axel a weber : the macroeconomy and financial systems in normal times and in times of stress dinner speech by professor axel a weber, president of the deutsche bundesbank, at the joint bundesbank - bank of france conference on " the macroeconomy and financial systems in normal times and in times of stress ", gouvieux - chantilly, 8 june 2009. * * * introduction ladies and gentlemen, i warmly welcome you to this dinner on the occasion of the joint bundesbank - banque de france conference here in gouvieux. the regal ambience of this castle may help us to momentarily forget our everyday events and concerns ; however, this will certainly not last. the global financial crisis has been keeping the world on edge for nearly two years now. the turbulence in the international financial markets that erupted in august 2007 developed into a full - blown global financial crisis in september 2008 with the collapse of us investment bank lehman brothers. the deterioration of the situation in the financial market caused the decline in global economic output, which was already starting to take hold, to take a dramatic turn for the worse. industrial and emerging economies underwent a nearly completely synchronised sharp economic downturn in the last two quarters. despite growing signs that the intensity of the downturn is subsiding, past experience has shown that the economy is generally very slow to recover from recessions that are associated with real estate and financial crises. although the forecast uncertainty is currently particularly high, the crisis is likely to put a strain on global financial markets and the real sector for some time to come. to quote the opening lines to the tolstoy novel anna karenina : “ happy families are all alike ; every unhappy family is unhappy in its own way. ” this pearl of wisdom is also relevant in times of financial crisis. although virtually the entire world was bowled over by the sheer force of events, it is small details that set the individual transmission channels apart. allow me to briefly cite germany as a case in point. in august 2007, right at the beginning of the financial crisis, germany was the first country to see two banks encounter difficulties, even though we had not had any local asset price bubbles. since the financial crisis is clearly a global problem, the risk - bearing capacity of many internationally active financial institutions has now been affected severely on a worldwide scale. turning to developments in the real sector, it is striking that germany saw a particularly sharp drop in overall economic activity relative to

##s and are flexible enough to allow perspectives on risk to change as business conditions change and new data become available. governance structure to ensure sound risk management, boards of directors and senior management at financial institutions must also establish an overall governance and control structure that is credible, robust, and consistent throughout the firm. it is critical that senior management set the tone at the top, communicate it, and lead by example. this strategy should be clearly articulated and should be recognizable in the actions of the firm's employees. business lines should be held equally accountable and there should not be any special treatment for " star " employees, even if they are bringing sizable revenues into the institution in a particularly year. while certain financial institutions may choose to conduct business on a decentralized basis, they must always remember that in the end the exposures and obligations are rolled up and combined into one consolidated legal entity. in addition, the institution's commitment to and emphasis on risk management should be eminently visible – both within and outside of the organization. for example, the firm should demonstrate that its risk managers have direct access to top management and play a key role in decisionmaking. they also must be able to speak authoritatively about the risk profile and risk - management strategy of the whole organization to market participants and counterparties. durability of risk - management structures of course, risk - management structures are successful only if they are sturdy and durable. these structures and their associated strategies should be embedded in the firm's culture and not be dependent on just one or a few people. they should be part of the fabric of the organization, not just a few catchy phrases repeated from time to time. for example, understanding and living up to the firm's risk - management standards should be a prerequisite for advancement to a senior management position. effective risk management remains sturdy and durable only if supported by strong and independent risk functions that produce unbiased information. having independent risk managers with a certain amount of authority allows for clear, dispassionate thinking about the entire firm's risk profile, with no favoritism toward any business unit. senior management should encourage risk managers to dig deep to uncover latent risks and point out cases in which certain business lines are assuming too much risk. in other words, it is good to have a few people within the institution who – to paraphrase a former federal reserve chairman – know when to take away the punch bowl. being the party pooper, however