supervision, the ESCB,
consisting of the ECB and the national central banks, will play a leading role in the European
Systemic Risk Board (ESRB), which is to be established in the next few weeks. The ESRB
will be responsible for the macro-prudential oversight of the financial system of the European
Union in order to prevent or to mitigate systemic risks to financial stability.
Thirdly, as I mentioned earlier, central banks are partly or fully in charge of banking
supervision in many countries. The central banks of Luxembourg and Turkey do not have
responsibility for banking supervision. However, in Germany the responsibility for banking
supervision has traditionally been shared by the Bundesbank and the Federal Financial
Supervisory Authority, or BaFin for short. BaFin was created some years ago by the merger
of the federal offices responsible for the supervision of banking, securities trading and
insurance. The operational tasks have mostly lain within the Bundesbank's remit, while BaFin
is responsible for all sovereign measures.
As you probably know, the new coalition of Christian Democrats and Liberals recently
decided to entrust the Bundesbank with banking supervision. Incidentally, giving central
banks more responsibility for banking supervision is currently being debated in other
countries, too. I would like to take this opportunity to make some remarks on this issue in the
German context:
Firstly, collaboration between the Bundesbank and BaFin has worked well, both before and
during the crisis. Secondly, the Bundesbank did not ask to be given full responsibility for
banking supervision. Rather it was an objective of the political parties that have won the
federal elections.
However, the Bundesbank recently declared its readiness to take on more responsibility for
financial supervision if this is politically desired. Still, it is of the essence that the future
system be compatible with the independence of the Bundesbank, which is laid down by the
EU treaty. We believe this is possible. Nevertheless, in our opinion, the new German
government would be well advised to closely consult the Bundesbank in the decision-making
process at an early stage. In any case, the Eurosystem will have to be consulted before the
law is changed.
Supervision of the financial system will have to become more systemically-oriented in the
future. This implies that the interconnectedness of financial institutions must be taken into
consideration.
3 Regulatory issues
Institutions matter. However, it would be very unwise to believe that the creation of new
bodies at the European or global level and some institutional reform alone will prevent the
reoccurrence of a similar crisis. Ultimately, it is the regulation of financial markets that
matters when it comes to creating a more resilient financial system.
Basically, making the financial system more stable is a manageable task. The real challenge
is to make it more stable without significantly hurting economic productivity. Remuneration
schemes, currently a hot topic among the public, are a good example. The disincentive
effects of bonuses in terms of short-termism and excessive risk-taking might be prevented by
imposing statutory caps on salaries or limiting tax deductibility. However, if interventions are
too far-reaching, they may have other disincentive and adverse effects. Therefore it is
important to find the right balance. The principles of sound compensation, which were
formulated by the Financial Stability Board (FSB) and are now being transposed into national
legislation in the G20 and other countries, strike this balance, in my opinion.
Creating level playing fields is another important demand when it comes to seriously
improving regulation. Therefore it is of the utmost importance to further promote the
convergence of international and US accounting standards, unless we want to continue to
compare apples and oranges. However, in this context I appreciate that the IASB
(International Accounting Standards Board) has recently agreed to refrain from broadening
the Fair value principle in the IFRS.
Strengthening banks' capital base is certainly the most important, but also the most difficult,
task on the regulatory reform agenda. Being involved in the processes of the Basel
Committee and the FSB, the Bundesbank appreciates the decision by the G20 to improve
the quality and quantity of banks' capital once the financial system has stabilised on a
sustainable basis and the economy has recovered. However, we should refrain from
unsettling the markets with precise schedules. Getting it right is important.
The impact study of the new capital measures of the Basel Committee on Banking
Supervision, which is planned for 2010, should provide some enlightening information. As
regards the introduction of a leverage ratio, we are afraid of competitive distortions, in
particular owing to differences in accounting standards. We therefore welcome the plan to
apply this risk-insensitive measure (at least temporarily) under pillar 2 of Basel II. Basically,
we are against deviating from the principle of risk-sensitivity in the Basel framework. In this
regard, the commitment of all G20 financial centres to adopt Basel II by 2011 has been a
very positive outcome of the Pittsburgh summit.
The implementation of a high level, and better quality, of capital requirements in the long run,
counter-cyclical capital buffers and higher capital requirements for risky products and
offbalance sheet activities are not only in the interest of the public, they should also be in the
interest of the banks themselves. On top of that, banks should make greater use of the
options they already have to strengthen their capital base, be it by withholding profits or
raising private or sovereign capital.
4 Conclusions
Let me conclude.
Financial stability is not just a buzzword as some critics suggested a few years ago. The
financial crisis has proven them wrong. Policymakers have shown their commitment to take
decisive steps in order to make the financial system more stable. Now it is up to the central
banks and the other players in macro-prudential supervision to enhance the analytical
instruments needed to recognise risks to financial stability earlier and more accurately.
Thank you for your attention.