 Hello and welcome to the Bloomberg-Davos debate. I'm Maryam Namazi. It's a question contemplated by governments, investors, consumers, amidst the struggle to contain the fallout from the financial crisis. Are big banks a cure or a curse for the global economy? Well over the next hour, we'll seek answers to that question from our panel of bankers and regulators. But first, a taste of how the debate is already dividing opinion. The big banks are too big. They're not as nimble and when they do go wrong, it's obviously going to be very, very big to recover. Breaking them up is the right thing to do. It's not going to affect the volume of money that goes out to SMEs. They have to be a force for good. What they do is the social good. It's clearly much better to design a financial system where you don't have any big banks which are too large to fail. There are very much a fundamental part of the global economy. We couldn't work without banks. You cannot expect the banks to solve the sovereign crisis on their own. The banks have been told to hold sovereign debt. If you double the capital requirement and you double the liquidity requirement, the available credit capacity in the industry shrinks. We criticized Japan for keeping alive zombie banks. We're pretty much doing the same in the West. Our cure and our benefit to the capitalistic system, but they have to be regulated. The United States government owes $15 trillion. Where are they going to get the money from? It's clearly the case that any economy, Britain is no exception, needs a well-capitalized, vibrant, competitive banking system that lends it to the real economy. Want to get straight to our panel now? Joining us today is Jean-Claude Trichet, the man at the helm of the European Central Bank during the financial crisis who worked to stem the panic, buying up covered bonds and boosting liquidity. Peter Sands, the chief executive of Standard Chartered, one of the few banks that actually grew profit throughout that same crisis. This lender operates in Asia, Africa and the Middle East. Nouriel Rubini, the man who predicted the crisis the biggest since the Second World War, professor of economics and international business at NYU Stern School of Business. Mr. Rubini is also co-founder and chairman of Rubini Global Economics. You also have Luxembourg's finance minister, Luke Frieden. His country has retained its triple A rating, one of the few eurozone economies to do so, but can it escape the fallout from the debt crisis? Adair Turner, Britain's top financial regulator. As chairman of the Financial Services Authority, Lord Turner oversees 29,000 financial firms. And Guillermo Ortiz, chairman of Bernorte, one of Mexico's biggest banks and former governor of the country's central bank. Well, thank you, gentlemen, for joining us today. Mr. Trichet, if I can start with you, just explain a little bit about who benefits for a bank to be big. Well, first of all, let me go back to what you said. We had to cope with in the mid-September 08 with the worst crisis since World War II, which could have been the worst crisis since World War I. And the crisis came from the systemic fragility, systemic instability of the whole financial system. And we had the revelation that the fragility was such that all the financial institutions, starting with the most vulnerable, up to the less vulnerable, could fall down like a house of cards. So we have to get that in mind, because, of course, all what is done by the public authorities or what is done by the regulators, by the G20, by the Financial Stability Board, by the Basel Committee as well as by national regulators can be criticized, can be put into question, can be challenged. But the fact is that we have no right to accept to be back to the fragility that we had observed and which could have been, again, the worst crisis since World War I. So it is absolutely necessary to have the right regulation and to concentrate on the big banks, which is not the right, in my opinion, definition, because you know what counts are those banks that are systemically dangerous. They can be big. They can be interconnected in a very intense fashion. They can be very complex. They can be in a way that they provide the global economy something which has no substitute, and all these criteria are necessary. But I would say what is necessary is for these banks that are systemically dangerous, if I may, potentially dangerous, quote-unquote, and has to be checked both at the national level and at the global level, we have to do what is required by the circumstances, because again, we cannot put ourselves in the same situation as we were in 0708. And in my opinion, what is to be done has been already decided and is to be implemented by the international community is well done, well oriented, even if it is criticized, because of course it is entirely designed to have a system that could be much less fragile. I would say nobody would forgive us to let the system as fragile tomorrow as it were three years ago. Let me just pick up on something you said there about the definition of big and the fact that big doesn't necessarily mean that it is systemically risky. Mr Sands, what is your take on that? Well, to start with, I think by most measures we wouldn't be considered in the realm of the global economy as being big, and we're not even a G-siffy, we're not even one regarded as being systemically important. But I do think it's a dangerous line of thinking to equate