Andreas Dombret: Global rules for global financial markets
Speech by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, as a response to the Note of the Pontifical Council of Justice and Peace,
Frankfurt am Main, 19 September 2012.
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I was asked to share my views today on the note of the Pontifical Council of Justice and
Peace on reforming the international financial and monetary system.
Lack of global financial regulation
I highly welcome the general tone of the Pontifical Council's note which stresses the need for
the financial sector to serve the overall economy and, accordingly, the common good. With
respect to financial regulation, the note rightly points to the lack of truly global regulation for
global financial markets as a key factor for the financial crisis that started in 2007. While
financial markets around the globe became more and more integrated and interconnected
over past decades, financial regulation remained largely national - despite of ongoing
coordination efforts in international committees and groupings. The crisis highlighted some
inefficiencies of international coordination in financial regulation and necessitated numerous
ad-hoc interventions by public authorities. Those events made clear that although rules and
regulations were partly agreed on internationally, their transition into national rules and
legislation was fragmented and, at times, even inconsistent. Not surprisingly, financial
institutions had a strong incentive to engage in regulatory arbitrage. An internationally
coordinated regulatory response is therefore warranted.
Minimum body of internationally agreed rules
I agree with the conclusion of the Pontifical Council that we need a minimum, shared body of
rules and regulations for global financial markets. But one size does not fit all. Accordingly,
and in line with the principle of subsidiarity, the rules should be set at the international level
but allow for sufficient flexibility to adapt them to peculiarities of national financial systems.
However, I do not see the need to create a new "global authority" for that purpose. Over the
past years, the Financial Stability Board (FSB) has emerged as the central body coordinating
the international financial sector reform agenda set in train by G20 Leaders at their
Washington Summit in 2008 and further developed at subsequent meetings. The FSB brings
together international institutions and standard-setting bodies as well as regulators, central
bankers and finance ministers from advanced and emerging economies with the most
important financial sectors globally. In the meantime, the FSB has gained a track record and
several important cornerstones of the reform agenda have been set in place. Take the policy
framework for dealing with systemically important financial institutions or the new regulatory
standard for bank capital adequacy and liquidity - commonly termed as Basel III - as
examples. G20 Leaders, in late 2011, agreed to further strengthen the FSB's role in order to
enable it to keep pace with its growing role in promoting the development and
implementation of regulation. Accordingly, in June 2012, G20 Leaders endorsed the FSB's
recommendations on strengthening its capacity, resources and governance. I strongly
support the further development of the FSB because I am convinced that it will further
improve the elaboration of international rules and regulations as well as international
cooperation in regulation and supervision and help to achieve an international level playing
field.
Rigorous monitoring of national implementation
While rule-making at the international level is a necessary condition for financial stability, it is
by no means sufficient. For the rules to be effective, they have to be translated in national
laws and regulations in a timely and consistent manner. Therefore, we need to strictly
monitor implementation, disclose the respective findings, and let peer pressure work its
magic. The FSB and international standard-setting bodies have jointly developed a
coordination framework for implementation monitoring to ensure consistent implementation
of the reform agenda. As another important part of implementation monitoring, the
International Monetary Fund together with the World Bank is regularly assessing the
adherence of its member countries to international standards. Thereby, the Fund is
promoting international monetary cooperation and exchange rate stability. In response to
weaknesses detected during the financial crisis, the Fund initiated various reforms with the
aim of strengthening its internal governance as well as its analytical capabilities. I highly
welcome those reforms which will further improve the Fund's work.
To sum up, I regard strengthening existing bodies in the field of global financial regulation
and the international monetary system as the right way forward for two main reasons. Firstly,
it allows building upon the substantial expertise gathered in existing institutions. Secondly,
jurisdictions are obviously reluctant to further cede national sovereignty to a supra-national
level. The enduring debate about the creation of a fiscal union in Europe is providing just one
vivid example in this regard. Accordingly, the creation of a global regulatory authority does
not seem to be practical at this point in time. Moreover, I regard the current practice of setting
rules for the global financial markets as appropriate. In a first step, set the rules at the
international level. As a second step, rigorously monitor their translation in national laws and
regulations to ensure consistency and a global level playing field. As I have pointed out, we
have adequate institutions at the global level to fulfill these tasks, so currently I do not see
the need to create new authorities for that purpose.
Thank you for your attention!