speeches central challenges in both the design and the implementation of new – and, hopefully, good – regulation. and nobody would dispute the fact that financial markets and their participants have become very complex. there are many levers which supervisors and / or lawmakers can pull. in some cases, pulling only one single lever the wrong way is enough to threaten the stability of the system. this can lead to unintended consequences such as regulatory gaps, duplication or arbitrage. let me discuss, at this juncture, a phenomenon known as the “ cobra effect ”. the cobra anecdote goes back to colonial india. in order to contain a plague of cobras, the british colonial administrators offered a bounty for every dead cobra. the plan initially seemed to work ; the colonial administrators were presented with a large number of dead cobras. unfortunately, however, this failed to bring the plague under control. most of the snakes delivered were actually not wild animals, but had instead been bred by entrepreneurial indians in order to collect the bounty. once the governor caught wind of it, he cancelled the premium, and the breeders then released the now - worthless snakes into the wild – thus making the plague worse than before... regulatory measures, too, can have undesired and unintended consequences. when the first basel capital accord was introduced 25 years ago, industrial countries´ government bonds, for instance, were classified as safe because nobody thought a government could default. bank regulators thus regarded government bonds as an anchor of stability for banks ’ balance sheets. as a result, banks today do not need to hold capital against the risks on oecd countries ’ government bonds. in addition, rules to limit concentration risk do not need to be applied to government bonds. it is therefore no big surprise that this exception in the basel framework had unintended consequences. banks poured massive funds into government bonds – especially domestic bonds. this created a kind of “ doom loop ” between the solvency of sovereigns and the solvency of domestic banks. we have to break this dangerous loop by ending the preferential regulatory treatment of government bonds. however, as the story of the cobra effect shows, abrupt changes carry dangers too. immediately prescribing that a certain amount of capital be held to back the risks on government bonds could lead to another set of unintended consequences. but that does not alter the fact that the existing rules need to be changed in order to break the “ doom loop ” between sovereign

##m ) has finally been adopted, and the european central bank ( ecb ) has begun to set up the necessary structures – including recruiting the staff required. the bundesbank is supporting the ecb in these efforts. the aim of joint supervision is for banks everywhere to be supervised according to the same high standards. in addition, cross - border effects can be covered better through joint supervision than by national supervisors. the financial system is likely to become more stable under european supervision. but, if push comes to shove, banks supervised at the european level will have to be resolved at the european level, too. for this, we need a centralised european resolution authority for banks which is based on sound legal foundations. the debate on this single resolution mechanism ( srm ) is in full swing, and several proposals are on the table. i believe the best solution is one that promises to be effective and enforceable in a crisis event while at the same time avoiding potential conflicts of interest on the part of the resolution authority from the outset. it is clear to me, too, that the srm for banks should be launched as soon as possible after the ssm. i am for the beginning of 2015 as the kick - off date. 4. strengthen macroprudential supervision the third and final aspect of “ good regulation ” i wish to mention is the macroprudential perspective. after all, “ good regulation ” must never lose sight of the “ big picture ”. the financial crisis swept away any lingering doubts that we need to broaden our regulatory perspective beyond individual banks. this means that we need macroprudential oversight alongside microprudential supervision. this has now been enshrined in german law : the financial stability act has been in force since the beginning of this year. the institutional framework for macroprudential oversight has thus been established in germany. the newly formed financial stability committee started its work at the beginning of the year. the bundesbank is a member of this committee and has been tasked with the ongoing analysis of developments relevant to financial stability and with identifying threats. where appropriate, we can propose that the committee issue warnings and, if necessary, specific recommendations for action. 5. the “ cobra effect ” and the preferential regulatory treatment of sovereign debt having mentioned these, to my mind, important three aspects of “ good regulation ”, i would like to touch briefly on a core problem : complexity. in my opinion, complexity is one of the bis central bankers ’