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Interview 19.02.2018

Dombret urges banks to submit licence applications in time

Interview published in "Die Welt"

Interview with Andreas Dombret conducted by Anja Ettel and Anne Kunz

The US stock market recently experienced the largest ever flash crash in absolute point terms. How dangerous are such events to financial stability?

I wouldn’t make too much of it. Trading did not cease at any point, as is often the case with such flash crashes. This type of turmoil on the stock markets is usually short-lived and reversible, and prices often bounce back a short time afterwards. This recent episode had a rather limited impact on market confidence and financial stability.

The crash was a big surprise, especially for those who had been speculating on persistently low market volatility. Losses in these products were so high that this had a negative knock-on effect on the stock market. Are you not concerned about this build-up?

If we have learnt anything in the past few years, it is that financial markets are never completely predictable. And that quants – that is, trading on the basis of certain algorithms – can evidently have a greater impact on the markets than previously thought.

But not great enough to warrant additional regulation?

To regulate is to intervene in the market – such a move cannot be taken lightly. First of all, we need to understand exactly what happened. If prices can fluctuate so widely in such a short space of time, there has to be a good explanation, otherwise confidence will be undermined. And confidence in market structures is essential.

That is precisely the problem: robo-advisors, dark pools and high frequency trading have made the market an extremely complex and confusing place. How do you intend to create and maintain confidence?

Algorithms and the herding behaviour that they trigger are topics that warrant in-depth discussion. However, for the case in point, I stand by what I said earlier. The fall in stock prices two weeks ago did not come as a surprise. The US share index in particular had been rising for a while with no correction of any note despite the high valuation level. Speculation of a correction had been rife for some time. However, in annual terms, the Dow Jones is still up. Nevertheless, we must take a close look at what happened in those 15 minutes when prices suddenly crashed.

The ECB has now started campaigning against the Bitcoin. Why are central banks so afraid of cryptocurrencies?

At the moment, I do not believe they pose a great risk to financial stability. Despite considerable growth, the market segment is still relatively small. And to date, very few banks, insurers and funds are active in this area. However, we have to keep a close watch on developments. As far as Bitcoins are concerned, the focus should be on protecting consumers and preventing money laundering. I believe international initiatives would be the best way forward here. 

Isn’t that a little bit two-faced? Central banks advocated blockchain – and it was this technology that enabled the Bitcoin to be born.

We need to draw a strict line between blockchain technology and crypto tokens. Blockchain technology is very interesting and could offer added value in various forms of use. By contrast, I cannot see any economic added value being provided by crypto tokens such as the Bitcoin.

In addition to the teetering stock markets, Brexit is another work in progress. Recently it has looked as if the Bundesbank and the European Central Bank (ECB) are close to losing their patience as far as Brexit is concerned. Your calls urging banks to apply for an EU licence have been getting stronger and stronger. Why are they holding back?

Some banks were very quick off the mark in the hope that submitting their plans and applying for a licence as soon as possible would give them an advantage. Others want as much certainty as possible before they make their decision. They are sitting on their application forms, changing them every time anything is said in Great Britain. And there are other banks that haven’t done anything yet.

And who are the black sheep of the banking world?

I’m afraid I can’t tell you that. Let me say this much: those institutions that have very complex operations in continental Europe and have been mainly working out of London to date already have very concrete plans. Many of them have also submitted applications already. Other institutions with less complex business operations haven’t made quite so much progress.

Well that’s probably not a bad thing, as they won’t need as much time.

Not at all! I cannot and will not guarantee that we at the Bundesbank, BaFin and the ECB will be able to process all of the applications in time if they’re not sent until the last minute.

In other words, those banks that send their application too late risk not being able to operate after Brexit? 

Those banks sending their application too late risk not having their application approved in time. I don’t mean this as a threat, but it should be taken as a serious warning. Banks should submit their final application in the second quarter of this year at the latest.

Do you think we will have a hard Brexit?

Unfortunately, it is possible that the parties will fail to reach an agreement and that there will be no transitional period. That is why we are urging banks not to wait and see but to prepare for a hard Brexit. Institutions can hope for the best but they should prepare for the worst. 

Is that not fear-mongering? Banks are convinced that there will be a transitional period.

From an economic perspective, it would definitely make sense to have a transitional period. But in the case of Brexit, we are facing a historic challenge. It is the first time that European countries are drifting apart instead of coming closer together. This will bring with it a whole host of new, unknown problems.

What do you think of the idea of easing employment protection in order to entice banks into relocating their employees to Germany?

At present, not many employees are prepared to leave London. As a result, it is important to underline the advantages of other locations – Frankfurt being one of them. But that is certainly not the job of the Bundesbank. We – together with BaFin – are responsible for supervision and bank licences, not PR. We’ll leave that to the experts.

Germany hasn’t had much success in that area. The European Banking Authority EBA went to Paris rather than to Frankfurt.

I’m afraid you’ll have to take those questions elsewhere. The German supervisors took a conscious decision to keep out of such matters. We answer questions from interested foreign banks, our doors are open for discussions, but we are certainly not going to start cold calling bankers touting licences for Frankfurt.

Other nations, such as the French, haven't been quite as reserved ...

Before making a decision to relocate, banks have to look at the entire package. How much office space is available, how many international schools are there and how easy is foreign travel? German supervisors are not making concessions. Our rules for foreign banks will not change. I believe that making promises to banks on the one hand yet hoping to supervise them closely and impartially on the other would also constitute a conflict of interest.

But then you’re risking that all major, international banks may move to Paris.

I have no concerns on that score. Many important banks will apply for a licence in Frankfurt. And anyway, talk of Brexit having winners or losers is foolish. Let me be quite clear here; Brexit will have no winners.

Do you think a hard Brexit is the worst case scenario – or could it get even worse?

A number of British politicians think that they will reap benefits from the competition among financial centres. However, I see competitive deregulation as extremely dangerous. We need joint regulations to contain risk in the global financial system. Financial systems are no longer purely national.

Could a free trade agreement for financial service providers limit the damage caused by Brexit?

Such a free trade agreement would be entering into new territory and that shouldn’t be rushed. Negotiations would certainly be extremely lengthy. But just because something is new, it shouldn’t be rejected flat out. We in the EU should also consider what form relations among financial service providers could take in the future.

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Additional information

In conversation

Dr Andreas Dombret

Interview with Andreas Dombret,
Member of the Executive Board of the Deutsche Bundesbank

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