Bundesbank Executive Board member Andreas Dombret says the latest reforms in banking regulation have made the financial system far more stable. "I firmly believe that we have embarked on an effective and, at the same time, balanced path over the past few years," he announced at a conference jointly hosted by the Bundesbank and the Institute for Banking and Financial History (IBF) in Frankfurt am Main, though he warned that the reforms will only be able to have the desired effect if, and only if, the rules are credibly and rigorously implemented and applied.

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

© Frank Rumpenhorst

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Don’t overtighten the regulatory screws

In Mr Dombret’s view, it will only be possible to rigorously oversee the rules if policymakers and supervisors change their attitude. Those who go easy on or even rescue a sickly bank by interpreting the rules generously are eroding the substance of the economy, he remarked, adding: "Not only do supervisors need to have the tools to intervene; they also have to be confident enough to use them." It would be wrong, he said, for that confidence to be undermined by incentives to shield banks.

Mr Dombret also warned against overtightening the regulatory screws, saying that regulators should take a break following the imminent conclusion of the Basel III negotiations. That breather, he said, "should be used to thoroughly evaluate the impact of the reforms and to amend and improve them where gaps and errors are found."

International regulatory agenda largely wrapped up

Mr Dombret’s colleague on the Bundesbank’s Executive Board, Carl-Ludwig Thiele, used his own speech to explore the origins of the financial crisis and the global regulatory agenda which followed in its wake. New regulations often have a long gestation period before they enter into force, he remarked, particularly where resolutions are adopted at the global level. Mr Thiele singled out the work of the Financial Stability Board (FSB) in this regard, a body consisting of representatives from central banks, finance ministries, supervisory authorities and international organisations. The FSB, Mr Thiele told his audience, has now made a name for itself as one of the foremost global bodies tasked with moulding the regulatory and prudential lessons from the financial crisis into reforms. 

Explore different avenues

Participants at the colloquium also explored different ways to make the financial system more stable. One of them – Joseph Huber, a professor at Martin Luther University Halle-Wittenberg – floated the idea of "sovereign money", that is, sight deposits which are wholly covered by central bank money. Speaking during a panel discussion, Mr Huber said he cannot grasp why the debate is centred so strongly around the stability of banks. "As I understand it, central banks are monetary authorities tasked with money matters, not with keeping banks alive," he remarked, arguing that only the central bank should be permitted to create money and thus control the amount of money in circulation. Current account holdings created by commercial banks under the present system, he suggested, should also be transformed into central bank money, or "plain money", in his words. That, Mr Huber reasoned, will claw back a degree of the control which has been lost due to the most recent measures. 

Close the regulatory gaps

Volker Wieland, a member of the German Council of Economic Experts, illuminated how the Council is proposing to untangle what are, in his opinion, still very close ties between sovereigns and banks. Some progress has already been made, Mr Wieland noted, pointing to the tighter capital standards for banks, the new macroprudential regulations and the resolution regime for banks, "but we can still see gaps that need to be plugged." 

One of the Council’s proposals is to raise the leverage ratio for banks from 3% to 5%, if not higher. "Common equity tier 1 (CET1) capital isn't the only option, but it’s ultimately the best buffer," Mr Wieland explained. Another issue identified by the Council of Economic Experts is that the bank resolution regime lacks credibility to a degree, given the multiple instances in which exceptions have been made for smaller institutions.