being big with either being dangerous or being bad. You can easily move from a situation in which you have banks that are too big to fail to having a banking system where the banks are too many to fail, where you have lots of small banks, but the net impact of what happens if they get into trouble is the same. Although Standard Chartered isn't a big bank in that sense, I do think it's worth putting the case for big banks. I don't think you can run the global economy, international trade and payments, supporting the kind of infrastructure requirements we have around the world, supporting major corporations, building big projects, making deals with each other. That's not going to happen without substantial sophisticated financial institutions. We're not going to have that happen with a cottage industry of smaller banks, which is not to say we shouldn't have smaller banks, they're part of the sort of biodiversity of the system, but you need big banks as well. I also think there's a lot of misunderstanding about scale economies. If you build a big, overly complex bank with lots of unrelated businesses in a sprawling empire, it should be no surprise that you end up with something that doesn't have scale economies. But if you look at the underlying economics of the individual businesses of banking, they are absolutely subject to scale economies. And because of that, whether you like it or not, banks will get bigger. The relentless economics, you get better risk diversification and better use of cost base, and that is good for customers, and it's good for the regulatory system. The other observation I'd make is there is this sort of notion that the world economy is dominated by big banks. Actually, banking is a remarkably fragmented industry. The top 10 banks in the world actually control much smaller share of banking assets than the top 10 companies in most other global industries. It's still a relatively fragmented industry. Well, just picking up on a point you made there about the big banks and the role they play within economies, Mr. Urbini, what is your thought on that, that to some extent we do need the big banks to serve the demands of government, society and economies? Well, we need a well-functioning financial system with banks and other financial institutions that are providing a wide variety of financial services. But to me, it's not clear why you should have under the same umbrella commercial banking, investment banking, prop trading, asset management, insurance and so on. And what turned out to be the case in the last few years was that there were institutions that were systemically important and their threat and collapse had systemic effects. Now, it might be too big to fail or too complex to manage or too interconnected to fail, but we've seen what happens in this situation. And not only we had too big to fail financial institution, but there's a result of the policy response to take the United States, consolidation in the banking system that become even bigger to fail. JPMorgan took over Berstern and Washington Mutual, Bank of America took over Mary Lynch and Countrywide, Wells Fargo took over Wacovia. So now the system is even more consolidated, it is bigger. Now we're saying we reform the system, we have living wills, we have insolvency regimes and we're going to be able to break up these monsters or close them down when there is an X crisis. Nobody really believes that. This is something that's not going to happen. Are you going to break up or in an orderly way shut down a JPMorgan or a city group or a Goldman Sachs? So we have still a system in which actually those systemic issues are still there and we've done very little about resolving this problem. So we have actually a worse problem right now. Lauterna, your response to that that we're in exactly the same boat as you were a few years ago when the crisis began. We still have a very serious threat to the system posed by some financial institutions. Well, I think it's a very good challenge. I mean, if you go back to the situation that Jean-Claude described in autumn 2008 as regulators, as authorities, we faced a very difficult dilemma with the big systemically important institutions. Either we allowed them to go into insolvency and that's what happened with Lehman's and that was a disaster. Or the only alternative that seemed to be available for us was to put enough capital and liquidity in that we rescued them as they were and without any imposition of losses on debt holders who therefore never faced the risk or the consequences of the decisions they'd made. And that was unsatisfactory and seen as unsatisfactory by the people who had to rescue these banks and out of that came the debate about putting the stop to too big to fail. And I think it is an important debate. I want to stress it's not the only debate here. I do agree with Peter's point that actually you could have an unstable system with lots of small interconnected banks. Let's remember that the US banking crisis of 1929 to 1933 was broadly speaking a crisis of lots of small banks. There are issues about capital and liquidity across the whole of the banking system. There are issues about the fundamental instability of the asset and credit cycle which require a macro-prudential response. It's also true that we shouldn't just focus on banks. We need to be very aware that the origins of the financial crisis of 2007 to 2008 also lay in a set of things that we call shadow banks, the