andreas dombret : the “ too big to fail ” - problem and the roots of international cooperation speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, at a reception to bid farewell to mr thomas notheis, financial attache, and to welcome his successor, mr alexander sattler, mumbai, 30 october 2014. * * * ladies and gentlemen thank you, consul general siebert, for hosting this event here at your residence. i am happy to have the opportunity to officially thank the bundesbank ’ s outgoing representative, thomas notheis, and to welcome his successor, alexander sattler. allow me to say a few words on the roots of international cooperation. not too long ago, the saying was that when the united states sneezes, the world catches a cold. this is certainly still true, and the turbulence following the federal reserve ’ s announcement of tapering was a case in point. however, we have reached a point where the health of the world economy is not just determined by the state of the us economy. the world in which we live has become very small over recent decades. and, in a small world, every policymaker in every country must be aware that his or her decisions can influence other countries as well. the world is interconnected by a close - knit network of trade relations and via a globalised financial system. financial markets in particular have become integrated to such a degree that a small distortion at one end of the world can quickly spread and affect the entire system. in 2008, the failure of a single investment bank in the united states caused a global financial crisis and a worldwide recession. such banks are usually referred to as “ too big to fail ”. they are woven so deeply into the fabric of the financial system that their failure can tear everything apart. consequently, when push comes to shove, governments are compelled to bail out these banks to avoid a systemic crisis. this adds up to an implicit and cost - free insurance for large banks, which sets all the wrong incentives. thus, tackling the “ too big to fail ” - problem is paramount to create a stable financial system. this is a well - established fact that has also been acknowledged by india. from 2015 onwards, a number of indian banks will be classified as domestically systemically important. nevertheless, banks that are too big to fail pose a problem that is global in scope and has to be resolved not only at the national but also at

and all that in 20 minutes. in light of such incidents some have argued that post - crisis regulation has put pressure on banks to quit activities, which led to reduced liquidity, thereby increasing the likelihood of extreme price swings. this logic provides the basis for some people ’ s demand for a redesign of regulation. regulators are carefully monitoring the micro - and macro - prudential implications of the reforms. however, any analysis and recommendation would have to recognise that a reduction in the trading activity of banks was a genuine intention of the post - crisis reforms. we therefore need to weigh up concerns about liquidity against reduced trading activity. to put it bluntly : yes, markets are going to be less conducive for the generation of quick profits, but that was what was intended by the reforms – what we very much need are informed and committed investors, not short - termism. this will strengthen stability. but that is also why banks need to adapt to the new environment. while the banking sector has been shaken, business models have not been stirred – that is, only few have been overhauled. some stirring, however, might not hurt. and, here, it is market forces, rather than regulatory forces that come into play. what i mean is that banks must apply the acid test to their business models. especially european banks are lagging behind in redirecting their strategies. against the backdrop of changed market structures and in a low interest rate bis central bankers ’ speeches environment – which is, in all likelihood, here to stay – banks must urgently rethink their strategies to survive. i cannot emphasise enough how pressing it is for banks to assess and adapt their business models. but let me also stress that it is not the task of supervisors to intervene in the strategic orientation of banks. we have a public mandate to put a stop to imprudent activity with the aim of securing a stable banking sector that serves the real economy. therefore, we tax and limit negative externalities. for example, in addition to what i have already discussed, legislation and regulation of banking structural reform – also known as “ ringfencing ” – is under way in the us, the uk, and the eu. the regulations will ringfence those segments of banks that deserve particular protection, in particular deposits. this is designed to internalise negative externalities and reduce moral hazard. banks will have to accept the new public framework and construct sustainable business strategies which are compatible with it and which may restru