andreas dombret : the glass is half full – seven years of regulatory reform in the financial sector keynote address by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the euromoney conference “ the public sector financing forum ”, frankfurt am main, 30 september 2015. * 1. * * introduction ladies and gentlemen thank you for inviting me to speak at today ’ s public sector financing forum. it is a great pleasure to be here. the focal point you have chosen for this forum – the low - interest - rate environment – is indeed highly topical, and has been keeping us all very busy lately. a case in point is the survey that the bundesbank and bafin recently conducted among german banks on the challenges posed by low interest rates – more on that later. as you all know, the financial sector still faces a truly challenging environment. while the worst aspects of the crisis and its consequences have been weathered successfully, circumstances remain difficult. in my speech today, i will be discussing these circumstances and also shedding some light on what we have to do to complete the post - crisis regulatory reforms. i will argue that we have come a long way but that we are not done yet. nevertheless, since we have accomplished the majority of reforms, my message is this : the glass is half full, not half empty. 2. a truly challenging environment before i talk about regulation, let me sketch the truly challenging environment that now exists, and let me emphasise four factors. first, after the crisis, banks faced substantial deleveraging pressure. adjusting risk taking and funding strategies was necessary in order to survive and meet new regulatory demands. as the process of phasing in the regulatory reforms will continue until 2019, many institutions still need to deleverage further. second, all financial institutions ‒ but banks in particular ‒ need to adapt to new technological demands for renewal. digitalisation offers substantial challenges and opportunities at the same time. in any event, it has the potential to reshape the banking sector. the third factor is the high degree of investment uncertainty. unfortunately, in the current economic setting, there remains a high degree of uncertainty about the economic trajectory. what regulators can do, however, is pave the way for a sustainable recovery in the financial sector within a strong framework of rules – and combine this with reasonable phasing - in horizons. the fourth factor in the difficult environment is the low interest rate setting in which you all have

“ too big to fail ” could not be held accountable for their actions. looking ahead, there won ’ t just be recovery and resolution plans for credit institutions ; clearly defined liability cascades will be established, too, so as to ensure that the taxpayer really is last in line to foot the bill – that is to say, after shareholders and creditors have been bailed in, and then only in absolutely exceptional cases. but, to put this theoretical resolution model into practice, institutions will need to hold a certain amount of additional debt which, should the need arise, will be transformed into loss - absorbing capital. for global systemically important financial institutions, this will be achieved by way of the tlac standard, which the fsb will finalise this autumn. the same principle applies to the european institutions, but implementation here is based on what is known as the mrel standard, which differs in some respects from the tlac requirement. one difference is that all institutions will be required to satisfy the mrel requirements, not just the systemically important ones. another is that the minimum requirements will be set individually for each institution by the competent resolution authority. these new standards will have a transformative impact on the market for loss - absorbing debt capital. they will introduce attractive new instruments that offer high returns for investors, particularly for those outside the banking sector. and the disclosure requirements under these standards will give investors the transparency they need to make well - founded decisions. these reforms together with those that have already been accomplished will strengthen institutions ’ stability and systemic resilience. nevertheless, when speaking about regulatory reforms, we have to bear in mind that most of those which i have mentioned only affect the regulated banking sector. in the context of low interest rates and tougher regulation, there are incentives for regulatory arbitrage through the shifting of assets from the regulated banking sector to somewhere outside the regulatory perimeter. and we are seeing significant movement in this direction. that is why the g20 has agreed on a roadmap for regulating the shadow banking sector. work is being conducted simultaneously by the fsb, the basel committee and iosco. the objective is to ensure that shadow bank - like risks to financial stability emerging outside the regular banking system are subject to appropriate oversight and regulation. yet, we are careful not to inhibit sustainable market - based financing models that do not pose such risks. one good example of a well - designed instrument is the basel committee ’ s standard for measuring and controlling large exposures. while