andreas dombret : the first six months of european banking supervision – an nca ’ s perspective speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the ilf ( institute for law and finance ) conference on the banking union, frankfurt am main, 4 may 2015. * 1. * * introduction ladies and gentlemen thank you for inviting me to speak at today ’ s ilf conference on the banking union. it is a great pleasure to be here. and again, the ilf has shown impeccable timing : it is six months to the day since we erected the first pillar of the european banking union. for on 4 november 2014, the ecb became the direct supervisor for the 123 largest banks in the euro area. together, these institutions account for more than 85 % of the aggregate total assets of the euro area ’ s banking sector. that makes the ecb one of the world ’ s biggest banking supervisors. yet the ecb is not walking alone ; it is being accompanied by the national supervisors. ultimately, european banking supervision rests on the shoulders of both the ecb and the national supervisors. let me therefore share with you my view, as a national supervisor, of the first six months of european banking supervision. 2. the benefits of european banking supervision shifting banking supervision from the national to the european level harnesses three specific benefits. first, european banking supervision makes it possible for banks throughout the euro area to be supervised according to the same high standards. these standards will emerge from sharing insights and empirical findings internationally, and from adopting best practices from each national approach to banking supervision. the option of conducting cross - border peer reviews is another way in which the goal of establishing a common set of high standards can be achieved. second, european banking supervision makes it possible to effectively identify and manage cross - border problems. this is essential, because large banks usually operate in more than one country. the failure of the franco - belgian bank dexia in 2011 is a classic case in which banking supervision with a cross - border focus could have improved crisis management. another example is germany ’ s hypo real estate, which folded in 2009. third, shifting banking supervision from the national to the european level adds a layer of separation between supervisors and the banks they supervise. this will prevent domestic supervisors from handling their banks with kid gloves out of national interest. at a more general level, the ultimate forte of european banking supervision is that it blends

some of the more lurid scenarios that are being drawn up for the first of january 2000. our topic this morning, however, is not the year 2000 problem, but the perennial question of how to devise sustainable and realistic monetary and exchange rate policies in an uncertain global financial environment. the first part of my presentation will deal with the theoretical and practical approaches to this issue, particularly in the light of the asian financial crisis. in the second part, i shall focus on hong kong ’ s experience, since 1983, of a linked exchange rate system. finally, i shall return to the regional perspective and examine the prospects for greater exchange rate stability through monetary co - operation and other routes. choice of exchange rate regime few of us, i think, would disagree with the proposition that there is no single exchange rate regime that is suitable to all economies all of the time. indeed, given the experience of the last couple of years, one may be tempted to conclude that there is no regime that is satisfactory any of the time. the difficult choices and trade - offs involved in devising a workable regime call to mind a cartoon i once saw that theorised that the dinosaurs became extinct when they tried, unsuccessfully, to devise an exchange rate mechanism. but modern governments cannot escape the choice, and it is opportune to reconsider what options are available in light of the recent experience in asia and elsewhere. it is now well understood that exchange rate and monetary regimes are inextricably linked. the days when significant barriers to capital movements allowed governments to pursue independent monetary and exchange rate policies are long gone. so any decision on an exchange rate framework is not narrowly confined to external considerations, but must reflect broader policy choices, as well as the structure of the economy in question. the practical and theoretical considerations involved in deciding on an appropriate exchange rate system can be reduced to four broad factors : the external versus domestic orientation of the economy ; the flexibility of its cost - price structure ; the exposure to financial shocks ; and the reputation and credibility of policy makers. these factors, naturally, differ from one economy to another. in theory, the choice is straightforward enough : the best system is the system that best accommodates a country ’ s “ natural endowment ” of these factors. success in practice, however, is not simply — or even primarily — a question of choosing the preferred exchange rate framework from a textbook perspective. policymakers on the ground need to address the much more demanding challenge of ensuring consistency between