andreas dombret : could less be more? the role of finance for the economy dinner speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the safe conference on regulating financial markets, frankfurt am main, 30 may 2016. * 1. * * introduction dear mr. kick, ladies and gentlemen given that my speech is standing between you and the next course of our dinner, i will endeavour to be brief. one colloquial definition of insanity is doing the same thing, over and over again, but expecting different results. 1 by that standard, how sound is current financial regulation? looking at the many new topics of financial regulation on the agenda of this conference, it would appear that the response to the crisis has been quite sound. your contributions and this conference in general are, in my view, very valuable in helping to understand why financial regulation needs to be strong and how it can work for the economy and our society. and since you will be debating the details of these issues all day long, i will not go into the specifics of financial regulation. instead, i will discuss a remaining fundamental problem of financial policy making – one where our current policies might fit the definition of insanity i quoted earlier. it relates to the question of how much finance we need for solving our current economic problems. for over three decades before the crisis, the simple answer was “ more is better. ” this mindset led us into the crisis, the consequences of which we are still witnessing today. to keep relying on more finance seems questionable. the core problem, i believe, is one of mind - set. i am talking about the idea that more credit and financial activity lead directly to economic growth. according to this plain idea, leverage and liquidity in banks lead to more lending, which in turn fuels investment, which then leads to more growth and economic development. in that spirit, some are, again, arguing that what the economy needs is less regulation and more lending. i refer to this ideology as a “ finance - led growth strategy ”. i am convinced that we must overcome these intuitively appealing ideas and their ideological siblings. in that spirit, tonight i will talk about our current economic challenges and the role that finance, on the one hand, and financial regulation, on the other, can play in underpinning sustainable economic development. 2. less and more in the current economy after the financial crisis, financial regulation has been hailed as a savio

the the impact assessments carried out by the basel committee and the financial stability board with relation to the transitory and long - term effects of the basel reform package revealed that the costs of financial intermediation may temporarily rise during the implementation phase ( e. g. in terms of increasing spreads, lower credit volumes and a more moderate gdp growth ). however, in the long run, the net positive benefits are expected to dominate as a result of lower probability of crises to occur. in the euro area, the expansion of banks ’ balance sheets has been around 400 % between 1992 and 2007 ( just before the crisis ) whereas nominal gdp has increased only 130 %. as a result, the ratio of banking sector total assets to gdp, a measure of the depth of bank intermediation, increased from 145 % in 1992 to 331 % in 2007. it should be also noted that the reported assets understate the growth of bank activity in that period, as a lot of it took place off - balance sheet. see, among others, g. dell ’ ariccia, d. igan and l. laevan, “ credit booms and lending standards : evidence from the subprime mortgage market ”, imf working paper, no 08 / 106, imf, 2008 ; and a. maddaloni and j. - l. peydro, “ bank risk - taking, securitization, supervision, and low interest rates : evidence from lending standards ”, ecb working paper no. 1248, october 2010. bis central bankers ’ speeches forthcoming eu - wide stress test will be more comprehensive and detailed than the previous exercise, thereby playing an even more important role in supporting banks ’ access to medium - and long - term funding. going back to the ongoing regulatory reforms, while the overall impact in terms of the size of the banking sector is expected to be moderate on average, some business lines or institutions may be relatively more severely affected. overall, credit institutions that are smaller and focused on the traditional retail banking business are not expected to be severely affected by the new prudential rules. however, some large universal banks ( especially those with significant investments in other financial institutions and in insurance companies, often across borders ) will face new challenges, mainly resulting from the new definition of capital and from the introduction of the leverage ratio. these large institutions are typically more leveraged than their smaller counterparts and, as a result of the introduction of certain adjustments in the calculation of the regulatory