of the next crisis in good time. this means that, in future, institutions will also have to be prepared for hitherto unknown dangers, uncertainties we may not even know exist. and here, a strong capital position is the best buffer against shocks, regardless of where they come from. however, dealing with unknown dangers requires german banks to embrace a new risk culture. the crisis made us painfully aware of just how far removed from a sound culture of risk the risk culture was at many banks in germany. 2. risk culture one reason for an inadequate risk culture lies in the “ too big to fail ” problem, which was a central issue in the last crisis. the failure of banks that are very large or strongly interconnected might endanger the whole financial system – the failure of lehman brothers in 2008 was a case in point. thus, in the eyes of the markets these banks enjoy an implicit bis central bankers ’ speeches state guarantee : in case of trouble, the state would feel compelled to step in and rescue the distressed bank. yet this implicit state guarantee creates flawed – and dangerous – incentives. if a bank can be sure of state support when it gets into difficulties, it will no longer see risk and return as being two sides of the same coin. essentially, this means that profits from risky business operations remain with the bank, while the taxpayer is left to shoulder potential losses : this is an unjustifiable scenario. for this reason, i believe that an important signal to the market and to banks is to develop mechanisms that allow even big banks to fail without destabilising the entire financial system. the possibility of a market exit, which is fundamental to any market economy, must also exist for the banking sector. the real threat of actually failing is in itself a strong incentive for banks to be more aware of risk in their actions. the long - term goal, then, must be to put risk and return back onto the same page. one important step towards that goal is the european resolution mechanism which will start in 2016. this mechanism ensures that the owners and creditors of banks are the first in line when it comes to bearing losses. consequently, the taxpayer will be the last in line to foot the bill. this realigns risks and rewards and will certainly have a fundamental and positive effect on the risk culture within banks. yet what is crucial here is not only that rules are in place for dealing with a distressed bank, but that banks don ’ t get into financial dire straits in

be achieved by boosting income in fee and commission business and by taking into consideration cost - cutting measures. there is traditionally a strong branch network in germany. streamlining this could reduce costs. mergers could also make sense for several credit institutions, with the focus in each case being on the sustainability of each business model. 4. closing remarks ladies and gentlemen in my speech, i have discussed three challenges that german banks currently face : regulatory reform, necessary changes in risk culture and low profitability. regulatory reform definitely comes at a cost for the banks. however, when we talk about the cost of regulation for the banks, we also need to talk about the cost of crises for the general public. viewed from this perspective, i think the price we are paying for stricter regulation is entirely appropriate. even for the banks themselves, the rising outlay for regulatory matters is not only a cost factor. they, too, benefit from a stable financial system. the same is true of a change in risk culture. there is evidence that institutions inadequately identified and managed not just their market and credit risks but their operational risks as well : it is therefore imperative that improvements be made. credit institutions have themselves already announced their intention to change their risk culture. however, this fundamental decision is not one that should be merely voiced at the senior management level. the banks must do more than simply talk the talk : their new values must be practised institution - wide by managers and employees alike. in conclusion, each institution faces the major challenges of adjusting to new regulatory requirements and of improving its risk culture without completely losing sight of profitability, particularly as profitability is already challenged by the current environment of low interest rates and fierce competition in the german banking market. however, i am confident that german credit institutions will succeed in overcoming the challenges ahead and in finding a healthy balance between risk and reward. the first steps to achieving these goals have already been taken. thank you for your attention. bis central bankers ’ speeches