Jean-Claude Trichet: Shaping the future of global financial market
regulation
Transcript of a short video interview with Mr Jean-Claude Trichet, President of the European
Central Bank, at the Netherlands Bank's Amsterdam Financial Forum 2009, Amsterdam,
28 November 2009.
* * *
President Trichet, we really appreciate your willingness to address the Amsterdam
Financial Forum. What would be your main messages for the Financial Forum?
It is a great pleasure to address the Financial Forum that will discuss topical issues for the
long-term stability of the financial system and for the economy as a whole. Regrettably I
cannot join you in person. By the time you see this video, I am on my way to China for our
euro area-China dialogue. Nevertheless, I would like to share with you some of my views on
the ongoing regulatory reform agenda.
I would like to pay tribute to the role of the Basel Committee and its Chair, my colleague Nout
Wellink. The Basel Committee is one of the major fora shaping the future of financial market
regulation. I would like to highlight in particular the Committee's main priorities over the
shortterm and the challenges it faces in the coming year.
President Trichet, what impact did the decisions of the G20 have on the work of the
Basel Committee and its governance?
The leadership of the G20 in determining the new financial regulatory framework has led to a
strengthening of the Basel Committee and of its governance. The Basel Committee
broadened its membership in June to include new representatives from the G20 countries as
well as from Hong Kong and Singapore. Strengthening the governance of the Basel
Committee was crucial to enhance the Committee's ability to carry out its core mission of
improving global supervisory practices and standards. Its new governance is expected to
also contribute to the effective implementation of reforms, including in major emerging
countries.
What exactly is your role in the Basel Committee?
I have the honour of chairing the oversight body of the Basel Committee. We have extended
the membership to supervisory authorities and central banks of 27 countries. In September,
we met in the new composition for the first time. This was, indeed, a very important and, I
must say, challenging meeting given the issues at stake. I was very pleased that we reached
agreement on a comprehensive set of priorities for the work of the Basel Committee in the
short-term. These measures will constitute a major overhaul of the prudential framework and
will improve the resilience of the financial system. In particular, we have committed to
improve the risk-weighted capital requirements; to establish countercyclical capital buffers;
and to introduce a global liquidity standard as well as a leverage ratio that will supplement
risk-weighted capital requirements.
Could you elaborate a little further on these issues? What will be the implications for
financial institutions?
First, financial institutions will have to raise the quality, consistency and transparency of
capital. Tier 1 capital should be predominantly composed of common shares and retained
earnings to increase its loss-absorbing capacity. A common definition of capital and
appropriate disclosure of its components will be internationally established. This will
contribute to increased transparency and comparability.
Second, a framework of countercyclical capital buffers above the minimum requirement
will be introduced. The Basel Committee will set up appropriate indicators for the build-up
and release of these buffers. Measures for the conservation of capital will also be
considered, such as constraints on its distribution.
Third, a non risk-based leverage ratio will supplement risk-based capital requirements and
help to curb excessive balance sheet growth. To ensure the comparability of the leverage
ratio at the global level, necessary adjustments, for instance in accounting rules, will be
made.
Fourth, banks will be subject to a minimum global standard for funding liquidity. This new
standard will include a stressed liquidity coverage ratio that will be underpinned by a
longerterm structural liquidity ratio.
Finally, there is one more very important issue that I would like to mention. This issue is
compensation. The G20 Leaders endorsed the Financial Stability Board's implementation
standards to align compensation with prudent risk-taking and long-term performance. The
Basel Committee has set up a network of senior supervisors to monitor the implementation of
these standards. As discussions around bank bonuses resurface, it is of the utmost
importance that banks implement these standards immediately, and in time for the 2009
bonuses. I urge supervisors to ensure timely and consistent implementation. And once again
I urge banks to behave responsibly in this respect and resist short-term temptation. We all
have to be conscious that in the current episode, profit developments in individual institutions
cannot be seen in isolation from the very large public support granted to the financial system
as a whole.
President Trichet, are you satisfied with the results of regulation so far?
Yes, I am quite satisfied with the progress but the proof of the matter of course lies in the
implementation. The far-reaching measures being developed by the Basel Committee under
the presidency of Nout Wellink will result, over time, in higher capital and liquidity
requirements as well as in less leverage and procyclicality in the banking system. The
proposals on these measures will be issued by year-end. The calibration will take place in
2010. Their implementation will be phased in, taking into account expectations for the
improvement of financial conditions and economic recovery.
But even though this comprehensive package is an achievement, it does not imply that the
work is over. The challenges related to finalisation of the package in the coming years should
not be underestimated. These include assessing the interplay of the adopted and upcoming
measures, and deciding on the overall level of capital in the financial system.
What do you mean by the interplay of the various measures, will they complement or
reinforce each other?
There will be an important interplay of the various measures. We will undertake an
impact
assessment to analyse their cumulative effect. The aim is not to simply add-up the various
measures, but to take into account their interrelation. We need to look at the measures
already taken and assess how they combine with the upcoming changes to the definition of
capital, the introduction of a leverage ratio and of countercyclical capital buffers.
Are you not concerned that these measures will hamper efficiency of the banking
sector?
We need to reach agreement on the overall level of capital in the financial system
compared to pre-crisis levels, building on past and recent experience including national
stress-testing exercises. In doing that, we need to strike a balance between a level of capital
that promotes long-term financial stability without unduly compromising growth and efficiency
of the banking sector. This will be no easy feat. We have challenging years ahead of us and I
strongly urge the work of the Committee to continue at full speed. We mustn't loose either
the momentum or the window of opportunity for reform.
How will these new regulations contribute to strengthening resilience of the financial
system?
Speaking towards an audience in the Netherlands let me illustrate it with an analogy, drawing
on a project well known to you. The Dutch have through time developed the Delta project - a
series of defences to protect the stability of the nation, guarding it against floods. What we
are trying to build is the Delta Project of the financial system that will protect it from risk
excesses. If I may say, in this sense we are fortunate that the Basel Committee is chaired by
a Dutchman!
As you know, the Delta Project, considered one of the seven wonders of the modern world,
comprises different types of constructions, such as dams and dikes, that together protect the
nation from the risk of flooding. Similarly, the set of regulatory measures being developed by
the Basel Committee will act together as a series of defences against risks to financial
stability. We also need to agree on the height of the defences we are putting in place as this
is linked to the overall level of protection we are aiming at. This will determine the appropriate
level of capital.
The official goal of the Delta Project is to reduce the risk of flooding. Let this be an inspiration
for us in our efforts to safeguard the stability of the financial system.
Mr Trichet, thank you very much for your contribution.
Thank you for your attention. I wish you a stimulating and constructive discussion.