bundesbank is giving the ecb every possible support in the process of setting up the ssm, not least by providing experienced staff. in addition, the bundesbank will bring its experience to the table through the joint supervisory teams coordinated by ecb staff. and it will continue to play a major role in the supervision of smaller financial institutions. to build the banking union on solid foundations and avoid shaking confidence in the ecb, a “ balance sheet assessment ” will be carried out before the ssm is launched. this will be rather like a doctor ’ s check - up. and that brings us back to the problem of legacy assets. as you may recall, this issue has been part of the banking union debate right from the start. the balance sheet assessment will screen the balance sheets of the around 130 significant institutions which will fall under the ecb ’ s direct supervisory remit. the aim is to ensure that these banks ’ finances are sound before the ssm is launched so that they are not found to have major write - down needs just after the ssm has started its work. that would be a heavy political burden for the ssm to bear – especially if banks then had to be recapitalised or restructured following such write - downs. precisely because this balance sheet assessment could uncover some inconvenient truths for the current national supervisors, it is important to ensure that it is carried out correctly, competently and consistently. that is why we should also draw on external expertise – by enlisting the help of external auditors, for example. if the assessment reveals that banks need to be recapitalised, this should be achieved as far as possible via the capital market. if this isn ’ t possible, the next step is to establish whether the bank actually has a sustainable business model at all or whether it needs to be resolved. only if the bank cannot be resolved because of a threat to financial stability will it be recapitalised by its home country. the esm will only be involved in exceptional cases ; then, banks will not be recapitalised directly but via a loan to their home country. at this point, i ’ d like to emphasise one key overarching concept : taxpayers should not have to prop up banks which have unsustainable business models. setting up the ssm offers us the opportunity to subject bank balance sheets to strict scrutiny. we must not let this chance slip through our fingers. otherwise, we could jeopa

jens weidmann : banking supervision and regulation – what action does the bundesbank consider necessary? speech by dr jens weidmann, president of the deutsche bundesbank, at the club of hamburg - based economic journalists ( club hamburger wirtschaftsjournalisten ), hamburg, 30 august 2013. * 1. * * introduction mr nicolai ladies and gentlemen i ’ m delighted to have the opportunity to speak to you today at the club of hamburg - based economic journalists. of course, i can hardly say that i don ’ t have much contact with economic journalists. but it ’ s unusual for me to have the chance to discuss current issues with so many members of the media at once. the contact between central bankers and the press is so close because we need you, the economic journalists, to help the public understand our decisions and actions. despite our best efforts, our publications simply do not reach the same number of people as your media. but it is incredibly important for the public to understand our decisions so that they have confidence in our work. and this confidence is vital to maintaining a stable currency. after all, monetary policy mainly works by influencing expectations – the current issue of “ forward guidance ” being a case in point. yet the public have to be confident not just in a central bank ’ s monetary policy decisions but also in its role in payments or banking supervision and regulation. there are no half measures : either a central bank has the public ’ s trust or it doesn ’ t. and bearing in mind the old adage that it takes years to build up a good reputation and only minutes to ruin it, it ’ s easy to see why we central bankers – especially those in europe – are focusing so intensely on banking supervision and regulation at the moment. today, i ’ d like to give you a brief overview of the state of play in banking supervision and regulation and the steps that still need to be taken. 2. year five of the crisis – where are we up to? the financial and sovereign debt crisis has exposed substantial flaws in the financial system, which various reform projects are now seeking to address. many banks proved unable to withstand losses on their assets without outside help and had to be bailed out by taxpayers. this shook the foundations of some countries ’ public finances, too. some european countries became less and less solvent, worsening the banks ’ economic woes, as they had to take write - downs on their government bond holdings. the crisis therefore revealed