hazard. thus, if a higher input of borrowed capital is cheaper for the bank, this is only because the costs of this are payable elsewhere. conversely, the business costs of higher capital requirements are offset by relief elsewhere, namely for the taxpayer. and we should not forget the positive effects that larger capital buffers have for financial stability, which i have already described. from an individual perspective, one can, of course, well understand that bankers are resistant to higher capital requirements. but from an overall economic perspective, we have to consider negative externalities for society as a whole. 5. conclusion ladies and gentlemen, there is a close relationship between the state and the banks due to implicit guarantees. this is not in line with the core principles of a market economy. these guarantees are threatening to destroy the close connection between risk - taking and liability and have created wrong incentives for the risk - taking behaviour of banks. thereby the social costs of a failure of a big bank have increased. given these high costs, a bail - out seemed ultimately inevitable. to overcome this situation, we need well - designed and credible bail - in procedures. the practicability of resolution regimes requires coordination under the institutional setting as foreseen by the single resolution mechanism. and we have to reduce the overall costs of a failure. without reducing these costs, any bail - in procedure would lack credibility. high capital buffers would reduce the overall costs of letting a systemically important bank fail. hence, practicable bail - in procedures and higher capital buffers are two sides of the same coin. if we follow this approach in real life, we have the opportunity to make important headway towards redrawing the lines between the public and the financial sectors, between the state and banks. and thus we also have the opportunity to restore confidence in our banking sector, our public sector and in our economic market system as a whole in the spirit of those who advocated our social market economic system so brilliantly, in the spirit of ludwig erhard and the founding fathers of the social market economy. let me sum up : • first, blurring the lines between the state and banks threatens to destroy the unity of risk - taking and liability. • second, redrawing those lines calls for credible and practicable bail - in procedures. • third, for these procedures to be credible, the overall costs of a failure have to be reduced through higher capital buffers. • fourth, the state is not a good banker and should

andreas dombret : the state as a banker? speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the institute of monetary and financial stability, frankfurt am main, 28 january 2014. * 1. * * introduction ladies and gentlemen it is a great privilege for me to speak at the institute for monetary and financial stability, and i wish to thank professors siekmann and wieland for their invitation. an invitation from an institute of this name certainly cannot fail to impress a central banker. one of the central objectives of the imfs is to promote the exchange of views between scientists, and the transfer of knowledge between academics, financial institutions and central banks. against this backdrop, i am very happy to be here and to present today ’ s distinguished lecture on “ the state as a banker? ” the question mark at the end of the title signals that the state playing an active role as a banker is something which should be called into doubt. the issue is indeed closely connected with the fundamental conceptual question of financial stability and our market economy in general. 2. blurring of the lines between the state and banks if one were to ask the question whether or not the market economy merits our trust, another question has to be added immediately : “ does the state merit our trust? ” in the aftermath of the financial crisis, the two questions are unfortunately inseparably linked. i believe that the loss of confidence in our economic system, or in parts thereof, has a lot to do with this blurring of the lines between the public and financial sector, and here mainly between the state and the banks. both have suffered a loss in confidence over the last few years – the banks as a result of the financial crisis, of scandals and of manipulations, and the state, at least in europe, as a result of the european sovereign debt crisis. in the past, a discussion similar to the topic of my speech would have focused on the traditional direct links between the public sector and parts of the financial sector. and by that, i am referring to the state as an owner of banks. and indeed, one can call into question whether such a role is appropriate. nowadays, such a narrow focus seems less fitting for two reasons : first, implicit guarantees for, and explicit bail - outs of, banks have become an omnipresent phenomenon since 2008 for those parts of the sector generally viewed as “ too big to fail ” or “ too interconnected to