Buch: Macroeconomic effects of financial market reforms matter
Bundesbank Vice-President Claudia Buch has spoken out regarding the financial market reforms that were initiated in the wake of the financial crisis and the need to assess their long-term effects on the economy as a whole. Professor Buch gave a presentation on financial stability in Munich to mark the Bundesbank's 60th anniversary
The Bundesbank defines financial stability as the ability of a financial system to fulfil its tasks for the real economy,
"including in times of crisis and radical change," said Professor Buch to industry representatives at the "Banking Evening" held in the Bavarian Regional Office. She went on to state that the financial system's tasks include facilitating funding for productive investments, offering savers secure investment opportunities, distributing risk appropriately and ensuring the payment system continues to function..
Important to have an adequate capital base
Professor Buch drew a few lessons from the financial crisis in her talk, such as how the crisis laid bare the importance of the financial industry for the real economy. The Vice-President underscored how essential it is for banks to have an adequate capital base to create a buffer against risks and to cushion shocks, which would otherwise be intensified within the financial system and could impact on the real economy.
"Capital provides a 'double dividend' – it makes the financial system more stable while also facilitating growth and innovation."
Following the crisis, the Bundesbank received an important mandate: responsibility for financial stability. Microeconomic data are necessary to shine a light on the interaction between the financial industry and the real economy. The sooner "sources of infection" are identified within the financial system, the easier it is to take countermeasures and problems will impact less heavily.
"The social returns look favourable"
Professor Buch also stated that the financial market reforms introduced in the wake of the crisis should be assessed based on their long-term macroeconomic effects, and added that higher capital requirements for banks ultimately allowed a rise in lending. Another example she cited is the withdrawal of implied subsidies for financial institutions – private costs may increase and the institutes' profitability may decline on account of higher financing costs.
"The social returns look favourable, however, if taxpayers no longer have to foot the bill for the losses of financial institutions," said Professor Buch.