complicated interconnections of repo markets, money market funds, sieves, hedge funds. We know that that can be a source of instability. So the issue of the big banks is certainly not everything. But it is important. They are peculiarly important within the system. And in response we've ended up with three things that we said we're going to do. First of all we're going to try and reduce the probability of them getting into trouble with the surcharge on capital, the global systemically important financial institution surcharge comes in. And I think that is entirely justified. The second, and I think this is probably to pick up Nouriel's point, the biggest challenge, we have said that we will find a way where we can resolve them without taxpayer support and crucially without that leading on to a disruption of their fundamental core functions in society. And honestly we're sort of work in progress there. That's the honest point. And this year I think is one where we've really got to push this forward. I think what we increasingly realise is that there are two visions of how we have to achieve that. There are probably some institutions which are those heavily involved in investment bank and trading type activities where the idea that we can break them up is actually very, very difficult because their attitude of the market towards them in terms of confidence is so interconnected. With those firms we are fundamentally going to have to resolve them if they get into difficulty at a global integrated level and I think we will have to make sure that they have enough potentially loss absorbing debt, bail in a debt, debt that we can convert to equity available at the group level that in conditions of uncertainty we can force that into equity and recapitalise them. I believe we will therefore have to move on to actually regulating that slice of the balance sheet which we have not regulated before beyond equity telling banks of that nature that they will have to hold bail in a debt of a certain percentage of the balance sheet. I think there are some other banks particularly those banks which are broadly speaking organised as holding companies of retail and commercial banks throughout the world where there really is a model that we could break them up and where they make it absolutely clear that there is no one authority which will look after them but in conditions of crisis they would be broken up and those are ones where we have to organise them locally, nation or by region as subsidiaries as fully capitalised and liquid subsidiaries which are capable of surviving the breakup of the overall group. I think and I'll leave it for later comments I think we can do all that in a way that does not intervene with those advantages which do come in some ways from being large and cross-border and I think I agree with some of what Peter said in that but I also think it can be overstated. My own point of view is that the steps that we are taking to deal with the big bank issue important but not the whole of the story will enable us to make them more stable, more safe without interfering with those beneficial roles which some of them are playing. Ms Ortiz, what are your thoughts on that? Is it possible to make the system safer and sounder without putting profits or indeed growth in peril? Let me react to some of the comments that have been made. First, I think that obviously the regulatory community has reacted broadly and appropriately to face this problem but the question of the too big to fail question, I think I tend to agree with Nouriel, I mean there is no way in my mind and as I said it is work in progress that you can actually wind down orderly a big complex institution. Let me give you another perspective from the emerging markets world. During the past crisis and this is important none of the emerging markets that have suffered a crisis in the 90s or in the early 2000s had a domestic financial crisis as a consequence of the global crisis. The banks in the emerging world were much better capitalized they did not get into toxic products and so on and so forth and very importantly the subsidiaries of the large foreign banks were isolated because they were constituted on the local lowest and they had their own capital so we faced the situation a little bit very paradoxical. In my previous incarnation as a central banker one of the main discussions that we had in the Basel committee and the financial stability fund is what happens to the subsidiary of a bank that goes wrong. Will the parent bank support it? No, it was the other way around. It was the subsidiaries of the large banks that were actually transferred capital and liquidity to the large banks. So I think that there's a lesson to be learned there and I think that we in the emerging market world are very much aware of the dangers of having a financial system which is dominated by foreign banks in the current state of the world. It's good to get the perspective from the emerging markets definitely and Mr Frieden tell me are we paying a point that was raised are we paying enough attention to shadow banking, to repo funds is our definition of institutions that can be a systemic risk to the entire economy or the entire system a little bit too narrow in this case? Probably yes, but I think we are aware of that and we have started on dealing more with those issues as well but we did it step by step. I think prior to the 2008 events and obviously listening to some of the speakers we