Salzburg Global Forum on Finance in a Changing World » Overview

The Salzburg Global Forum on Finance in a Changing World is an annual high-level program convened by Salzburg Global Seminar that addresses issues critical to the future of financial markets and global economy in the context of key global trends.

Established in 2011, the Forum offers senior and rising leaders from the financial industry and public sector an opportunity for in-depth, off-the-record conversations on how to build inclusive, open and resilient financial systems and set an agenda for the future.

The Forum’s overarching goal is to facilitate critical analysis of the changing financial landscape and regulatory environment, comparison of practical experience around the world, understanding of technology-driven transformations, and open dialogue on issues of trust and ethics. Each summer, it convenes an internationally representative group of leaders from financial services firms, supervisory and regulatory authorities, consultancies, auditors, law firms and other professional service providers who share a belief that inclusive, efficient and stable financial systems are essential for sustainable growth, shared economic opportunities and prosperity. Going forward, the Forum will continue to explore key developments, strategic shifts and tipping points in global finance, and to help participants learn practical lessons and share international insights.

TIAA-CREF President and UBS Chairman to Co-Chair Forum on Finance in a Changing World
TIAA-CREF President and UBS Chairman to Co-Chair Forum on Finance in a Changing World
Tatsiana Lintouskaya 
Roger Ferguson, president and chief executive officer of TIAA-CREF and former vice chairman of the U.S. Federal Reserve’s Board of Governors together with Axel Weber, chairman of UBS and previously president of the German Bundesbank between 2004 and 2011 will co-chair this fifth annual program in the series Salzburg Global Forum on Finance in a Changing World. Since 2011, Salzburg Global Seminar has held a series of high-level programs focusing on critical challenges of global financial regulation following the financial crisis. The 2015 finance session The Future of Financial Intermediation: Banking, Securities Markets, or Something New? (June 30 - July 2, 2015) will consider the strategic long-term changes taking place in global financial markets, the future of regional regulatory action, and the technology-driven shifts that are impacting the global financial services industry. For further information and to register visit the session page:
Andreas Dombret: "Reform Fatigue" One of Biggest Risks
Andreas Dombret: "Reform Fatigue" One of Biggest Risks
Bloomberg TV 
Deutsche Bundesbank board member and chair of the Salzburg Global Seminar session The Future of Banking: Is There a Sustainable Business Model For Banks? Andreas Dombret talks about European Central Bank stress tests and risks to financial stability in the euro area. He spoke on August 19 in Salzburg, Austria, with Jonathan Ferro on Bloomberg Television's "The Pulse." (Source: Bloomberg) Watch video online

JONATHAN FERRO, BLOOMBERG NEWS: I'm very, very please to bring to you Andreas Dombret. He is the Bundesbank board member and board member of the Single Supervisory Mechanism.

He's here with me right now. Andreas, thank you very much for joining us this morning. We're going to start by talking about some of the headwinds that banks face at the moment, regulatory headwinds. We've got all of these stress tests.

And there are some complaints that the banks in the Eurozone right now are "overwhelmed." What's your take on that?

ANDREAS DOMBRET, BOARD MEMBER, BUNDESBANK: This is very, very thorough exercise which takes quite some time. And the results are very important. So it is kind of clear that this comes with a cost. I realize that. It also comes with some stress.

Nevertheless, I believe that the positive effects of that exercise outweigh the costs by far, and that given the problems we had in the banking crisis this exercise is very much justified. Just think about this for one moment. The Single Supervisory Mechanism, at least we think, is a logical step of a single monetary union. So we need to do this. And costs come also with benefits and the benefits outweigh the costs.

FERRO: One of those benefits might be the way the Eurozone deals with bank failures. We saw Banco Espirito Santo collapse pretty rapidly, but the fallout was quite isolated. Now that was a very, very small Portuguese bank.

You oversee German banks. If a German bank fails the stress tests later this year are we prepared to deal with the fallout of that if they have to raise a significant amount of capital?

DOMBRET: I'm not going to speculate what's going to come out of the stress tests with regard to the German banks. All I can tell you today is that we actually cannot make any predictions. We haven't even finished all of the asset quality review and we have only started the stress tests. So it's a little bit unclear what will come out of it, but I'm not speculating whether German banks fail or whether German banks do not fail.

