2014

Andreas Dombret, Deutsche Bundesbank
“The State as a Banker?"

In the aftermath of the financial crisis, many people have lost confidence in the economic system. During this time, the links between bank risks and sovereign risks have become much stronger. In the IMFS Distinguished Lecture on Tuesday, 28 January, Andreas Dombret, member of the Executive Board of the Deutsche Bundesbank took a closer look on how the lines between the public and the financial sector have faded and could be redrawn again. Due to implicit guarantees a close relationship between the state and the bank has evolved. The links between bank risks and sovereign risks have become much stronger in recent years, the central banker, who is in charge of Financial Stability and Risk Controlling, warned in his speech "The State as a Banker?". "Blurring the lines between the state and banks risks deforming our market economy and our thinking about it", he said.

According to Mr. Dombret the lines between the state and the banks can only be successfully redrawn if the state provides a framework in which the private sector can operate. Therefore, Mr Dombret emphasized the need to establish the Single Resolution Mechanism as a central pillar of the European banking union, implementing the bail-in principle as a rule as it is currently foreseen by the finance ministers of the EU. By this means, if banks incur losses in the future, shareholders and creditors will be first in line to bear these losses; taxpayers come last. 

Five years after the Lehman insolvency, according to Mr Dombret the "too big to fail" problem could still damage the global financial system. In his opinion, only if the threat of failure was credible, it might encourage banks to behave prudently. In order to achieve this, a consistent legal framework across is required. "We need well-designed and credible bail-in procedures", Mr Dombret said in his speech referring to practicable bail-in procedures and higher capital buffers as two sides of the same coin. "The state is not a good banker and should not try to become a banker", the central banker said. The state should only take on this role in the most exceptional cases, if at all.

Jaime Caruana, General Manager, Bank for International Settlements (BIS)
“Global Liquidity: Where It Stands, and Why It Matters”

Speech (PDF)

In his Distinguished Lecture on March 5, the General Manager of the Bank for International Settlements (BIS), Jaime Caruana, described global liquidity as the "ease of financing" in the global financial system. He pointed out in his speech that we were entering a new phase of global liquidity and urged the central banks to stay the course of normalization.

As central banks return prudently to more normal policy settings "it is crucial that they do everything they can to manage expectations, both about their plans and about the uncertainties," Caruana said. Expectations shifted and portfolios adjusted during this process, followed by a certain degree of volatility in financial markets he explained. Therefore, central banks should not allow themselves "to be distracted by the bumpiness associated with this adjustment," Caruana added. According to the head of the BIS they should not be overly concerned by occasional disinflationary pressures.

However, Caruana emphasized that monetary policy was "only part of the picture". Therefore, he appealed to adhere to the reforms of the financial system and the real economy. "Countries need to pursue structural reforms," he said. "Debts need to be paid down and resolved or restructured where appropriate."

As the financial cycle tends to have a longer duration than the conventional macroeconomic business cycle imbalances were often difficult to protect Caruana underlined. Thus, in its analysis of the financial cycle the BIS takes a closer look at GDP growth, the flows of funds, changes in asset prices and monetary policy.

The aim of BIS is to serve central banks in their pursuit of monetary and financial stability, to foster international cooperation in those areas and to act as a bank for central banks. Therefore, the Basel-based BIS is often referred to as the central banks’ central bank.

Established on 17 May 1930, the BIS is the world's oldest international financial organisation. The BIS currently has 60 member central banks, all of which are entitled to be represented and vote in the General Meetings.

Jaime Caruana has held the position of General Manager of the BIS since 2009. As the Bank's chief executive officer, he carries out the policy determined by the Board of Directors. From 2000 to 2006, Mr Caruana was the Governor of the Bank of Spain and, in that capacity, served on the Governing Council of the ECB.