are still under the shock of 2008 prior to 2008 looking from the political and probably also consumers perspective a lot of people thought that larger banks inspire more trust. They were safer, they could better companies for bigger projects and I still believe today that we need large banks so I'm not against big banks anyway I think it's very difficult to come up with a legal definition of what is a big bank but as Jean-Claude Trichet rightly said we are talking about systemically relevant banks and that is always vis-à-vis a certain system and in 2008 together with my colleagues Ministers of Finance on France and Belgium we had to rescue in my country two systemically relevant banks and the question is not whether we should abolish those banks but to avoid that we have to come to such a situation whereby we have to rescue from a social and economic point of view such banks the clients of such banks to maintain the system and at the same time endanger the public finances of our countries we are representing as Ministers the taxpayers money so the question is how can we make sure that the big banks are there and we need banks of different sizes as said in the global economy to company bigger companies in their global projects yet at the same time make sure through better supervision adequate regulation that we do not put into jeopardy public finances if we have to come in and obviously if banks are large if they are systemically relevant there is an extra responsibility for governments in order to make sure that they are well supervised so once we have done that of course we have not to forget that they are what you referred to the the whole area of shadow banking but I can tell you in the Council of Ministers of Finance of the European Union we are closely looking into those issues as well and I think we have to do so on a global scale because it's obviously it's not limited only to the European Union Mr Trichet let me get let me get your reaction to some of what we've heard there it's I suppose it's a dilemma how do you help out banks and we're still facing this problem here in Europe a lack of confidence in financial institutions the belief in the markets that many of them do need recapitalizing and if it comes to that how do you boost the system without taxpayer money effectively without public finances well first of all I think that it's a global issue of course that we are dealing with and it is absolutely clear as it was said by the speakers that what we are trying to do at national or continental and global level is to reduce the probability of a collapse of a systemically important institution if it is unavoidable and I mean we are in a world which is the world of market economy so we always have to accept that events that are not of course very agreeable to observe and cope with can happen so if there is nevertheless despite the fact that we have reduced the probability of the collapse if there is a collapse then it should be as we should reduce the probability of having consequences that would have been very adverse both I would say of the taxpayer on the one hand and on the economy national and global economy on the other hand all what we are doing is directed to reduce those probability nobody would be foolish enough to say now it's safe it's absurd only soviet union could say that so we are not in a world where you can say that now I have to say that what is being done in terms of resolution in terms of improving loss absorption absorption capacity is in my opinion good I think that and I trust that it's very difficult of course to identify those institution that would be sufficiently complex sufficiently interconnected and perhaps sufficiently big even if it is not the best criteria fully agree but we have more or less the sentiment at the global level we have you know some and I don't want to to give a figure but under your control there I would say a little less than 30 say that and I note en passant at the global level it means that it is an industry which is reasonably fragmented because as you just said it is absolutely clear that in a large deal of other industries concentration at the global level is much higher doesn't mean that we are satisfied with that I will also say I fully agree with that has been said on the fact that you have those which are individually systematically dangerous potentially dangerous you have the herd and the herd is as dangerous as the individual and we know that and it is true for the banks it's also true for the non-banks as Adair said and I fully agree with that the systemic instability of a large part of the financial system is still there and we still have to work a lot on that Mr. Sands if I can get the bankers view if you like on the various regulatory efforts that are underway right now different reactions in different parts of the world in Britain we are seeing a possible reversion of the old US model if you like of a wall between certain types of investment banking commercial banking in the US we have Dodd Frank while in the EU the response has been largely to rely on Basel 3 with enhanced capital and liquidity requirements what are your thoughts on this do you think that there needs to be perhaps more coordination on a global level will it work to have all these different initiatives underway and how does that impact your business it would undoubtedly be extraordinarily helpful and much more effective to have greater coordination and coherence and