Should they fail or should a German bank fail we would have to deal with that. Don't forget that there's a difference between accounting and prudential measures. In terms of accounting we will see after the asset quality review how sound the banks are. The stress test is forward looking. It is a what-if scenario. What if there is a certain stress? In the adverse scenario the GDP would decrease more than 6.6 percent over a certain period of time vis-a-vis the baseline. This is not necessarily reality.

So I would urge everybody looking at the results of the stress test to see what is accounting and what are prudential measures. Accounting is backward looking and stress test is forward looking. So these are two different things. Even if you would have an issue and a challenge on the stress test that doesn't mean that you are insolvent at all.

FERRO: One of the big issues here right now in Salzburg is financial stability. When you've talked about financial stability and stability in the past you've said the biggest risk to that is "reform fatigue." How have your views developed over the last month?

DOMBRET: We are looking much better than we did 2012 with regard to financial stability. Spreads have come down.

Things have normalized. You just mentioned a very large, actually the largest Portuguese bank, and the effects on the spreads of Portugal were minimal.

So this gives you a little bit the impression that things are fine. Stock markets have been rising for some time now. They are falling a little bit again, but it shows that if you have reform fatigue, if you believe everything stays as it is and we are in safe quarters you are making a big mistake.

The crisis in the Ukraine is a reminder for all of us that things can happen very quickly and that there are unknowns we cannot really factor in. So we have to be careful and we have to continue on this path of reform because reform fatigue would be one of the biggest dangers we could have for our future development and also for financial stability going forward.

FERRO: Are you seeing a risk of investor complacency? It was something that was talked about a lot a couple of months ago, not so much very recently. But when you talk about spreads coming down so much are you more concerned about the investor complacency around that issue, or the kind of political complacency that those small spreads can actually breed?

DOMBRET: I do not give any recommendations to investors. So I'm not criticizing them either. Investors have to make up their own mind. I am basically talking about the political reform which is possible that political decision makers relax when things look better, and deviate from the path of reform and do a little less than what would be good.

FERRO: What's the ECB's role in the (inaudible)? Last week we had some not so good economic data, to be fair, across a lot of the Eurozone. I won't talk about the figures themselves, but off the back of that. And that was almost celebrated as bad news equals good news. And they were looking straight to the ECB. Are you worried that the ECB could very quickly become the only game in town?

DOMBRET: The ECB is an important game in town in terms of monetary policy. We shouldn't confuse responsibility for fiscal policy with monetary policy. 

FERRO: And off the back of that when you see the likes of France ditching their budget deficit targets, when you hear the likes of Renzi calling for more leniency around some of their targets themselves, how concerned are you going forward?

DOMBRET: I am more impressed and most impressed with those countries who stick to the reform plans.

FERRO: And going forward do you want to see the likes of France do more? And when they talk about a weaker euro off the back of that what's the response of the Bundesbank when you're looking at that situation?

DOMBRET: France knows that they're doing. They are responsible for their fiscal policy.

FERRO: And going forward, very, very quickly on the issue of financial stability, to the back of this year when we put these stress tests in the context of monetary policy without just talking about monetary policy itself in the context of financial stability, are these stress tests coming at a bad time?

DOMBRET: They are coming at a predictable time. We knew very early on that in November we would know the results of the AQR and the stress tests. Communication is very, very important in this regard. And Bloomberg and others play an important role in that, but there's never a good or a bad time. We have to stick to time plans.

FERRO: Andreas Dombret, thank you very much for joining us. That was Andreas of the Bundesbank, a very, very special guests for this morning brought to you live and exclusive from Salzburg. 

This transcript may not be 100% accurate and may contain misspellings and other inaccuracies. This transcript is provided "as is," without express or implied warranties of any kind. Bloomberg retains all rights to this transcript and provides it solely for your personal, non-commercial use. Bloomberg, its suppliers and third-party agents shall have no liability for errors in this transcript or for lost profits, losses or direct, indirect, incidental, consequential, special or punitive damages in connection with the furnishing, performance, or use of such transcript. Neither the information nor any opinion expressed in this transcript constitutes a solicitation of the purchase or sale of securities or commodities. Any opinion expressed in the transcript does not necessarily reflect the views of Bloomberg LP.

