Andreas Dombret: Capital requirements, the shadows and a level playing
field - current challenges in financial regulation
Statement by Dr Andreas Dombret, Member of the Executive Board of the Deutsche
Bundesbank, at the Bank of France conference "Financial Regulation - Stability versus
Uniformity. A focus on non-bank actors", Paris, 28 September 2015.
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1. Introduction
Ladies and gentlemen, Mesdames, Messieurs,
Thank you for inviting me to speak at today's conference. It is a great pleasure to be here at
the Banque de France. The Bundesbank works closely together with our colleagues and
friends from the Banque de France and the ACPR, so there is no way I would miss this
prestigious event.
As a banking supervisor, my focus, as you would suspect, lies mainly on the supervision and
regulation of banks. Much has been done in this area since the financial crisis, and maybe
some of these regulatory projects could also be assigned to non-banks.
2. Higher capital requirements - not only for banks?
One of the main lessons from the financial crisis was that the rules governing the banking
system were rather inadequate. We saw excessive risk-taking, insufficient loss absorbing
capacity and banks that were "too big to fail" - to name just some of the problems that led to
the crisis.
Regarding capital requirements, the most important regulatory measure was Basel III, which
introduced not only stricter capital requirements but also new liquidity rules. In the EU, CRD IV
and CRR ensure harmonised implementation of the Basel III framework across all member
states.
When Basel III is fully implemented in 2019, regulatory capital requirements will be significantly
higher and tougher than under Basel II, and I am sure that the financial system is already today
more stable than before. But will more and better capital and new liquidity rules be enough?
Certainly not. And therefore, besides the Basel III regime, many other regulatory projects have
been launched in response to the financial crisis. Two important ones are also the topic of this
panel: a regulation to solve the "too-big-to-fail" problem and efforts to regulate the shadow
banking system.
At the global level, the G20 intend to approve at their summit in November a standard that
global systemically important banks will have to fulfil in future regarding their capital structure.
In particular, these banks will need to ensure a minimum amount of total loss-absorbing
capacity, TLAC for short. This will make global banks more resilient, and it will allow for their
orderly restructuring or resolution.
Work on TLAC is making good progress, and I am quite optimistic that we can finalise the
requirements by the end of 2015.
One question we might discuss in this panel is whether TLAC can be extended to non-banks.
Please allow me to make one general remark: Strengthening loss absorbing capacity to
facilitate restructuring or resolution processes is, of course, generally useful for all financial
institutions.
However, regulatory requirements tailored specifically to banks cannot, and should not, be
superimposed on other financial market participants, since business models, risk profiles and
resolution procedures are fundamentally different. And we must not forget that these regulatory
requirements have not yet been implemented for banks, let alone other players. This means
that, even for banks, we have no practical experience yet.
Ladies and gentlemen, in my view, there is no one-size-fits-all solution for non-banks. As a
case in point, insurers differ fundamentally from financial market infrastructures or from
pension funds.
Nevertheless, those specific policy instruments to strengthen non-banks' loss-absorbing
capacity that even exist are still in their infancy. For central counterparties, for instance, they
will probably be discussed in the framework of the upcoming EU regulation for restructuring
and resolution of central counterparties.
3. An everlasting challenge: regulating the shadows
When entertaining the idea of extending TLAC to non-banks, we have to bear one important
aspect in mind: this extension will only reach those non-banks that are already regulated today
such as insurance companies, for instance.
And, more generally, tightening regulation might set off a trend to relocate activities to the
unregulated non-banks also known as the "shadow" banking sector. This is something
regulators have to watch closely.
Without a doubt, shadow banks can become a source of systemic risk, especially when they
are highly interconnected with the regular financial system. It is therefore of utmost importance
to monitor shadow banks' activities and try to regulate them adequately. At their 2014 Brisbane
summit, the G20 agreed on a new roadmap for regulating the shadow banking sector. Work is
being conducted simultaneously by the FSB, the Basel Committee and IOSCO.
But the ambitious reform agenda is far from being completed. In my view, a key task on the
way towards transforming shadow banking into resilient market-based financing is now to
identify areas where additional FSB recommendations are needed and where existing
recommendations should be fleshed out. We have to drive this reform agenda with all our
efforts.
4. Conclusion: International cooperation as precondition for effective regulation
Ladies and gentlemen, let me conclude my remarks with something that is very important to
me. Any regulatory project needs international cooperation. If we do not coordinate our
approaches towards regulation, we will create a fragmented financial system with vast
opportunities for regulatory arbitrage.
When all is said and done, we are all pursuing the same objective: a stable financial system -
certainly at the national level, but it is equally important at the global level. As regulators, we
therefore must work together in an effort to avoid any form of fragmentation of the regulatory
space. The issue of derivatives oversight is just one example where international cooperation
is essential.
Thank you for your attention - merci de votre attention.