I'm very supportive of the thrust of Basel 3 banks undoubtedly needed more and better quality capital and Basel 3 has also brought in a framework for the first time for liquidity regulation it still needs work but broadly speaking it's moving in the right direction and I would emphasise that the stuff around resolution and recovery making it possible for banks to exit to fail is I think absolutely central and should apply to all banks because I don't think actually a priori we ever really know which ones are systemically important so let's have a regime that works for all banks I think we should be realistic having big complex multinational institutions fail is never going to be easy it isn't in other sectors either but we should make it doable and that's the aspiration we should set and I do think that is a reasonable aspiration to set I do think we do run a risk with the sort of profusion of different regulatory agendas at different levels of considerable unintended consequences and confusion which I don't think is in the interests of anyone and just specifically on the proposals around sort of splitting up banks by structural change where a bank is bank we work because we're a big trade finance bank with payments we work with hundreds of banks around the world so we're assessing the risk of banks around the world and we've been doing that for 150 years the banks that we see fail and the data completely supports this tend to be small regionally concentrated retail banks and wholesale funded medium sized wholesale banks but this appears to be exactly the kind of model of banking that the structural proposals of the ICB are actually putting forward so I do think we need to be quite careful in thinking that structural change is a panacea or necessarily going to improve the fragility of the system just a quick follow-up to that then you mentioned you made a comment there about unintended consequences and are we starting to see signs of that with the banks here in Europe on going deleveraging is regulation helping or is it just hurting lending well I think you have to step back and say what is the root cause of the problem in Europe the root cause of the problem in Europe and the issues around confidence in banks is not actually an issue around confidence in banks it's fundamentally an issue around confidence in the underlying competitiveness and physical position of the countries and if the banks have to as they have to hold sovereign bonds that affects their viability and people's ability to lend to them and have confidence in them so the root cause here is the fundamental state of certain countries within the Eurozone we come back to a very fundamental problem you are not going to have stability in the financial system if you don't have good monetary and fiscal policy underpinning that all the capital and liquidity in the world in a bank doesn't help you if the country is in a desperate state and so the but coming to your point about unintended consequences it is inevitable when you are changing so many things so many aspects of the regulatory architecture that you will get outcomes that you didn't quite expect and I don't think the regulatory community should be embarrassed or apologetic about that because when you change a lot of stuff in a very complex and dependent world that's going to happen what I do think people should take on board is that in that context you need to be adaptive you need to say oh this isn't quite worked out the way we thought let's change it a bit and that's not giving into lobbying or anything like that it's just being sensible about it and we've seen some of this in the context of the impact on trade finance of all the Basel 3 stuff and there have been some moves to modify that and for the merging world that is crucially important I think you're also seeing some unintended consequences in the dynamics of funding markets around the world but again I'm saying we shouldn't be surprised you should expect systemic and unintended consequences but you should have a model of policy making that allows you to learn from those and adapt and make changes well if I could just get the central bank and I just appreciate central bankers reaction to that just picking up on that point that Mr. Sands was making there about the need for a sound monetary and fiscal policy to be in place is it the responsibility of the central bank so they prepare to be the guardians of the financial system if you like central banks have a decisive responsibility in terms of monetary stability if I may and that goes without saying they have a message or messages for fiscal policy but they are not responsible for fiscal policies and you know that to take the example of the ECB we have been adamant to tell governments permanently including at times where complacency and benign neglect was more or less of the essence specifically before the explosion of the recent crisis we were telling them look it's very very important and it's also very important that the overall policies that are pursued including competitiveness policies and so forth and structural reforms are made but it is not the responsibility of the central bank so I have to say that in our own case we maintain as much as possible the observers are the judges the stability of the monetary part of the system I have to say that monetary union in EMU can prove that it worked pretty well I have to say obviously but economic union had a lot of defects and we have to