Andreas Dombret was the Chair of the fourth session of Salzburg Global Forum on Finance in a Changing World. The session The Future of Banking: Is There a Sustainable Business Model For Banks? was supported by our main partners, HSBC, Ernst & Young and Oliver Wyman alongside our sponsor Oesterreichische Nationalbank and co-sponsors BNY Mellon, Byron Boston, Cleary Gottlieb, The Cynosure Group and Davis Polk. For more information, please see the session webpage: and follow the daily discussions on Twitter via the hashtag #SGSfinance

The Future of Banking: Is There a Sustainable Business Model For Banks?
The Future of Banking: Is There a Sustainable Business Model For Banks?
Max Proksch 
The world of banking is changing. Since the global economic crisis, a harsh spotlight has been set on the role, accountability and transparency of banks and their leadership, reducing public confidence and support to an all-time low.

On the inside, banks face complex challenges as they adapt to new regulatory environments and seek new ways to function as profitable motor for the economy. One thing is clear: Innovative renewal is needed if banks are to retain their central place in the payment system.

On August 18, 2014,
Salzburg Global Seminar will convene it fourth annual meeting of the Salzburg Global Forum on Finance in a Changing World to discuss the new and ongoing challenges facing the financial sector. The session has been entitled "The Future of Banking: Is There a Sustainable Business Model for Banks?" 55 bankers, regulators, managers and finance experts are expected to attend the event, hosted at Schloss Leopoldskron, home of Salzburg Global Seminar. There, associates of financial services firms, regulators and consultancy firms will have the chance to explain their situation, learn more about the problems faced by the other sectors and offer their solutions.

The three-day session will follow on from the third meeting – “Out of the Shadows: Regulation of the Non-Banking Financial Sector” – by discussing the challenges of shadow banking, the competitiveness of the capital market, and the implications of new technology such as big data and integrated analytics on business sustainability.

In addition, working groups will identify the substitutes to bank lending, the real obstacles to sustainability and focus on relationships between supervisors and management in terms of governance and risk management.

The meeting will be chaired by returning Salzburg Global Fellow Andreas Dombret, Member of the Executive Board of the Deutsche Bundesbank AG.

The heavy focus on interactive interview panels and plenary discussions allow a wide range of faculty speakers to express their options and best practices. Industry leaders such as Cyrus Ardalan (Barclays), Dominic Crawley (Standard & Poor's), Tom Huertas (Ernst & Young), and returning Fellows Douglas Flint (HSBC), Sharon Bowles (ECON), and Edward Greene (Cleary Gottlieb Steen & Hamilton) as well as young top professionals and participants will be able to engage actively and debate sustainability concerns.

