A difficult setting for banks
Bundesbank President Jens Weidmann said he considered it justified that bank regulation had been made more stringent worldwide as a lesson learned from the financial crisis, commenting that it was a good thing that credit institutions now held more and better-quality capital. Referring to the revision of the Basel III requirements, Mr Weidmann told the audience at an event that was part of the Frankfurt Finance Summit that "
this process of improvement has not been completed yet", but added that a further tightening was currently not on the agenda. Mr Weidmann did, however, call for an end to the preferential regulatory treatment afforded to sovereign debt. "
A banking system can only truly be stable if the fate of banks does not hinge on the solvency of their national sovereigns," he stressed.
Mr Weidmann went on to advocate taking some of the pressure imposed by bank regulation off small and medium-sized banks, since the stricter requirements were a relatively heavy burden for these institutions. "
In keeping with the principle of proportionality, we should," Mr Weidmann said, "
reflect on an adjustment of regulatory and supervisory standards to the size of banks - provided that financial stability is not at risk."
Low-interest-rate environment poses a challenge
Besides stricter regulation, the Bundesbank president mentioned other big challenges facing banks in the form of digitalisation and the current low-interest-rate environment. Looking ahead, he pointed to the danger that low interest rates could squeeze banks' profitability. For this reason, Mr Weidmann advised banks to scrutinise their business models, harness the advantages offered by digitalisation and continue improving their cost efficiency.
He told the audience that although, from a central bank's viewpoint, bank profitability was not an objective per se, profitable banks were nevertheless good for financial stability as they could boost their capital through profit retention and thus better absorb future losses. On top of that, they were in a better position to transmit monetary policy stimuli. This meant, Mr Weidmann continued, that low profitability ultimately made it more difficult, not easier, for central banks to fulfil their monetary policy mandate.
The Bundesbank president went on to say that an expansionary monetary policy stance was justified for now given inflation close to zero and projected to accelerate only very gradually. However, he warned against extending the period of ultra-loose monetary policy longer than was absolutely necessary to achieve the objective of price stability because of the mounting risks and side-effects such a policy stance entails. Central banks should, he said, take care of their independence and avoid being taken hostage by financial markets or politics.
Weidmann rejects criticism
The Bundesbank president pointed out that the low longer-term interest rates were not attributable to the ultra-loose monetary policy alone: low interest rates were also a reflection of weaker growth expectations. "
Making our economies more prosperous would pave the way for higher real interest rates," Mr Weidmann remarked, adding that this was the task of the policy makers, however.
Moreover, he rejected criticism to the effect that the Germans were saving too much and investing too little - accusations which, he said, had been levelled frequently in the past. As the Bundesbank president put it: "
Blaming savers for saving too much is, in my view, just as mistaken as blaming investors for investing too little." Against this background Mr Weidmann conceded that a current account surplus of more than 8 % of GDP was certainly not sustainable. Yet he reminded his audience that the most recent rise in the surplus owed a great deal to the depreciation of the euro and the strong decline in oil prices. "
Moreover, Germany is an ageing society," he pointed out, "so it has good reason to engage in precautionary savings." President Weidmann said he was opposed to active policy measures to counter the current account surplus, explaining that he felt a deficit-financed investment programme was neither necessary nor helpful. Based on a simulation exercise conducted by Bundesbank economists, the positive knock-on effects on other euro-area economies would be marginal at best, he noted.