burkhard balz : bolstering confidence, high - quality financial development promoting a chinese path to modernization keynote speech by mr burkhard balz, member of the executive board of the deutsche bundesbank, at the tsinghua pbcsf global finance forum " bolstering confidence, high - quality financial development promoting a chinese path to modernization ", beijing, 20 may 2023. * * * 1 introduction ladies and gentlemen, i am delighted to be able to speak to you today here at the tsinghua pbcsf global finance forum in beijing. as a central banker, i can certainly relate to the conference title, " bolstering confidence ". you see, confidence is a central bank's most valuable asset when it comes to fulfilling its tasks to the best of its abilities. none more so than in times of turbulence, when trust and confidence provide an essential basis. and we are living through turbulent times, there is no doubt about that. rarely has the immediate future been as incalculable und unpredictable as it was over the past three years. following on from the coronavirus pandemic, russia's war of aggression against ukraine has sparked deep uncertainty and sent anxiety levels soaring around the globe. the war poses potentially a threat to the tried - and - tested system of international cooperation and is placing a strain on the global economy. but surely everyone must grasp that the major global challenges we face in our time – first and foremost, climate change – can only be overcome if we pull together. and there are other developments as well which are putting many countries to a stiff test – the digital transformation is just one topic i could mention here. but true to the upbeat conference title of bolstering confidence, let me begin with some comparatively cheery news from germany. 2 economic activity and inflation germany's economy has weathered the fallout from the pandemic and the war better than had been feared for a time. true, the braking effect of higher energy prices in particular made itself felt for a while, and german economic output contracted by 0. 5 % in the fourth quarter of last year. but the current quarter is now expected to see a moderate rise ; real gdp is likely to increase somewhat on average in 2023. the german economy has proven itself to be more resilient and more adaptable than it is often believed to be. but what's far too high right now is inflation. measured in terms of the hicp, consumer

ratio. throughout 2010 the proposed measures will be calibrated on the basis of an extensive quantitative impact study. the fully calibrated set of measures will then be issued by the end of 2010 and the new standards will be phased in by the end of 2012 provided that economic recovery is assured. the proposed measures will certainly help to reduce the likelihood of individual bank failures. however, even though such events have proven capable of destabilising the whole financial system, totally eliminating the risk of failure would be highly detrimental to growth and efficiency. regulation at the microprudential level therefore has to be supplemented by a macroprudential stance that takes into account the stability of the financial system as a whole, thus constituting a second line of defence against systemic crises. a major concern in that respect is the treatment of systemically important institutions, as their failure might lead to system - wide disruptions. when approached at a more detailed level, the concept of systemic relevance proves to be rather complex. contrary to common perception, systemic relevance is driven by more than the sheer size of an institution. factors such as interconnectedness, substitutability and the state of the markets also determine whether the failure of an individual institution will have a systemic impact – the banks that played a core role in the crisis were actually often not that large. consequently, we need to put some effort into finding a reliable way of identifying systemically important institutions, and we might also have to accept that systemic relevance is not a zero - one criterion. the difficulties do not stop there. once an institution is defined as systemically relevant, moral hazard problems might occur. as the institution in question would most likely be aware of the fact that it cannot be allowed to fail, it would have every incentive to engage in riskprone behaviour and gamble on being bailed out as soon as it gets into trouble. any measures aimed at systemically important institutions must therefore take into account the moral hazard dimension. the reform of the basel ii framework is certainly part of the solution to this problem, as it will help to improve the capacity of systemically important institutions to absorb losses without creating moral hazard. however, what is required is a more comprehensive approach which specifically ensures that accountability is brought back into the game. major proposals that go beyond the reformed capital and liquidity framework include capital surcharges for systemically important institutions, better resolution regimes and a strengthening of the financial infrastructure. commissioned by the g20, the fsb