This session is the fourth in Salzburg Forum on Finance in Changing World, which was launched in 2011 with the session “New Rules for Global Finance: Which kinds of regulation are useful and which are counterproductive?” and continued in 2012 with “Financial Regulation: Bridging Global Differences”.
The fourth session of Salzburg Global Forum on Finance in a Changing World is supported by our main partners, HSBC, Ernst & Young and Oliver Wyman alongside our sponsor Oesterreichische Nationalbank and co-sponsors BNY Mellon, Byron Boston, Cleary Gottlieb, The Cynosure Group and Davis Polk. For more information, please see the session webpage: and follow the daily discussions on Twitter via the hashtag #SGSfinance
Value(s) for Money?
Value(s) for Money?
Louise Hallman 
Philanthropy has existed for centuries. Linguistically its roots belong in Ancient Greek, meaning “love for humanity”. As a concept, using money to make the lives of others better, it reaches back to the Age of Enlightenment, in 17th and 18th century Europe. But this does not mean the concept is static, unchanging. The ideas surrounding what money, whose money, for what purpose and how are contentious. The multitude of different actors, acting in a multitude of different ways has created not only a vast landscape of philanthropy, but an ecosystem; all parts existing, living and affecting each other. Just what is this ecosystem, how can and should its composite parts interact and how can the system be better structured are all issues up for discussion at Salzburg Global Seminar this week as 46 philanthropy sector actors, from grant makers to grant seekers, philanthro-capitalists to “traditional” foundations, and academic and activists, arrive at Schloss Leopoldskron, Salzburg, for the session “Value(s) for Money? Philanthropy as a Catalyst for Social and Financial Transformation”. Over the next two days, the participants, from 17 different countries, will deconstruct the current funding ecosystem, establishing where within it their organizations function, and consider the financial flows, the enabling environment, and current and potential results. Through dynamic, interactive group work, the participants will build their ideal ecosystem, and envision how best they can share this new found perspective throughout the philanthropy landscape. Inspired by an article by leading philanthropy expert, writer and activist, Michael Edwards entitled: “Beauty and the Beast: Can Money Ever Foster Social Transformation?”, the two and a half day program is being sponsored by Hivos, the Netherlands-based international development organization. Speaking at the opening session, Hivos director of programs and projects, Ben Witjes explained Hivos’ interest in the session: as a funding-seeker, funding-giver and a program implementer, the organization wants to know how the ecosystem is currently working and how it can work better. “Finance has become a lot more complicated,” said Witjes. Over the centuries, philanthropy has expanded from simply wealthy individuals funding “good causes” to now embracing more market-driven principles; risk assessments and expected returns and impact of investments are just as common in the language of philanthropy as they are in business. Innovative funding mechanisms that support social change – like crowd-funding, social impact bonds, payments for eco-system services and prize-backed challenges – have diversified the funding landscape and brought in new resources. The system, however, is arguably out of balance with too much focus placed on revenue-generation, and directing financial resources through the market. At the same time, less funding is available for the deeper, less tangible drivers of social change – change that is driven by the beneficiaries themselves and is inherently more democratic. Money, while a seemingly essential tool in change processes, can be a “curse”, reinforcing or exacerbating the very circumstances and power imbalances at the heart of systemic social challenges. As funding sources shrink and immediate impacts are more commonly expected, are those who take this funding and attempt to enact social change becoming too narrow in scope, favoring individual improvements over long-term systemic change? One example given on the opening day of the session came from women’s rights advocate Angelika Arutyunova. Arutyunova’s work includes research into the funding of women’s rights organizations, “Watering the Leaves, Starving the Roots: The Status of Financing for Women’s Rights Organizing and Gender Equality” and “New Actors, New Money, New Conversations: A Mapping of Recent Initiatives for Women and Girls” for AWID, the Association for Women’s Rights in Development. Her research found that of the 170 new women’s rights initiatives included in the study, of the $14.6bn committed, 35% of this money was allocated for “women’s economic empowerment and entrepreneurship”, 44% of which was given in technical assistance to individual women. This individual approach, whilst beneficial to the women involved and promising near-instant results, however, often fail to address the systemic issues that inhibit women from entering the workforce, such as enforced gender roles, respect and safety for women in the work place, and lack of education. Her research also concluded that whilst the “leaves” – individual women and girls – are receiving growing attention, there has been a lack of support for “the roots” – the sustained, collective action by feminists and women’s rights activists and organizations that has been at the center of women’s rights advances throughout history. The support for the collective action, she