andreas dombret : foreign banks between financial crisis and financial stability speech by dr andreas dombret, member of the executive board of the deutsche bundesbank, to mark the 30th anniversary of the association of foreign banks in germany, frankfurt am main, germany, 22 august 2012. * * * introduction ladies and gentlemen let me begin by offering the bundesbank ’ s warm congratulations to you, mr winter, and all the members of the association of foreign banks in germany on its jubilee 30th anniversary. thirty years is quite a long period of time – nearly one - third of a century – and something of a landmark. as the old saying used to go, “ never trust anyone over 30 ”. that catchphrase was popularised by the 1968 student movement – the students who used it are now themselves over 60! trust is indeed the key word. its importance is being learned by governments and banks alike as the sovereign debt and financial crisis tightens. so it is a good thing that the day - today dealings between the banking associations and individual banks, on the one hand, and central banks and supervisory authorities, on the other, are characterised by mutual confidence and trust – notwithstanding the necessary arm ’ s - length relationship between central banks and supervisory authorities, on the one hand, and banks and their associations, on the other. i can say that because i have worked in both camps. i was once a foreign banker myself. since joining the bundesbank in 2010, i have had a chance to see things from the other perspective. i would like to take this opportunity to thank you for the constructive cooperation i have been privileged to enjoy with all banking associations over the past two years. i hope that this cordial relationship will continue in future – including after the possible emergence of a new, overarching single european supervisory body. if it is carefully conceived and constructed, it could make an important contribution to safeguarding financial stability. and it might well refashion the current triangular relationship between banks, supervisors and central banks. let me nail my colours to the mast right away : i do not believe that it is absolutely essential for the central bank to have ultimate supervisory responsibility in order to capitalise on the synergies provided by central banks ’ macroeconomic and macroprudential expertise. the crucial requirement is the efficient exchange of information. stimulating competition in his book fault lines – how hidden fractures still threaten the world economy, former imf chief economist raghuram rajan argues that a

probability of crises occurring, but it limits the real and fiscal costs of crises ( jorda, richter, schularick, and taylor 2017 ). graph 5 shows that the leverage of banks increased on impact during the crisis because losses materialized and wiped out part of the banks ’ capital buffers. especially in countries with high rates of loan growth before the crisis, non - performing loans increased considerably after the crisis ( graph 6 ). post - crisis, leverage has decreased as a result of higher capital requirements and market pressure. yet, banks remain more highly leveraged than they have been in historical perspective. real sector adjustment turning to the real sector, the surge in private sector borrowing before the crisis is reflected in high levels of growth. in this sense, pre - crisis trends in growth are an insufficient benchmark for sustainable levels of growth after the crisis. during the crisis, there was a fall in real gdp growth ( graph 7 and 8 ), which was driven to a large extent by a decline in investment ( graph 9 ), and recovery has been only gradual. comparing investment patterns in europe and the united states, dottling, gutierrez, and phillippon ( 2017 ) conclude that weak investment in the us is mainly the result of structural features of the economy and of increased concentration. in europe, weak investment is more transitory, which is consistent with previous findings linking weak investment to debt overhang. heterogeneity in terms of gdp growth and output gaps in the euro area which initially increased during the crisis, has been declining ( graph 10 ). 4 convergence of gdp growth implies that there is little convergence of income levels in europe in many cases, high growth rates have not been accompanied by improvements in productivity ( graph 11 ). over the past decades, productivity growth has slowed down, and the euro area lags behind the us ( mcgowan, andrews, criscuolo, and nicoletti 2015 ). differences in productivity reflect reflect differences in terms of spending on research and development ( r & d ) ( graph 12 ) and in the number of researchers employed in r & d ( graph 13 ). notwithstanding differences across countries, r & d indicators have improved in the post crisis relative to the pre - crisis period. the output gap measures the difference between actual output growth and its long - term potential. one important driver of productivity can be the exit of weaker firms and the market entry of new, more productive firms ( cinera and galgau 2005 ), which raises