andreas dombret : beyond the financial crisis – dealing with systemic risk dinner speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at the workshop “ beyond the financial crisis : systemic risk, spillovers and regulation ”, organised by the deutsche bundesbank and technische universitat dresden, dresden, 28 october 2010. * 1. * * strengthening resilience ladies and gentlemen, i warmly welcome you to this dinner on the occasion of the workshop, jointly organised by the technische universitat dresden and the deutsche bundesbank. this has been a busy day full of research results and models. i would now like to complement this view with some remarks focusing on the policy dimension of systemic risk. over the last months, the international community has already decided to improve the regulatory and supervisory framework for the international financial system in several key points. the recent agreement on tighter capital standards ( basel iii ) represents a particularly decisive step forward in the envisaged re - form agenda. the new rules will probably be finally ratified at the forthcoming g20 summit of heads of state and government in seoul. bank capital will have to be stronger and higher in future, which will reduce the likelihood of individual institutions failing. larger risk buffers in the form of additional capital are not enough, however. more attention needs also to be paid to the “ big picture ”, the system as a whole. if the crisis has taught us one serious lesson, it is that the tightly networked international financial system can cause events which start out as isolated shocks to rapidly go global and unleash systemic effects. such systemic risks can originate in any part of the financial system : channels of potential contagion exist both within financial sectors and markets and across sectors and components. feedback loops between the financial sector and the real economy can also give rise to systemic risk. the system as a whole can also encounter difficulties if, owing to interdependencies, the rational conduct of market participants at the individual level were to lead to market dislocations in the aggregate. i draw three direct conclusions from the foregoing, which are related to one another and should be main elements of the policy response to the crisis. first, we need to find a suitable way of dealing with systemically important institutions. second, the traditional microprudential supervision needs to be supplemented with a macroprudential – or systemically oriented – component. third, we must

##cive to keeping economic growth at a pace, which is consistent with the potential output growth, determined by the structural features of the polish economy. the fact that inflation and core inflation has stayed below the previous forecasts for a relatively long period may be an indication that the impact of the factors which may slow down the returning of inflation to the target in relation to that accounted for in the projection is stronger than previously assumed. factors which could potentially accelerate the return of inflation back to the target include a higher wage growth than assumed in the projection, provided it would not be accompanied by national bank of poland “ financial stability review report ”, warsaw, september 2005 national bank of poland “ financial system development in poland 2004 ”, warsaw, november 2005 h. koskenkyla, ed. “ finnish financial markets 2002 ”, bank of finland, 2003 monetary policy committee statement, 26 april 2006 sufficiently fast increase of productivity, further oil price hikes or a deterioration of the public finance situation in relation to that envisaged in the convergence programme. the council maintains its belief that the most favourable scenario for poland would be to implement an economic strategy focused on creating conditions which would ensure the introduction of the euro at the earliest possible date, which would be conducive to a higher long - term economic growth. ”, end quote. public finances prospects this brings me to the developments in public finances. the fiscal outlook over the medium - term future would be broadly positive, if it were not for substantial risks, mainly political, surrounding the deficit path. in 2005, poland recorded an esa ’ 95 deficit of 2. 5 % of gdp. this corresponds to a deficit of 4. 4 % of gdp with the pension funds classified outside the general government sector, which will be the binding methodology from next year onwards and which is therefore the relevant methodology for assessing poland ’ s future compliance with the european fiscal rules. this implies that poland is 1. 4 percentage points away from meeting the maastricht fiscal criteria. it is not a demanding medium - term consolidation target for an economy with an expected real gdp growth of close to 5 percent, providing a very good environment to reduce the ratio of public spending to gdp. it is worth noting that germany may achieve consolidation of this magnitude over the 2006 - 2008 period, without such a favorable growth environment. however, the convergence programme 15 presented by the government in january of this year, does not foresee fulfilment of the deficit criterion in the programme horizon ; in