sabine lautenschlager : interview with mannheimer morgen interview by ms sabine lautenschlager, member of the executive board of the european central bank and vice - chair of the supervisory board of the european central bank, with mannheimer morgen, conducted by mr rolf obertreis on 25 july and published on 29 july 2017. * * * ikb, a german mittelstandsbank1, was facing a serious crisis at the end of july ten years ago. do you remember that? the problems with subprime securities, i. e. risky home loans packaged together in bonds, started to appear in april 2007 in a us company. we already had an uneasy feeling in the spring, but we didn ’ t think that it would send the banking systems into a tailspin. many people thought that it was a one - off event. did you have a premonition of what september 2008 might bring and of what might follow? nobody foresaw the extent of what would happen between summer 2007 and summer 2009, even though in late summer 2007 it was becoming clearer that the turbulence could intensify. could such a financial and banking crisis happen again? i would never say that there could be no recurrence of a financial and banking crisis. 100 % protection does not exist. however, supervision is today in a much better position. we can intervene much more decisively and also in a more preventive way. before 2009 supervisors in germany could only take action if they could clearly demonstrate that banks were at risk and that damage would soon be inflicted. supervisors can now demand much higher capital requirements for risks at a much earlier stage. a comprehensive new regulatory framework has greatly strengthened supervision. so, banks and savings banks are now safer than ten years ago. all credit institutions have significantly more capital and significantly higher liquidity today. the requirements have been increased, including in respect of a bank ’ s risk management. the management board of a large bank must, for example, include a chief risk officer with wideranging powers who has equal status with the other board members. banks only need to hold 3 % of their balance sheet total as capital. in germany, measured against the risks on the balance sheets, the figure is now on average around 12 %. that seems small when you look at the capital ratios of small and medium - sized enterprises, for instance. the 3 % relates to each and every bank transaction, whether it is risky or not.

##e sub - prime mortgages reduces the incentives for financial intermediaries to carefully screen and monitor borrowers. 11 the intuition is straightforward. if banks are allowed to put the large risk that a sub - prime mortgage loan poses off - balance sheet by securitising it, they will concentrate their business efforts in expanding the originations. this seems consistent with the facts. after all, the share of securitised sub - prime mortgages in the us reached 75 % in 2006, up from 54 % in 2001. 12 hence, only a small share of sub - prime mortgages remained on the balance sheet of the originating institution. 2. the abuse of risk management duties conducting a fully - fledged risk analysis requires full information. the ultimate investors in securitised loans could in principle have exercised the due diligence that banks were no longer providing. but risk management was difficult, paradoxically, because information became unavailable to investors. it was buried in financial structures that were not transparent. paradoxically, securitisation – a new technique to control risk – had made risk control practically impossible. the “ originate and distribute ” business strategy had turned risk into a commodity. risk could be bundled, sliced and re - bundled for further sale. securitisation and financial derivatives were the vehicles through which risk became marketable, passed between participants, spread across the system and – in this way – it became difficult to localise and quantify. individually, diversified strategies all looked like rational attempts to unload risk to those parties in the system that were more willing and able to bear it. in the aggregate, however, strategies all looked alike! viewed across the system, diversification was subject to a fallacy of composition. individual strategies were diversified. but the aggregation of a complex web of identical strategies – all source : dealogic / dcm analytics. original usd amounts converted into euro. data sources are : center for responsible lending, inside mortgage finance and mortgage bankers association ( mba ). data for foreclosures refer to the sum of sub - prime amr and fmr. keys et al ( 2010 ). source : mortgage market statistical annual ( 2007 ). designed to shed risk individually – generated a lack of diversity for the financial system as a whole. in the end, it turned out that the system could not diversify risk away. 3. flawed liquidity transformation through the use of short - term repurchase agreements banks increasingly financed their longer - term