jens weidmann : managing macroprudential and monetary policy – a challenge for central banks speech by dr jens weidmann, president of the deutsche bundesbank, at the suerf / deutsche bundesbank conference 2011 / imfs – the esrb at 1, berlin, 8 november 2011. * 1. * * introduction ladies and gentlemen, in the event of an earthquake, the question that decides between life and death is whether the buildings are stable enough to withstand the tremor of the earth. in the event of a financial shock, a crucial factor for the severity of the crisis is to what extent the financial sector is stable, and whether it is possible to contain negative feedback effects within the macroeconomy. the financial system ’ s recent track record in this respect has not been wholly convincing, to put it mildly. therefore, one central question on the global political agenda is “ how to better ensure financial stability? ”. comparing the stability of our financial and monetary system with a building that has to withstand a substantial earthquake, the two columns monetary policy and microprudential supervision – which supported that building and which we believed to be strong enough – turned out to be insufficient. shocks caused by turbulences on local markets may propagate much more quickly and widely than it had been previously expected. hence, an explicitly systemic view on financial markets is needed as an additional element in our policy - making building, namely macroprudential policy. in the following, i would like to elaborate on the question as to how this new column should be designed. first, i will address the more conceptual aspect of the interrelations between financial stability and monetary policy, and point out that, since both policy fields pursue separate objectives, an individual set of instruments for macroprudential policy is needed. second, i will concentrate on operational aspects of macroprudential policy. in particular, i will highlight that macroprudential policy will rightly gain in importance and that central banks ought to make a substantial contribution without, however, compromising their main objective – price stability – and their independence. finally, i will outline that, in addition to this, the european sovereign debt crisis poses a much more fundamental question : how can central banks fulfil their mandate if risks to macroeconomic and financial stability emanate from unsound public finances and structural economic weaknesses, yet policymakers do not succeed in putting these deficiencies right? 2. interrelations between financial stability and

. financial institutions are required to bolster firms ’ growth constantly through deepening the ongoing relationship with them. in complementing such support, lending that uses movable assets, such as inventories, or accounts receivables as collateral – the so - called asset - based lending – or that utilizes covenants for medium and small firms can be useful options. third, it is intrinsically important for financial institutions to play a role in encouraging metabolism, for example, corporate realignment. at the same time, it is also important that financial institutions also aim at metabolizing themselves through mergers, consolidation, or unbundling, in accordance with their own business models. for example, financial institutions that aim to be globally active could pursue the advantage of scale or scope through mergers and acquisitions. by contrast, for financial institutions that aspire to enhance their presence in niche markets, limiting functions and concentrating resources could be an important option. those financial institutions ’ behavior is expected to not only improve management efficiency of individual financial institutions through increased competitiveness but also lead to increased profitability of the financial sector as a whole through efficient resource reallocation. proper risk management the second challenge for japanese financial institutions is proper risk management. in that regard, there is an increasing awareness among financial institutions, including those overseas, of the importance of the following : to gauge risk comprehensively, for example, by way of stress testing, without relying too much on specific quantitative methods such as var, and to share the recognition of risks not only in the risk management section but also including top management. in addition to such general challenge, a reduction in market risk associated with stockholdings, in particular, would be a specific challenge for the future. as for market risk associated with stockholdings, many japanese financial institutions have recognized the magnitude of price volatility associated with stockholdings and have been taking steps to reduce such risk as a management priority. nevertheless, the pace of reduction in stockholdings has somewhat slowed recently due partly to sluggish stock prices and thus the due amount of market risk associated with stockholdings still remains. of course, stockholdings could have implications as a part of corporate governance or could play a role as a tool to gain total profits including fee revenues. even in those cases, however, it is important to firmly identify the risks and returns. on that basis, if it is judged that the risk is larger, financial institutions are required to steadily promote efforts toward the reduction of their