correct that it is the unique opportunity that the crisis offers then you see your fault lines and you correct it it was done by Latin America Guillermo knows nothing about it because he was at the helm of what was done it was done in I would say in Asia recently it was done in Canada it was done in Sweden and Scandinavia we have to do the job now to be in a good sustainable path particularly I have to say as regards macro policies which are not in the responsibility of central banks in Europe and I would say not only in Europe in the advanced economy as a whole we have to prove that they are in a sustainable mode now well in that case let me get the emerging markets perspective on that from a former central banker Mr Ortiz the role of central bankers then a central banking policy in terms of maintaining stability within the system let me say that you know most of the emerging markets suffered financial crisis very bad financial crisis in the 90s and the early part of the century and I think that we came away from those crisis first with a huge cost for taxpayers second with lessons I think that were well learned in fact central banks at least in Latin America and in Asia took it as a function although it was not spelled in the law the question of financial stability that now is very much in vogue and you have all these committees on financial stability in which a central bank and the regulators participate and so on that was an integral part of the central bank function in the emerging market world and this is one of the reasons I think why the shock to the system that came about with the big crisis did not produce a I would say a dislocation of domestic financial activity the only dislocation came about through contagion and also through the presence of foreign banks that were instructed by their prime banks to contract and that was felt I think across the emerging world but then again I think that central banks have to play a crucial role as they did in the emerging markets today in assuring financial stability I think the key point again to be emphasized is the one that John Claude mentioned at the beginning we need a system that's safer we need a system that the industry by definition is a leverage industry it's subsidized by the positive insurance and so on and so forth and the shareholders have limited liability so the combination of these elements obviously makes for more risk taking that would be socially optimal so this is again the job of the regulators to find the right balance I think that learning by doing in the emerging markets is something that we learned some of these lessons I mean Lord Turner what's your response to that central banks do have responsibilities Mr Ortiz was saying but then as Luke Frieden points out don't governments also need to make sure that they're exercising some sort of supervision over these large institutions not to mention regulators like yourself well I think there's a very important issue here which Peter has raised in the present situation we need to be clear what you can expect from regulatory tools versus fiscal and monetary tools we have now launched in the UK what is called macro-pudential policy through the financial policy committee and the idea of the financial policy committee is that we'll use regulatory tools to limit the upswing of the credit boom by applying counter cyclical capital or loan to value limits in the upswing new mechanisms apart from the interest rate to take away the punchbowl before the party gets out of hand what's interesting is that we've been launched as the FPC when there isn't much siding of a party going on indeed we'd like a little bit more party activity out there in the economy and the thing which we've been really frankly struggling with is what is the role of macro-pudential policy of the movement of regulatory levers in the downswing when you'd like to actually if anything stimulate a bit of credit supply now the theoretically easy answer is what you do in the downswing is you remove the counter cyclical things that you put on in the upswing that in the upswing you put on more capital you put on more liquidity you get to a very high level come the downswing you release those the fundamental problem we have at the moment is that because we didn't have this regime in place for the last 10 years we've never put in place the buffers which we can now release and so we are caught on a sort of horns of a dilemma of struggling with the fact that you could argue that we for the state of the world economy the European economy be a little bit more relaxed about capital and liquidity allow lending to the real economy but actually it was quite clear in autumn last year that the fundamental problem which was driving a dangerous potential credit crunch was that the markets were not willing to lend money on an unsecured basis to the European banks there was a funding crunch going on because they were worried about the capital adequacy and the solvency so your problem is that the situation in the cycle says you want to relax but actually if you did relax and you made your banks more fragile that could be the worst possible thing but what I think that also illustrates is Peter's point that that dilemma cannot be resolved by the regulator alone because underlying that is the fundamental problems of the euro zone and the fundamental problems of the euro zone is this cycle between sovereign debt uncertainty and the banking system with a banking