axel a weber : the reform of financial supervision and regulation in europe speech by professor axel a weber, president of the deutsche bundesbank, at the institute of international and european affairs, dublin, 10 march 2010. * 1. * * introduction ladies and gentlemen first of all, i would like to thank you for giving me the opportunity to speak to you here at the institute for international and european affairs. it will come as no surprise to you that the financial crisis will be the main topic of my speech. however, the onset of the crisis lies nearly two and a half years in the past, and we are now seeing more and more signs of stabilisation and recovery. therefore, i shall leave aside the current state of financial markets and shall instead try to look ahead, focusing on structural issues. in this regard, the main challenge for the years to come will be to create a more stable and more resilient financial system to prevent future crises. it is obvious, however, that such an ambitious endeavour will not happen on its own. instead, it requires strong commitment, resolute efforts and broad reforms. where to begin? 2. lessons from the financial crisis the first step in any serious reform should be to gain a clear understanding of the events that occurred and their underlying causes. even though it is a tempting thing to do, a crisis of the magnitude we have been witnessing over the past two and a half years cannot be traced back to a single cause. in fact, there could be a hundred narratives, and each would appear to explain the events in a satisfying manner. the most popular of these narratives would revolve around the following explanations for the crisis : gaps in the regulatory framework, distorted incentives inside the financial system, such as short - termist remuneration schemes, an insufficient resilience of the financial system, an institutional design of financial supervision that did not properly reflect the crossborder dimension of crises, and a lack of awareness of systemic risks. all these narratives point to a number of lessons to be learned. and it is these lessons which show us the direction for the reform of the financial system. with regard to financial regulation and supervision, the lessons of the crisis cover, broadly speaking, the following four areas : first, we have to improve regulation and supervision at the microeconomic level. second, we have to pay greater attention to systemic risk control at the macroeconomic level. third, we have to ensure an effective interplay between these two levels

, gabriele and richhild moessner ( 2011 ), “ macroprudential policy – a literature review ”, bis working papers, no. 337, bank for international settlements. see kelber, anna and eric monnet ( 2014 ), “ macroprudential policy and quantitative instruments : a european historical perspective ”, banque de france financial stability review, no. 18, april and elliott, douglas j., greg feldberg and andreas lehnert ( 2013 ), “ the history of cyclical macroprudential policy in the united states ”, federal reserve board, finance and economics discussion series, 2013 - 29. a full overview of the different measures can be found in “ a chronology of main developments in the central bank of ireland 1943 – 2013 ”, central bank of ireland booklet ( 2013 ), also see kelly, john and mary everett bis central bankers ’ speeches in the 2000s many suggested the best contribution monetary policy could make to financial stability was to keep inflation low and stable, and if imbalances did emerge, the central bank could always “ clean up ” afterwards. 4 the effective microprudential supervision of individual banks would, it was thought, also safeguard financial stability. the recent crisis provided a clear demonstration that such an approach is not sufficient. recent evidence shows that in the post - war period, real estate credit has become an increasingly important predictor of fragility in the financial sector. 5 financial imbalances resulting from the unsustainable expansion in asset and credit prices, or contagion across the financial sector due to interconnectedness and strategic complementarities such as “ herding ” behaviour among market participants, can lead to the build - up of systemic risk. since such imbalances have very serious consequences for the real economy and price stability, one response is for the central bank to use interest rates to “ lean against the wind ”, and that may be appropriate in episodes of severe financial exuberance. 6 however, it is very challenging for central banks to manage their price stability objective and address concerns about systemic risks with just one tool ; namely interest rates. any central bank aiming to cool off systemic risk by hiking rates might risk disrupting the business cycle to the detriment of its price stability objective, or vice versa. that is why independent policy instruments are needed to address each policy objective. 7 macroprudential policies are now commonplace. they are generally regulatory policies or instruments with the specific