axel a weber : the reform of financial supervision and regulation in europe speech by professor axel a weber, president of the deutsche bundesbank, at the institute of international and european affairs, dublin, 10 march 2010. * 1. * * introduction ladies and gentlemen first of all, i would like to thank you for giving me the opportunity to speak to you here at the institute for international and european affairs. it will come as no surprise to you that the financial crisis will be the main topic of my speech. however, the onset of the crisis lies nearly two and a half years in the past, and we are now seeing more and more signs of stabilisation and recovery. therefore, i shall leave aside the current state of financial markets and shall instead try to look ahead, focusing on structural issues. in this regard, the main challenge for the years to come will be to create a more stable and more resilient financial system to prevent future crises. it is obvious, however, that such an ambitious endeavour will not happen on its own. instead, it requires strong commitment, resolute efforts and broad reforms. where to begin? 2. lessons from the financial crisis the first step in any serious reform should be to gain a clear understanding of the events that occurred and their underlying causes. even though it is a tempting thing to do, a crisis of the magnitude we have been witnessing over the past two and a half years cannot be traced back to a single cause. in fact, there could be a hundred narratives, and each would appear to explain the events in a satisfying manner. the most popular of these narratives would revolve around the following explanations for the crisis : gaps in the regulatory framework, distorted incentives inside the financial system, such as short - termist remuneration schemes, an insufficient resilience of the financial system, an institutional design of financial supervision that did not properly reflect the crossborder dimension of crises, and a lack of awareness of systemic risks. all these narratives point to a number of lessons to be learned. and it is these lessons which show us the direction for the reform of the financial system. with regard to financial regulation and supervision, the lessons of the crisis cover, broadly speaking, the following four areas : first, we have to improve regulation and supervision at the microeconomic level. second, we have to pay greater attention to systemic risk control at the macroeconomic level. third, we have to ensure an effective interplay between these two levels

of prudential supervision and a cross - check with the analysis of risks to price stability. and fourth, the cross - boarder character of the crisis means that we also have to ensure close cooperation between national supervisors. to put it another way : there is more to a crisis than the microeconomic level, and there is certainly more to it than the national level. currently, a great deal of effort is being put into transforming these lessons into the necessary reforms. for the remainder of my speech i would like to focus on the european level and comment on some of these endeavours. 3. institutional aspects of european financial supervision within the european union, much work is being done in establishing a comprehensive financial architecture. drawing on the lessons learned, this work is pursuing two goals. the first goal is to strengthen the macroprudential level of supervision and ensure an efficient interplay with the microprudential level. the second goal is to strengthen cooperation among member states in the field of prudential supervision. in my following remarks, i would like to give a brief outline of the new architecture, address the role that central banks should play in this framework, and point out some crucial issues that still need to be discussed. 3. 1. key components of the new european financial architecture to gain an overview of the key components of the new architecture, let us start at the macroeconomic level. given the urgent need to reinforce the macroeconomic perspective of financial regulation and supervision, the european commission decided to establish an independent institution responsible for macroprudential oversight across the eu financial system. the main goal of this european systemic risk board ( esrb ) will be to avert and mitigate systemic risks to financial stability. to achieve this objective, the esrb will set up an early warning system to identify the relevant risks. whenever necessary, the esrb will then issue warnings and recommendations to deal with the identified risks. these warnings and recommendations could be addressed to the community as a whole, to individual member states, or to national supervisory authorities. to strengthen the link between micro and macroprudential supervision, the esrb will work in close cooperation with the european system of financial supervisors ( esfs ). the esfs forms the complementary part of the financial architecture at the microeconomic level. its main goal will be to strengthen cooperation between the national authorities to account for the cross - border dimension of crises that arises from the existence of multinational financial firms or possible contagion effects. with this objective