argued, is necessary to ensure more systemic, rather than individual change. However, that is not to say that all organizations now need to start working towards broader systemic change. Change is a matrix, posited Arutyunova: one axis spanning from the individual to the community to the broader system, with the other spanning from informal (cultural and social norms, beliefs, practices) to the formal (laws, policies, resource allocations). Not all actors need to act across all points of the matrix, but all actors need to be aware of their niche and how it fits into the broader action for change. Over the course of the next two days, many of the Fellows will be invited to present their own case studies and experiences, as the group work towards the session’s five goals of not only mapping the current funding landscape to locate gaps and fault lines by issue, sector or region, but also stimulating the exchange of experience and ideas to deepen the knowledge base and identify options for short- and longer-term strategies; prioritizing components of a new funding ecosystem, taking into account current geo-political and -financial environments; targeting achievable yet significant interventions that can create tangible improvements over the next year; and taking account of provider and recipient motivations, scope roles and opportunities for collaboration between different actors, including government and multi-lateral organizations.  The session continues Salzburg Global's series of session on the issues surrounding philanthropy, the last of which were held in 2012, "Value vs. Profit: Recalculating ROI in Financial and Social Terms" and "Philanthropy in Times of Crisis and Transition: Catalyzing Forces of Change." 
You can follow all the discussions from the session on Twitter with the hashtag #SGSphil. All session materials, tweets and blog posts can be found on the session page:  
Salzburg Global 2014 Program now available online
Salzburg Global 2014 Program now available online
Oscar Tollast 
Salzburg Global’s 2014 Program will feature over 25 distinctive sessions and workshops inspired by three interdependent values: Imagination, Sustainability and Justice. The three values underpin Salzburg Global’s new program ‘clusters’ and aim to form the foundations for global citizenship. Under these ‘clusters’, a number of topics will be discussed. For example, participants will be asked how societies can renew their education, how to improve life chances for present and future generations, or examine how societies can reframe responsibilities. The 2014 Program brings together distinctive multi-year projects and partnerships with the common goal of promoting vision, courage and leadership to tackle the most complex challenges of a globalized society. The Salzburg Academies – covering Global Citizenship, Media and Global Change, and the Future of International Law – will continue to prepare outstanding young people with the skills to drive change. Salzburg Global Seminar remains determined in breaking down barriers separating people and ideas. It spans the world’s regions and challenges countries at all stage of development and institutions across all sectors to rethink their relationship and identify shared interests and goals. The program is available for download as PDF. 2014 Program Brochure
“Simpler regulation is not better regulation”
“Simpler regulation is not better regulation”
Louise Hallman 
Taking shelter from an unusually chilly August night, 53 central and commercial bankers, regulators, supervisors, academics, politicians and other financial experts gathered in the Great Hall of Schloss Leopoldskron to consider whether “simpler regulation is better regulation”. Chaired by Douglas Flint, Group Chairman of HSBC Bank Plc in London, the two teams* debated either in favor of the current system of risk weighted assets, which seems to lead to remarkably different results from bank to bank, or in favor of the simple leverage ratio, which many view as too simple. Whilst perhaps not as immediately accessible to the non-financial expert as last year’s debate “The surest solution to ‘too big to fail’ is to break up the banks” (indeed it’s not the sort of topic that would be discussed over cornflakes with your children, as one participant joked), the matter under discussion was nonetheless important. As one Fellow put it: “How would you explain leverage ratio to your children? It’s quite simple: I would take them to a children’s playground and take them to the see-saw; and then I would place the kids on one end, and with some speed I would jump on the other end. And I would then I would see my future capital evaporating into thin air! That would be an indication that I should see my medical supervisor to have a discussion about whether my weight is too risky. But even to the untrained eye it’s obvious that too high a leverage is pretty risky and you should therefore place a limit on the leverage ratio you take.” After hearing the two teams’ for and opposing arguments, the debate was opened to the floor and eventually a vote was taken. Below are some of the quotes presented in the main cases in favor of the simple leverage ratio and risk weighted assets system. *Please note that as the debate was held under Chatham House Rules, no names of team members or audience speakers will be published. All participants were speaking in a personal capacity and do not represent the views of their respective organizations. In favor of: Simple Leverage Ratio
