jens weidmann : the concurrence of crisis management and regulatory policy speech by dr jens weidmann, president of the deutsche bundesbank, at the euro finance week, frankfurt am main, 19 november 2012. * 1. * * introduction ladies and gentlemen i am delighted to be able to speak at the euro finance week again this year. in my speech last year i talked about two topics : the financial markets and the sovereign debt crisis. this year i will be talking about the sovereign debt crisis and the financial markets – albeit with a somewhat different focus. let ’ s begin by taking a look at the overall situation in the third year of the sovereign debt crisis. policymakers in europe still face two challenges. first, they have to solve the current crisis. and second, they have to make the structure of european monetary union more stable. of course, these two challenges are interconnected, since the short - term measures taken to solve the crisis must not clash with what is important for the stability of monetary union in the long term. this means that what we need is indeed a meaningful “ concurrence of crisis management and regulatory policy ”. the bundesbank has pointed to two paths towards stable monetary union. one leads via an improved maastricht framework in which national ownership is increased – meaning countries are to decide for themselves, but must themselves also bear the consequences of their decisions. the second way leads via a fiscal union under which substantial national sovereignty would be transferred to the european level. however, it does not look at present as if policymakers will be taking either of these paths with any great commitment. in the wake of the crisis, joint liability has expanded considerably, representing a move away from the maastricht framework. at the same time, however, little willingness is being shown to cede national core powers. thus, monetary union is not moving much closer to fiscal union either. if we are to achieve a coherent structure, therefore, the main foundations still have to be laid. although the future architecture of monetary union remains unclear, work on a new financial market architecture is making progress – in the shape, above all, of the european banking union. this activity is well justified for, whichever of the two paths monetary union will take, a considerably more stable financial system will be needed with rules that will strengthen, above all, investors ’ individual responsibility. but thoughts differ on the purpose and design of the banking union project, too. in my view

into a coherent overall framework for monetary union. allow me to explain that last point in more detail. for this, we have to change our perspective. the banking union focuses on problems emanating from the banking system. bis central bankers ’ speeches but what about the dangers to the stability of the banking system that emanate from public finances or the economy as a whole? two lines of defence can be drawn here, too, at the interfaces to macroprudential policy and to the fiscal and economic policy framework of emu. it is possible to lower the likelihood of such undesirable developments, particularly in fiscal policy, and to limit the effects they have on the banking system. to lower the likelihood of difficulties in public finances, the banking union needs to be accompanied by european - level powers of fiscal policy intervention to be used if a member state persistently violates the european rules or the conditions tied to the financial assistance programmes. at the same time, this would reduce the danger that problems in public finances could be passed on to the taxpayers of the euro area through the mechanisms of the banking union. if the main purpose of the banking union were, ultimately, to introduce extensive joint liability through the back door, thereby giving the government more leeway to incur debt, this would be a disservice to monetary union. such a danger does exist, and i believe we should not take it lightly. along the second line of defence, the banking system needs to be better protected from the fallout of public finance problems. the regulatory reforms implemented so far, which likewise serve to make the financial system more resilient, already play an important part in this respect. but over and above that, banks need to be more strongly reined back from the tendency to expose themselves to excessive government solvency risks. to this end, the banking union must be accompanied by further regulatory measures. i consider two to be of particular importance, and the aim of both, ultimately, is to end the practice of giving claims on the government preferential treatment over other balance sheet assets. first, an upper limit or a kind of large exposure cap needs to be imposed on individual banks ’ exposure to sovereign debt. second, banks need to back government bonds or loans to the government with equity capital. backing government bonds with capital would result in a further advantage, namely that price signals would be sent out earlier if indications arose of an unsound development in public finances – giving rise to pressure to consolidate.