claudia buch : how can we protect economies from financial crises? statement by prof claudia buch, deputy president of the deutsche bundesbank, for a panel debate at the rencontres economiques d'aix - en - provence " in search of new forms of prosperity ", aix - en - provence, 8 july 2017. * * * these remarks have been prepared for a panel debate at the rencontres economiques d ’ aixen - provence, july 7 - 9, 2017, session 19. i would like to thank steffen gunther, marcus john, katharina knoll, sophia list, frieder mokinski, jens reich, marc rennert, christoph weißermel, and melanie wulff for their most helpful contributions to an earlier draft. any errors are my own. financial crises are costly – output and financial wealth are lost, unemployment increases, and social gaps widen. the costs may be prolonged, and they may become chronic. the global financial crisis that began ten years ago with the liquidity squeeze on global financial markets in august 2007 is still casting long shadows. global debt levels remain elevated. debt levels of the non - financial sector relative to gdp stood at 220 % by the end of 2016 compared with 179 % a decade earlier ( bis 2017 ). 1 in the aftermath of the financial crisis, risks were shifted from the private to the public sector ( figure 1 ). in the euro area, government debt due to the support for financial institutions went up by €488 billion, or 4. 5 % of gdp, between 2007 and 2016 ( eurostat2017a ). today, in the euro area, government debt relative to gdpis about 24 percentage points higher than it was prior to the crisis ( eurostat 2017b ). the global financial crisis has had a significant impact on economic growth and unemployment. the estimated median loss varies between 4 % and 9 % ( ball 2014, mourougane 2017, ollivaud and turner 2014 ). such output losses have also had social consequences. in the euro area, the unemployment rate went up from 9. 2 % in 2005 to 11. 2 % in 2015 ( eurostat 2017c ). 1 / 8 bis central bankers'speeches answering the question of how economies can be protected from financial crisis is thus a key challenge for policymakers. complete “ protection ” against fluctuations on financial markets is not possible and would impair critical functions of markets in terms

any economic sectors unscathed. and it is safe to say that these upheavals will force market participants to reprice many assets. does the term " stranded assets " mean anything to you? to hit the 2 degrees celsius target, we will need to curb the amount of carbon dioxide we emit worldwide. at a rough estimate, our co2 2 / 7 bis central bankers'speeches emissions are probably not much more than 1, 000 gigatonnes away from exhausting our budget. however, the co2 content of the known fossil fuel reserves still in the ground is far higher – something like three times as much. what this means is that much of these reserves will need to be left untapped. and the problem is that many businesses ’ valuations depend to a significant degree on the future anticipated value of such fossil fuel reserves. but if those reserves are out of bounds, as it were, they are effectively worthless, making them " stranded assets ". the loss in the value of these assets puts the companies ’ very survival on the line. as a case in point, the market capitalisation of the major us coal businesses has contracted by roughly 60 % over the past five years, and by around 90 % over the past ten. and that was against the backdrop of the us equity market as a whole racing from one record to the next. and that ’ s just one example of many i could mention. depending on how quickly and unexpectedly the transition and the resulting repricing process take place, they may well have a huge bearing on the stability of entire sectors of the economy. so it will mainly become an issue whenever businesses and investors are unable to plan for the long term because they need to be in a position to respond to short - term policy impulses. this poses the risk of cliff effects, which can trigger disruptions and financial losses that then affect the financial system and its stability. 3 climate risks in the german banking system let ’ s now jump straight from theory to practice. to what extent would german banks and savings banks be affected by a shift to a lower - emission economy? at first glance, the amounts lent by german institutions to sectors emitting especially high levels of co2 appear insignificant : loans of €1 million or more granted by german banks to coal mining companies currently amount to no more than just under €1 billion in total. however, loans to coal mining companies can make up 1 - 2 % of individual institutions ’ issued loans of