axel a weber : progress on the g20 agenda speech by professor axel a weber, president of the deutsche bundesbank, at the international capital markets and emerging markets roundtable, institute of international finance ( iif ), washington dc, 25 april 2010. * 1. * * introduction ladies and gentlemen the financial crisis has certainly been a devastating event. but it also set in motion a process that will lead to the creation of a more stable and more resilient financial system in the future. as warranted by the global character of the crisis, this process has found a sound international basis in the g20, bringing together major advanced as well as emerging economies. nevertheless, the g20 agenda is not just a response to the financial crisis but also a response to the needs of a globalised world. consequently, the agenda covers a broad range of topics such as the realisation of a more balanced pattern of global economic growth, the reform of the international financial institutions, and the strengthening of financial regulation. whereas a lot could be said about the first part and the sometimes overly ambitious and activist policy recommendations associated with it, i would like to focus on the last - named aspect for the remainder of my speech. 2. major issues in the reform process with regard to financial regulation, a comprehensive reform agenda was set in train by the g20 summits in washington, london and pittsburgh. the envisaged reforms aim at creating a strong regulatory framework that ensures financial stability and supports steady and sustainable economic growth. although significant progress has already been made, much remains to be done. as the implementation of the agreed rules is what finally counts, 2010 and 2011 will prove to be crucial years. what have been the main achievements up to now? the major step has been the reform of the basel ii framework for capital and liquidity regulation. relevant proposals were put forward in december 2009, including, among other things, measures to raise the quality, consistency and transparency of the capital base, a global standard for funding liquidity as well as the introduction of a leverage ratio. throughout 2010 the proposed measures will be calibrated on the basis of an extensive quantitative impact study. the fully calibrated set of measures will then be issued by the end of 2010 and the new standards will be phased in by the end of 2012 provided that economic recovery is assured. other major elements of reform centre on the problem of systemically important financial institutions. here, the reform of the basel framework is part of the solution,

variety of reasons, one of them being concerns about the current account deficit. subsequently the krona began to depreciate and continued to do so more or less uninterrupted but on the whole in an orderly fashion over a period of a year and a half until the end of november last year. by that time, it had fallen by about a third against other currencies. this large depreciation is not without precedent in other countries. in that respect, i might mention, since we are in stockholm and since i have drawn some parallel with the other nordic countries, that the swedish krona fell in broadly similar proportions over a period of time after the exchange rate was floated in late 1992. the depreciation of the icelandic krona fed into domestic prices and inflation picked up significantly. late last year, the exchange rate had clearly overshot sharply on the downside. then expectations turned around again. it was clear, among other things, that the economy was cooling down and that the current account deficit was shrinking fast. optimism also arose once prospects improved that the inflation spike, which followed the exchange rate depreciation, would subside quickly again. the krona began to appreciate and has by now regained an important part of its earlier value. inflation has subsided sharply again this year and expectations are that the inflation target of 2½ percent will be achieved before the end of the year. the large current account deficit recorded in the year 2000 also began to shrink rapidly, it fell by more than half in the year 2001 and the outlook is for approximate balance this year. these developments demonstrate the resilience and adaptability of the icelandic economy ; moving from a very large current account deficit to virtual balance in the course of two years and reducing inflation from bordering on a two - digit rate to 2½ percent within one year. although developments in iceland showed many of the same characteristics as those in some of the other nordic countries during the post - liberalisation rapid expansion, such as credit expansion, current account deficit, exchange rate depreciation and so on, iceland escaped the difficulties suffered by banking systems in some of the other countries. icelandic bank credit grew very rapidly in the late 1990 ’ s and into the year 2000 and a sizable portion of the credit expansion was financed with credit from abroad. the capital adequacy ratios of banks fell for a while but nevertheless remained comfortably above the minimum required and internationally recognised levels. the year 2001 also turned out to be quite favourable for