jens weidmann : banking supervision and regulation – what action does the bundesbank consider necessary? speech by dr jens weidmann, president of the deutsche bundesbank, at the club of hamburg - based economic journalists ( club hamburger wirtschaftsjournalisten ), hamburg, 30 august 2013. * 1. * * introduction mr nicolai ladies and gentlemen i ’ m delighted to have the opportunity to speak to you today at the club of hamburg - based economic journalists. of course, i can hardly say that i don ’ t have much contact with economic journalists. but it ’ s unusual for me to have the chance to discuss current issues with so many members of the media at once. the contact between central bankers and the press is so close because we need you, the economic journalists, to help the public understand our decisions and actions. despite our best efforts, our publications simply do not reach the same number of people as your media. but it is incredibly important for the public to understand our decisions so that they have confidence in our work. and this confidence is vital to maintaining a stable currency. after all, monetary policy mainly works by influencing expectations – the current issue of “ forward guidance ” being a case in point. yet the public have to be confident not just in a central bank ’ s monetary policy decisions but also in its role in payments or banking supervision and regulation. there are no half measures : either a central bank has the public ’ s trust or it doesn ’ t. and bearing in mind the old adage that it takes years to build up a good reputation and only minutes to ruin it, it ’ s easy to see why we central bankers – especially those in europe – are focusing so intensely on banking supervision and regulation at the moment. today, i ’ d like to give you a brief overview of the state of play in banking supervision and regulation and the steps that still need to be taken. 2. year five of the crisis – where are we up to? the financial and sovereign debt crisis has exposed substantial flaws in the financial system, which various reform projects are now seeking to address. many banks proved unable to withstand losses on their assets without outside help and had to be bailed out by taxpayers. this shook the foundations of some countries ’ public finances, too. some european countries became less and less solvent, worsening the banks ’ economic woes, as they had to take write - downs on their government bond holdings. the crisis therefore revealed

its target, the more likely it is that its credibility will be called into question. against this background, the ecb governing council was without a doubt confronted with a difficult situation. as you are aware, the bundesbank takes a sceptical view of the government bond purchases. after all, the low level of inflation in the euro area is primarily the result of the drop in energy prices. lower energy prices can only be expected to dampen inflation rates temporarily. they are also clearly boosting growth in the euro area because its member states are net importers of oil on balance. the risk of a deflationary spiral driven by falling prices and wages, which the bundesbank and other institutions already considered to be low even before the start of the purchase programme, is now even lower. however, the risks associated with the purchase programme and those which result from the increasing fusion of the boundaries between monetary and fiscal policy, together with potential risks to financial stability that could result from a very loose monetary policy are, in our view, higher. this could result in the urgently needed consolidation of public finances in the crisis countries bis central bankers ’ speeches being put on the back burner. the associated danger of monetary policymakers being pressured into maintaining the expansionary course for longer than necessary should not be underestimated. 2. cash cycle and recycling ladies and gentlemen you can see that monetary policy in the euro area is in somewhat of a predicament. against this backdrop, the bundesbank ’ s cash department also has to address the subject of “ crises and crisis prevention ”. for us, it is important that we are able to react to external shocks independently. to do so, we need an infrastructure and a level of involvement in the cash cycle which gives us the necessary degree of flexibility to respond accordingly. that is why we do not promote an unlimited amount of cash recycling outside of the bundesbank. rather, the bundesbank always ensures that it assumes an adequate level of involvement in the cash cycle. the processing of 15 billion banknotes per year, as is formulated in our strategy, and the corresponding branch network, which will comprise a total of 31 branches in future in line with a decision by the executive board, are indispensable in order to ensure a functioning provision in the event of crises and emergencies. however, the cash cycle not only faces challenges from external shocks. the creation of the eurosystem alone has inevitably led to the commingling of different cultures