andreas dombret : deceptive tranquillity and the threat of reform fatigue – the need for international cooperation opening remarks by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a joint seminar of the central bank of the republic of turkey and the deutsche bundesbank, istanbul, 4 july 2014. * 1. * * introduction ladies and gentlemen the italian writer edmondo de amicis described istanbul as “ a universal beauty where poet and archaeologist, diplomat and merchant, princess and sailor, northerner and westerner screams with the same admiration ”. as far as i am concerned, he could have added central bankers to the list of those who admire the city of istanbul. which is to say i am happy to be here today at the joint seminar of the central bank of the republic of turkey and the deutsche bundesbank. i would like to thank our turkish colleagues for their hospitality, and to express my gratitude to all who helped make this seminar possible. turkey and germany are closely connected. at the beginning of the 1960s, the first turkish immigrants came to germany, and today, more than 50 years later, around 3 million people of turkish origin live within germany ’ s borders. our two countries are therefore connected not only at the political but also at a very personal level. last year, the central banks of turkey and germany added a new level of partnership. since november, a representative of the bundesbank has been based in istanbul to build networks, to share information and ideas, to explain the bundesbank ’ s positions and to facilitate cooperation. this joint seminar on financial stability is the tangible outcome of these efforts. 2. international cooperation in financial stability today ’ s and tomorrow ’ s seminar covers an issue in which international cooperation is certainly necessary : financial stability is a public good, and a global one at that. the past few years have taught us that financial crises do not stop at national borders. we live in an integrated world, and no country is able to insulate itself any more. that said, we need a global approach to secure financial stability, and the fundamentals of such an approach are personal contacts, open exchange and mutual understanding. for me, one of the main objectives of this seminar is to strengthen these fundamentals. central banks in particular have a natural interest in financial stability, and in many instances they are involved in safeguarding it. nevertheless, it is important to make a distinction between the different roles that central banks have

market confidence right away. with this in mind, the brrd explicitly requires resolution authorities to exclude the use of extraordinary liquidity support when developing resolution plans. in fact, the bank should ideally be able to repay any emergency liquidity support before resolution. it ’ s all in the name : ela is intended for emergency situations. after a credible resolution, one should assume that the emergency has been dealt with and that ela is no longer needed. that ’ s why we need to address this elephant in the room. we need to tackle the issue of funding in resolution. new instruments may be needed. we can ’ t assume that with their limited resources, the central bank or resolution fund will fully take care of funding in and immediately after resolution. even a well - recapitalized bank may experience increased liquidity needs generated by market volatility, and by asymmetrical information on the bank ’ s viability. market participants may be discouraged from providing liquidity – and existing creditors may be encouraged to run – if there is uncertainty over the new entity ’ s ability to meet increased liquidity needs. for banks that are solvent and sound following resolution, the first port of call would then be the standard liquidity facilities of central banks. having said that, resolution authorities and banks cannot take liquidity support for granted. and prolonged support should in any case not be factored in ex ante as part of the solution. this is because, firstly, central banks will critically assess the viability of the bank post - resolution and need assurance that support would indeed be only temporary. second, the bank needs to have sufficient eligible collateral, after haircuts, to access central bank facilities. while this may seem obvious, there is a risk that such collateral has been largely pledged in the run up to resolution. in addition, the provision of ela itself could effectively postpone the point of resolution, while further reducing the availability of collateral during and after resolution. in that sense, central banks and resolution authorities have a common interest in resolving banks in a timely manner, i. e. before asset encumbrance reaches uncomfortably high levels and collateral runs out. in short, don ’ t forget about funding in resolution. sources of funding – including private ones – should be identified and prepared in tranquil times and quantified conservatively. asset encumbrance should be closely monitored and timely intervention may be required to assure sufficient funding in resolution. let me briefly restate my main