“Do you want something simple that leaves bankers to do their job? ...Or do you want the regulators to intervene on a daily basis?” “The methodology behind risk weighted assets underestimates rare events…[which means] it does not work in times of crisis, but we are still using it to work out how banks should work in times of crisis! ...All traders know that when there is a crisis, when there is a crash, you just turn off your computer…you know it doesn’t work on days when 25 standard deviation events happen ten times a day—which statistically is absolutely impossible, but in the real world does happen. So how can we compute the amount of capital that banks need with methodology that simply does not work?” “Risk weights have been a way for bankers and politicians to fiddle with the figures… Who has decided that all lending to all SMEs in Europe would bear a risk of 75%? What’s the science behind this? Aren’t we just using risk weights to lull ourselves into a false sense of security?” “Risk something that is dynamic, it’s not something you carve in stone and say ‘Oh, I know the risk is this.’"  “If we’re saying that less regulation would lead to riskier behavior, are we saying that banks just can’t be trusted with money?” “To paraphrase Donald Rumsfeld, we need to know our unknowns as well as the unknown unknowns; risk weights only measure the known unknowns.” “We need legislation that doesn’t require wheelbarrow to move it around!” “If a simple leverage ratio makes a good ‘back stop’ for banks, why not use it as the ‘front stop’?” “Leverage ratio is not going to be there naked! It’s still going to have a large exposure regime. There will still be requirements for diversity. There would still be requirements for liquidity. And so it’s just a question of if you’re going to have a leverage ratio anyway, it’s relatively accurate, it doesn’t have quite so much in it that’s bogus, Basel have already done the corrections to deal with the difference in the accounting standards. We should get rid of something [risk weighted assets] that we don’t need, that really doesn’t do us any good, and makes legislation far too complex. We want simplification because that’s the only way to actually get understanding [both from politicians and the public].” In favor of: Risk Weighted Assets
“Why is a simple leverage ratio a bad idea? Historically there is not a lot of evidence it worked. The 19th century was not a happy time – there were credit and stability crises time and again.” “Squeeze the balloon in one place and it’ll come out somewhere else – we’re driving banking into the shadows.” “A mandatory simple leverage ratio penalizes banks with large assets.” “A simple leverage ratio could force banks out of high volume-low return banking, raising the price of credit.” “Banking is a complicated business… Leverage ratio is pursuing simplicity at the price of ignoring the risk. We’re oversimplifying a complex thing!” “Only having a simple leverage ratio is like flying only knowing the wind speed, without knowing the height or the tilt of the plane.” “Banks are in the business of managing risk, particularly credit markets, liquidity, and transformation risks. And to manage those banks and to supervise those banks, it’s absolutely essential to use risk-based models. To move away from risk-based models would be mad!” “Leverage ratio doesn’t distinguish between good assets or bad assets – an asset is an asset… It’s really important to appreciate that a leverage ratio would lead banks to maintain the minimum liquid asset buffer and have no incentive to have any surplus above that minimum. Do we really want banks to be doing that in relation to one of their most important risks?” “If you’re a bank where the leverage ratio is the key constraint and not the risk weighted asset ratio, it means all the effort, all the focus on risk weighted assets, all that understanding of risk is ignored, and we run the risk of creating lazy supervision because supervisors will focus on the leverage ratio – they don’t need to worry about risk weighted assets either – and we end up with the worst of all worlds where there’s a misalignment between the way in which banks look at and manage risk, and the way in which regulators are looking at them.” “If you take away the sophisticated and granular understanding of risk, those discussions [between banks and supervisors, and between different supervisors] lose any grounding in substance.” “Investors need to be able to understand the risk in banks and one of the things investors want is much more detail and granular understanding of the risks in the portfolios of banks. Risk weighted assets: not perfect, but provide a key input into that really important information flow to that key stakeholder group.” “Humankind makes progress going forward – leverage ratio is a step backwards.” Result
For a simple leverage ratio: 17 votes 
For risk weighted assets: 19 votes
It would appear this group of Salzburg Global Fellows doesn't quite agree simpler is better.
Andreas Dombret: "When talking about shadow banking we should be clear what we mean"
Andreas Dombret: "When talking about shadow banking we should be clear what we mean"
Andreas Dombret 
