axel a weber : developing a long - term investment perspective favouring financial stability and growth introductory remarks by professor axel a weber, president of the deutsche bundesbank, at the eurofi financial forum plenary session 16 on “ defining a common regulatory and supervisory basis to achieve resilience, growth and competitiveness ”, brussels, 29 september 2010. * * * ladies and gentlemen the financial crisis has painfully demonstrated vulnerabilities of our financial system. strengthening the resilience of the financial system, that is of financial markets and their players, is therefore the top priority when it comes to learning the lessons of the crisis. closing the regulatory gaps which the crisis has revealed – however important that is – would be too little. financial reform has to go beyond that and establish the necessary institutions and regulations to deal with systemic risks. financial reform will not save us from any future financial crisis but it can significantly dampen the frequency and intensity of financial crises in the future. reducing the likelihood of individual bank failures may act in this respect as a first line of defence. the most important project in this regard is the revision of basel ii. this reform will significantly increase the risk buffers of individual financial institutions by introducing stricter requirements regarding the quality and quantity of bank capital. while the new rules require banks to increase their capital, the provision of transition periods enables them to adapt to the more restrictive capital and liquidity requirements. hence, i am not afraid that the implementation of basel iii might significantly impair the lending capacity of banks or hamper economic recovery. while being subject to considerable uncertainty, recent comprehensive impact studies by the basel committee and the financial stability board suggest the economic impact during the transition period will be moderate and that the long - term net benefits will be positive. now it is up to the g20 heads of state and government to approve the package at their seoul summit in november. its global implementation afterwards is of utmost importance in order to guarantee a level playing field and to prevent regulatory arbitrage. in addition, some elements of the package require further work in the process of finalising the whole. in particular, the extent of anti - cyclicality of capital buffers might be strengthened further, and the requirements of the liquidity buffer in its currently proposed form warrant further adjustment as well : requirements for eligible assets of private issuers, for example, appear rather strict. while the new basel rules will certainly help to make the financial system of the future safer and more stable, a second line

rules of the game ” governing international payments have ebbed and flowed. so it is not surprising that france has chosen the international monetary system as a theme of its presidency of the g20 this year. why not leave these issues to market forces? what are the externalities in the international monetary system which mean that one country ’ s actions distort the choices open to others? the main externalities in today ’ s international monetary system are most visible in the interaction between the advanced and emerging economies. the rising importance of the emerging economies has perhaps been the most important development since the bretton woods framework of fixed exchange rates was abandoned in the early 1970s. china and india alone have brought 2 ½ billion people into the world trading system, with many more in other countries such as brazil and russia. and over the next five years, emerging economies are expected to account for almost three quarters of total growth in world output. trade has promoted development in china and other emerging markets, and has benefited the rest of the world as the costs of a range of traded goods and services, particularly manufactured goods, have been driven down. but the emergence of the accompanying imbalances in current accounts had huge effects on the global pattern of spending. between 1998 and 2006, annual output in high - saving economies expanded by around $ 10 trillion – $ 1trillion more than the growth in domestic demand in the same economies. the rise in bis central bankers ’ speeches output relative to demand in the high - saving countries was only possible because there were matching capital flows. capital flowed “ uphill ” from many of the emerging markets to advanced deficit economies, not an obvious sign of capital moving to exploit profitable investment opportunities. the deficit countries – predominately the us, uk, australia and countries in the euro - area periphery – were borrowing almost $ 1trillion dollars more each year by 2006 than they had been in 1998. this created unsustainable paths for domestic demand, net debt and long - term real interest rates. whether households or policymakers truly understood how unsustainable these paths were is hard to know. but the extent of the resulting financial fragility became all too apparent in late 2008. credit supply in many of the advanced economies froze, confidence collapsed around the world and private demand fell sharply. output was cushioned only through an unprecedented policy response around the world. that did bring an end to the sharp falls in output, and allowed confidence to recover somewhat. and in many countries