speeches central challenges in both the design and the implementation of new – and, hopefully, good – regulation. and nobody would dispute the fact that financial markets and their participants have become very complex. there are many levers which supervisors and / or lawmakers can pull. in some cases, pulling only one single lever the wrong way is enough to threaten the stability of the system. this can lead to unintended consequences such as regulatory gaps, duplication or arbitrage. let me discuss, at this juncture, a phenomenon known as the “ cobra effect ”. the cobra anecdote goes back to colonial india. in order to contain a plague of cobras, the british colonial administrators offered a bounty for every dead cobra. the plan initially seemed to work ; the colonial administrators were presented with a large number of dead cobras. unfortunately, however, this failed to bring the plague under control. most of the snakes delivered were actually not wild animals, but had instead been bred by entrepreneurial indians in order to collect the bounty. once the governor caught wind of it, he cancelled the premium, and the breeders then released the now - worthless snakes into the wild – thus making the plague worse than before... regulatory measures, too, can have undesired and unintended consequences. when the first basel capital accord was introduced 25 years ago, industrial countries´ government bonds, for instance, were classified as safe because nobody thought a government could default. bank regulators thus regarded government bonds as an anchor of stability for banks ’ balance sheets. as a result, banks today do not need to hold capital against the risks on oecd countries ’ government bonds. in addition, rules to limit concentration risk do not need to be applied to government bonds. it is therefore no big surprise that this exception in the basel framework had unintended consequences. banks poured massive funds into government bonds – especially domestic bonds. this created a kind of “ doom loop ” between the solvency of sovereigns and the solvency of domestic banks. we have to break this dangerous loop by ending the preferential regulatory treatment of government bonds. however, as the story of the cobra effect shows, abrupt changes carry dangers too. immediately prescribing that a certain amount of capital be held to back the risks on government bonds could lead to another set of unintended consequences. but that does not alter the fact that the existing rules need to be changed in order to break the “ doom loop ” between sovereign

4. 2 the second channel : transition risks it should be taken as a fact that the 2 - degree goal under the paris agreement can only be reached if economies across the world are transformed into green, low - carbon economies. achieving this transition will require potentially disruptive technological advances as well as farreaching changes in climate policy. without a doubt, such a transition will prompt markets to reassess the value of a broad range of assets. depending on how quickly and orderly the transition and the associated re - pricing occur, they could become highly relevant for the stability of financial institutions as well. to illustrate one particular transition effect, let ’ s look at the concept of the “ carbon budget ". meeting the target of the paris agreement will require limiting global carbon emissions. the intergovernmental panel on climate change estimates that in order to reach the 2 - degree target with a probability of just 50 per cent, the maximum amount of additional carbon emissions this century must roughly remain below 1, 100 gigatonnes of co2. for higher probabilities of success, lower carbon budgets apply. however, the total amount of carbon embedded in all known global fossil fuel reserves is estimated at roughly 2, 800 gigatonnes. this means that, to reach the 2 - degree target with a reasonably high probability, about two - thirds of all known coal, oil and gas reserves must remain in the ground. but the future exploitation of these reserves is what many companies base a significant share of their value on – especially, but not only, those engaged in extracting and refining them. according to the world wide fund for nature, listed fossil fuel companies currently carry more than half of the total global fossil fuel reserves on their balance sheets as assets. if these reserves cannot be developed, the corresponding assets become worthless – they become what are known as “ stranded assets ". the decision to actually limit emissions would be made by governments, and their tool would be climate - related laws and regulations. and there is a clear trend towards more government intervention. the global climate legislation study found that, since 1997, the number of climate change laws and policies has doubled every 4 - 5 years. while the pace has been levelling off recently, the trend is clear. we have already seen examples of sharp devaluations in the fossil fuel and energy sector. one oft - cited example are the top four us coal producers. their combined market capitalisation has fallen by well over 90 per cent since 2010. listed utility