loss absorbing capacity of banks, tlac in short, which the g20 leaders will hopefully finalise at their summit in antalya next month. the same principle applies to the european institutions, but implementation here is based on what is known as the mrel standard, which differs in some respects from the tlac requirement. one difference is that the minimum requirements will be set individually for each institution by the competent resolution authority. these new standards will have a transformative impact on the market for loss - absorbing debt capital. they will introduce new instruments and will enhance standardisation of subordinated debt. in combination with new disclosure requirements, these standards will lead to transparent, attractive investment opportunities. but, at the same time, this will also lead to the pricing in of the increased probability of a bail - in – in other words, investors will demand higher risk premiums. 7. challenge 3 : learning to live with different market structures this brings me to my third challenge, namely adapting to new, different market structures. what do i mean by that? two things : first, market structures are going to be different than before the crisis – in particular less liquid ; second, in such a new environment, banks need to adapt their strategies to survive. while both trends will be monitored closely by supervisors, it is the banks and market participants that have to adapt. let ’ s think first about the market environment before i come to banks and their business models. before the financial crisis, ever - present liquidity was the touchstone of the free financial markets philosophy. the belief was that, if only demand and supply of a tradable asset were sufficiently high, you could assume perfect, frictionless markets. but this was an illusion. rather, the pre - crisis ‘ liquid ’ market structure resulted in interconnectivity and the well - established problems of “ too - interconnected - to - fail ” and “ too - many - to - fail ”. moreover, this liquidity supported unsustainable trading strategies and short - termism. now, in the post - crisis environment, in which tougher regulation is one element, we have witnessed several new dynamics resulting from changing market structures. particular attention has been paid to extreme, unexpected price movements that seem to have come from nowhere. the incident which received the most attention was probably the so called flash crash of 2010. on may 6 of that year, investors were stunned when the dow jones plunged almost 6 per cent before recovering –

andreas dombret : shaken but not stirred? the banking system seven years after the crisis speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the financial markets group research centre of the london school of economics and political science, london, 29 october 2015. * 1. * * introduction dear professor goodhart, dear charlie bean, ladies and gentlemen thank you very much for inviting me to speak here today. it is a great honour to give a public lecture at the lse and the financial markets group research centre, which truly is one of the leading european centres for academic research into financial markets. in my speech tonight i will outline the status quo in the banking sector and the most pressing challenges. “ shaken but not stirred ” might be an accurate description of its present state, which still presents many challenges. in saying that, i am, of course, alluding to one of your country ’ s most successful exports : the agent who not only solved the cold war, but who has recently also begun to prevent wrongdoing on the financial markets – james bond. in the 2006 version of casino royale, for example, bond ’ s opponent, le chiffre, engages in insider trading and market manipulation. in anticipation of his terrorist plot to destroy a prototype aeroplane, he bets on the fall in the stocks of the aircraft manufacturer. moreover, he engages in extreme leveraging : by financing the bet with money borrowed from african rebels, whom he has promised high returns on the ‘ invested ’ money. of course, it is not the supervisory authority, but her majesty ’ s agent james bond who prevents the attack, resulting in the collapse of le chiffre ’ s fraudulent plan. insider trading, market manipulation, extreme leveraging, terrorism financing – you can imagine how daunting a task like financial supervision is in a world without james bond. seriously, though, besides the aspects i have just mentioned, there were even more problems with banks and the financial markets before the financial crisis. 2. reconstructing the financial infrastructure after a perfect storm seven years ago, we were in midst of a perfect storm unleashed by the financial crisis that had the lehman brothers insolvency as its focal point. the events and revelations that ensued put the global economy into recession and discredited the banking sector. this led to an overwhelming demand to bring the state back in : for robust regulation of financial markets, and of banks in particular, so that