andreas dombret : financial regulation as a global challenge remarks by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a reception to say goodbye to mr jakob orthacker, financial attache, and to welcome his successor, ms julia becker, london, 11 june 2014. * * * ladies and gentlemen thank you, ambassador ammon, for hosting this event here at the german embassy in london. i am happy to have the opportunity to officially thank the bundesbank ’ s departing representative, mr jakob orthacker, and to welcome his successor, ms julia becker. i am particularly happy that sir jon cunliffe, deputy governor of the bank of england, is here today. thank you, jon, for your remarks. now let me say a few words on financial regulation and the need for international cooperation. my argument begins with the idea that a global financial system requires global regulation. to push this idea further, i would define the term “ global ” in at least three dimensions and argue that regulation should be consistent in all of them. first, regulation needs to be consistent across jurisdictions. this is necessary to provide a level playing field and reduce the scope for regulatory arbitrage. against this backdrop, recent regulatory initiatives in some countries indicate that the “ balkanisation ” of the regulatory space represents a genuine risk. we have to be aware of that. second, regulation needs to be consistent across sectors. this is again necessary to prevent regulatory arbitrage. in practical terms this means that we have to deal with the shadow banking system. consequently, the g20 have moved shadow banking high up on their agenda. third, regulation needs to be consistent across asset classes. take the regulatory treatment of government bonds as an example. i cannot see a single good reason why banks should not have to back government bonds in their balance sheets by capital, but i see many reasons why they should – not least the objective of breaking the sovereign - bank nexus. financial regulation that is consistent along these three dimensions will help to make the financial system a safer place. however, while being a safer place in the aggregate, the financial system is not necessarily a safe place for individual banks. after all, we live in a market economy and creative destruction is a central element. individual banks must be able to fail like any other enterprise. this must also hold for large banks which are often labelled “ too big to fail ”. to allow them to fail without destabilis

to building walls. but walls separate. in europe we have since gone some way to responding to newton ’ s observation. the creation of the european common market without frontiers was the first significant step towards tearing down walls and building solid bridges across europe. another milestone along the road to european integration was the introduction of the euro. currently, we are working again on a historic project of european integration, namely the creation of a european banking union. the banking union is currently our largest institutional construction site. the legal basis for the new european single supervisory mechanism is now in place since 3 november, thus we have entered the implementation phase. the major challenge ahead is the comprehensive assessment of banks. currently, the banking supervisors are selecting the bis central bankers ’ speeches critical balance sheet items of the banks under the single supervisory mechanism. these items will then be subject to closer scrutiny. this appraisal of the present situation will be complemented by a joint stress test of the european central bank and the european banking authority which will be designed to reveal future risks. it is essential to convince the markets that banks are solving their legacy problems before the european central bank takes over responsibility for banking supervision at the end of next year. the cleaning - up of the balance sheets will be an important pre - condition to ensuring a smooth start for the new supervisory regime. in a market economy it is essential that banks, like any other business firms, can fail and can exit the market. “ too big to fail ” was with us for much too long. therefore, it is most important that we move from the old bail - out regime to the new bail - in regime in a credible way. consequently, the single supervisory mechanism has to be accompanied by a corresponding recovery and resolution mechanism with a view to protecting taxpayers ’ money from failing banks. the rules specifying potential bail - ins have to spell out a clear pecking order for covering losses. thereby, the principle of dual subsidiarity should be observed. to put it in a nutshell : before public money is used, private creditors have to contribute to covering losses. and before european financial backstops, such as the esm, are used, member states have to cover losses of their banks. this would reinforce another important principle, namely that liability and control have to go hand in hand. this being said, let me emphasize that the single supervisory mechanism, accompanied by a recovery and resolution mechanism, can neither resolve today ’ s debt crisis nor act as a substitute for structural reforms