Dr. Andreas Dombret was speaking at the opening session of 'Out of the Shadows: Regulation for the Non-Banking Financial Sector'.   When talking about shadow banking we should be clear what we mean. I subscribe to the FSB’s definition of “credit intermediation involving entities and activities outside the regular banking system”. What I deem to be relevant from my financial stability perspective is that such entities create bank-like risk without being subject to banking regulation. Obviously, the non-banking financial sector is composed of a very heterogeneous set of agents. Some of them – such as insurance corporations and pension funds – usually have very long-term investment horizons and can therefore potentially serve as a stabilising element for the financial system. To be clear on this point: I firmly believe that insurance corporations can be systemically important institutions, too. Thus, effective resolution regimes for G-SIIs need to be developed and implemented. The overall effects of the so-called shadow banking system and its activities on financial stability are ambiguous. Theoretically, non-banking financial in-stitutions that perform bank-like activities are associated with diversification and specialization benefits. Therefore, it could be assumed that they con-tribute to efficiency gains and greater financial system resilience. However, empirical evidence from the financial crisis suggests that the activities of shadow banking entities might often be driven by the motive of exploiting regulatory arbitrage. Altogether, the economically beneficial attributes and systemically stabilising effects of entities and activities of the shadow bank-ing system are not always that obvious. In particular, developments prior to the financial crisis revealed that the activities and entities of the shadow banking system can also pose a threat to the stability of the financial system as a whole. The risks inherent in the shadow banking system pertain to both dimensions of systemic risk: the cross-sectional (interconnectedness) dimension as well as the time-serial (procyclicality) dimension. I see these potential threats as being caused mostly by maturity and liquidity transformation, the build-up of leverage and credit risk transfer conducted by the shadow banking system. All of those activities are not evil per se, but the ensuing systemic risks need to be contained. All activities must be made transparent, in particular vis-à-vis supervisory authorities, and they must be adequately regulated. In that regard, I welcome the global regulatory initiative on shad-ow banking – under the leadership of the FSB – and I am closely following initiatives at the regional and national level.  I want to comment on three specific aspects of the systemic risk posed by shadow banking: first, the risk of runs on money market funds; second, the potential procyclicality of securities financing transactions; and third, the linkages between banks and shadow banking entities. Regarding money market funds’ liquidity risk: due to their perceived deposit-likeliness, constant net asset value MMFs face a relatively high risk of investor “runs” in times of crisis. Thus, the mandatory move to variable net asset value MMFs might be the single most important regulatory action to make the MMF segment more stable. I expect the European Commission to implement that move in Europe soon – in line with the ESRB’s recommen-dation of December 2012. It was with keen interest that I also observed the recent proposal by the US Securities and Exchange Commission to adopt similar measures. Regarding securities financing transactions: In an environment of ample liquidity, securities financing transactions can obviously contribute to a procyclical build-up of leverage in the financial system. Going one step further in a typical chain of transactions, the practice of collateral re-hypothecation intensifies interconnections in the financial system, while at the same time lacking the necessary transparency for clients and supervisors. Therefore, I support the recommendations envisaged at global level to increase regulatory reporting and public disclosure requirements for financial institutions’ securities financing activities. With the results of thoroughly conducted impact assessments at hand, the imposition of somewhat tougher regulatory measures, such as minimum standards for calculating collateral haircuts, can be considered. The last issue I want to cover are the interconnections between banks and entities of the shadow banking system. With the global implementation of Basel III capital and liquidity requirements for the banking sector, there are increasing incentives to shift risky activities to shadow banking entities, where regulation is less stringent. However, such regulatory arbitrage poses risks to the stability of the entire financial system. To effectively regulate the direct ownership links between banks and shadow banking institutions, the scope of regulatory consolidation needs to be internationally harmonised. Also, minority participations of banks, such as investments in the eq-uity of funds belonging to the shadow banking system, require an interna-tionally consistent, risk-sensitive application of Basel capital standards. And, last but not least, large exposures of banks vis-à-vis counterparties of the shadow banking system need to be adequately measured and controlled by looking through complex investment structures. Finally, the effectiveness of regulatory requirements with regard to shadow banking must be constant-ly assessed and their implementation should be peer reviewed at the global level. As outlined, addressing the liquidity risk of money market funds, procyclical credit expansion via securitised financing, and interconnections between banks and shadow banks are key regulatory reforms. Adequately regulated, it should be possible to effectively mitigate systemic risks posed by such non-banking financial institutions and enable them to affect financial stability more positively.
Deutsche Bundesbank, Communications Department
Wilhelm-Epstein-Strasse 14, 60431 Frankfurt am Main, Germany, Tel: +49 (0)69 9566 3511 oder 3512, Fax: +49 (0)69 9566 3077,  Reproduction permitted only if source is stated.
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