jens weidmann : digitalisation, financial regulation and low interest rates dinner speech by dr jens weidmann, president of the deutsche bundesbank and chairman of the board of directors of the bank for international settlements, at the 6th frankfurt finance summit, frankfurt am main, 11 may 2016. * 1. * * introduction dr raettig ladies and gentlemen good evening, and a very warm welcome to you all at the conference dinner of this year ’ s frankfurt finance summit here at the deutsche bundesbank. i am speaking this evening not as a host but as a guest speaker, but i think that has little bearing on what i have to say. so thank you very much for your invitation and for giving me the opportunity to share my thoughts. once a year, frankfurt main finance e. v. brings together decision - makers from commercial banks, insurance companies, stock exchanges, regulatory authorities and central banks as well as academic experts to discuss the latest issues in the financial business. as you all know, frankfurt is germany ’ s leading financial centre and the euro area ’ s foremost financial hub. however, some of you might not be aware that we are gathered this evening at this city ’ s nucleus as a financial centre after the second world war. the old part of this building complex, which today houses the bank ’ s regional office in hesse, was once the domicile of the bank deutscher lander. and the establishment in 1948 of the newly founded german central bank in frankfurt is widely seen as marking the start of frankfurt ’ s emergence as germany ’ s leading financial centre. the establishment of germany ’ s post - war central bank ignited a fierce debate among the english - speaking allies. while the americans preferred a decentralised central banking system rather like the federal reserve system, the british authorities were more in favour of a centralised set - up with a central bank in hamburg. with hindsight, we now know that the british gave in on this particular point. but what, in an alternate history, would have happened if the british had prevailed on this issue? would you perhaps be attending the “ hamburg finance summit ” tomorrow – indeed, what would frankfurt look like today if all the skyscrapers had not been built? that ’ s something we ’ ll never know. ladies and gentlemen, fear not. in the following, i will neither delve into historical anecdotes, nor will i present you with any further hypothetical questions. rather, i would like to talk about

behaviour. but when financial stability is at stake, they have an incentive to deviate from their previous commitment. so, do higher capital ratios and the bail - in regime resolve the time inconsistency problem? no, but they do mitigate it substantially. while the revamping of the basel framework has not been finished yet, its completion is scheduled for this year. a further significant tightening of the capital requirements, in the sense of a “ basel iv ”, is not on the agenda. i feel that ’ s something that needs to be said in order to prevent the financial industry from facing needless regulatory uncertainty. there is one field of regulation, however, where too little has been done so far – the treatment of sovereign exposures in banks ’ balance sheets. a banking system can only truly be stable if the fate of banks does not hinge on the solvency of their national sovereigns. thus, i have been advocating, for quite some time now, a phasing - out of the preferential treatment of sovereign borrowers over private debtors. in the euro area, the introduction of non - zero risk weights and a large exposures regime for sovereign bonds would also help to inject greater credibility into the “ no bail - out clause ” of the eu treaty if banks were then able to digest a sovereign debt restructuring. appropriate capital rules are the best and most important contribution which financial market regulation can make to the stability of the banking sector. in this respect, it is good to see that, in germany, the average tier 1 capital ratio rose from 9. 1 % at the beginning of 2008 to 15. 6 % in mid - 2015, and that the quality of capital has improved substantially. all in all, i wouldn ’ t say that banks are being overburdened by regulation. nevertheless, for small and medium - sized banks, the burden is relatively heavy. in keeping with the principle of proportionality, we should reflect on an adjustment of regulatory and supervisory standards to the size of banks – provided that financial stability is not at risk. there is no doubt, however, that the new regulatory environment poses a challenge for all banks. 4. low interest rates another challenge facing banks is the current low - interest - rate environment. ultra - low interest rates, or even negative rates, and an unusually flat term structure are squeezing banks ’ profits. particularly affected are those banks whose profits mainly originate from net interest income. from the perspective of a central banker,