and systemic effects. clearly, these tools are important and helpful in preventing and managing systemic risks. but are they sufficient? this seems questionable given the high level of complexity that has arisen in globally integrated financial markets. this complexity leads to non - linear dynamics in the system which are very difficult to handle both for the risk management of financial institutions and for supervisors. the complexity is also characterised by a phenomenon known as “ knightian uncertainty ”, named after the famous chicago economist frank knight. knight argued : “ there are known knowns ; there are things we know we know. we also know there are known unknowns ; that is to say we know there are some things we do not know. but there are also unknown unknowns – the ones we don ’ t know we don ’ t know. ” bis central bankers ’ speeches let me illustrate this theory. prior to the financial crisis a shadow banking system emerged which found itself at the centre of the crisis a few years later. this shadow banking system has aspects of “ known unknowns ” and “ unknown unknowns ”. as a consequence, risks stemming from this system were broadly ignored or underestimated. international macroprudential bodies like the esrb and the fsb are trying to fill this gap with knowledge, but progress in this area is made at a snail ’ s pace due to the lack of data. even if we are successful in the end we cannot be sure we have identified all relevant risks, because “ unknown unknowns ” could also exist in another area of the financial system which we do not observe. in my view, therefore, complexity reduction might be an effective instrument for preventing systemic crises. i can imagine that advice such as this could have been found in the lost sibylline books. again, let us be specific. there are a lot of regulatory target variables which involve the use of complex risk - adjusting methods. for example, the core capital ratio is the ratio of core capital to risk - weighted assets. but the models used for adjusting the risk did not perform perfectly and underestimated the true risks stemming from cdos. as a result, financial institutions were undercapitalised when lehman became insolvent. if, in addition, we had had a robust target such as a leverage ratio which is not risk - adjusted, financial institutions would have been better prepared on the eve of lehman. moreover, according to the concept of rwas, government bonds have zero weights. with a risk - robust measure

axel a weber : 7th bundesbank lecture 2010 – introductory remarks introductory remarks by professor axel a weber, president of the deutsche bundesbank, at the 7th bundesbank lecture 2010, berlin, 14 september 2010. * 1. * * introduction ladies and gentlemen i am very pleased to welcome you to this year ’ s bundesbank lecture, which is being held at the old town hall in the very heart of berlin. the old town hall was built between 1902 and 1911 as an extension of the “ red town hall ”, which is just a stone ’ s throw from here. from 1949 to 1990, the old town hall was the seat of the council of ministers of the then gdr, and, in 1990, the unification treaty between the two german states was negotiated in this very building. today, it serves as the seat of the senator for the interior of the federal state of berlin. the room we are in is the “ bear hall ”, named after the statue of a bronze bear in the middle of the hall. this statue – the bear is berlin ’ s heraldic symbol – had been exiled to east berlin ’ s zoo for four decades before it returned in 2001. it is in these historic surroundings that we have gathered for the 7th bundesbank lecture. i am particularly grateful that mr mark carney, governor of the bank of canada, will be our speaker today. mark, my special welcome to you and thanks a lot for accepting our invitation. it is an honour to have you here. let me say a few brief words about both this event and our speaker for today. 2. on the event when we established the bundesbank lecture in 2004 we had two objectives in mind : the first objective was to raise the bundesbank ’ s profile further in the german capital. the second aim was to provide a high - level forum for public debate on economic and monetary policy issues. especially this second objective seems to have gained in importance given our turbulent times and the intellectual uncertainty they have provoked. consequently, we are happy to look back on a long line of very distinguished speakers – including, of course, mark carney, but also alan greenspan, jean - claude trichet, tommaso padoa - schioppa, ben bernanke, mario draghi and dominique strauss - kahn. 3. on the subject it is no surprise that the financial crisis has dominated this event during the recent past. we have just entered the fourth year of the crisis