sabine lautenschlager : walled off? banking regulation after the crisis speech by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the single supervisory mechanism, at the institute of international and european affairs, dublin, 13 march 2017. * * * walls have their place in human history. just think of the great wall of china or hadrian ’ s wall or the berlin wall. and then there are the more abstract walls : paywalls or chinese walls, for instance. in my speech today, i would like to discuss banking regulation – which some see as a massive wall of rules. if you asked bankers, some would certainly claim that they have been imprisoned by that wall and would even like to tear it down – some politicians might feel the same way. however, to paraphrase the american poet robert frost : “ don ’ t ever take a wall down until you know why it was put up ”. you will understand that i, as a german, cannot fully support this statement but with regard to regulation this advice is appropriate. following that advice, let us have a look at why the regulatory wall was put up. why banks need rules why do we need rules at all? rules confine us ; they limit our freedom. take the rules of the road as an example. you can ’ t drive as fast as you want ; you have to wear a seat belt and you have to stop at red lights. these rules exist to make our lives safer. they help to prevent accidents ; they protect drivers, passengers and pedestrians. and that also applies to banking rules. banks take on risks – that is part of their job. these risks, however, can lead to huge losses – not only for the banks and their investors, but for the entire economy and all of us. in the euro area, it is mostly banks that finance the economy. they also take in deposits and provide other essential services, in payments, for instance. it is therefore crucial that banks work well – not only in the short run but in the long run. so it makes sense not to give them absolute freedom, but to wall them off from the biggest risks. after all, bankers are people. like the rest of us, they sometimes tend to overestimate potential profits and underestimate risks. markets can get carried away, as alan greenspan said, by irrational exuberance. expecting eternal growth, banks

down. it protects us all : taxpayers who had to bail out failing banks during the crisis ; savers and investors who lost money ; business owners who could not get loans ; and, yes, it also protects the banks themselves. still, the history of finance seems to follow an eternal cycle. a crisis happens and the rules are tightened. after a while, people forget the crisis, and the rules are loosened. this leads to the next crisis, which takes everyone by surprise. the rules are tightened. listening to some politicians, i am worried that we are about to enter the next stage of the cycle : a new wave of deregulation. as george bernard shaw said : “ if history repeats itself, and the unexpected always happens, how incapable must man be of learning from experience! ”. isn ’ t it time to prove that we are capable of learning from experience? thank you for your attention. 1 reinhart, c. and rogoff, k. ( 2009 ), “ this time is different ”, princeton, nj. jorda, o., shularick, m., taylor, a. m. ( 2011 ), “ when credit bites back : leverage, business cycles, and crisis ”, nber working paper no. 17621. 2 fender, i. and lewrick, u. ( 2016 ), “ adding it all up : the macroeconomic impact of basel iii and outstanding reform issues ”, bis working paper, no 591 ; de - ramon, s., iscenko, z., osborne, m., straughan, m., andrews, p. ( 2012 ), “ measuring the impact of prudential policy on the macroeconomy : a practical application to basel iii and other responses to the financial crisis ”, fsa occasional paper, no 42. yan, m., hall, m. j. b., turner, p. ( 2012 ), “ a cost - benefit analysis of basel iii : some evidence from the uk ”, international review of financial analysis, vol 25, pp 73 - 82. 5 / 5 bis central bankers'speeches