system which holds very large amounts of liquid assets liquid assets as government bonds and which we in the past have said they should hold because these are risk free assets I think what we are waking up to and maybe we should have been clever enough at an earlier stage in the euro zone project to understand that when you go ahead with a euro zone where you have individual countries with large amounts who are no longer their own fully sovereign currency issuing authorities you have changed the nature of that debt that debt is more equivalent to as it being state of California debt than US Federal debt because it is not underpinned by the potential quantitative easing actions of the US Federal reserve and I think there are very major issues here which can only be solved by a fairly deep federalization of the euro zone including moving towards euro bonds and features like that and I think that is an important point to make with this as macro-prudential regulators we can try to get the balance right as best possible between progressing fast to a more stable system but also being aware of the dangers of restricting credit supply but we cannot resolve those problems ourselves part of them have to be resolved by the appropriate actions of the euro zone leaders in coming up with a future design of the euro zone which is stable and of course crucially by the actions of the European Central Bank and I think we all recognize that European Central Bank's actions before Christmas with the three year LTROs was absolutely fundamental to giving us this breathing space in terms of an extra degree of confidence in the markets which the political leaders have to seize to actually design what is a long term stable system for the euro zone we are going to open the discussion up to the floor very shortly keen to get your questions but first I wanted to ask you Mr. Rubini listening to all of this has anything happened since the financial crisis to make you think that maybe the banks can help us grow out of this well we are in a difficult situation right now because on one side there is a recognition that we need more capital less leverage more liquidity in the short time however there is a severe disintermediation in the financial system credit contraction especially in the euro zone and economic growth is anemic in the case of the euro zone actually is entering a recession so there is an ongoing debate right now in the euro zone between now Germany and France saying maybe we should postpone some of those capital liquidity charges and those in the UK were saying we should stick with them I think it's fundamental for the system to continue with building up the capital liquidity because we have to build a system it's going to be more resilient and we have to find other ways to jumpstart economic growth I think in the case of the euro zone easier monetary policy maybe fiscal stimulus in some part of the court can afford it a weaker value of the euro could be policies that are going to lead to stronger economic growth right now is contracting while you're building a system then the financial sector is more in this nexus between sovereign risk and banking risk is unfortunately a serious one you know the bank risk became sovereign when we backstop bailed out and infenced the banks but now the sovereign risk is becoming bank risk because a significant part of the government papers in the hands of the banking system you have a bunch of sovereigns that are either insolvent or near insolvent they cannot save themselves that alone save their own banks and now we're in this vicious circle between the two that is exacerbating the euro zone all right so I'm going to throw it out to the floor now are there any questions no questions thinking about it yeah please specialist different areas break them up is that your solution my view of it is somewhat controversial is that we should go at least in the United States back to Glass-Steagall meaning after the Great Depression we decided to separate investment banking from commercial for about 50 years we didn't have any severe financial crisis or banking crisis where at times you know a single bank went in trouble and so on and that system really started to create financial imbalances of leverage of excessive risk-taking when we decided to phase out those kind of separation you know banks by definition have to be having guarantees of deposits and having land of the last resort support because by definition they are in the maturity transformation business they take short-term deposit and make illiquid loans and so on so there is a argument for providing that support land of last resort and insurance and deposit insurance for the banks but giving that type of insurance a guarantee for the prop trading activity or investment banking activity of financial institution in my view doesn't make sense that's why I'm in favor of breaking up larger banks and in favor of going to separation between commercial bank and investment banking and that's not the view that's been taken by the official sector after the crisis I think there's going to be another crisis maybe the next crisis we're going to talk seriously about going back to those types of separations. Perhaps sir not very cheerful Ben Chu from the Independent Newspaper I've got a question for Dare Turner how would you respond to Peter Sands point about the Independent Newspaper's proposals he said they will throw up unexpected consequences and he suggested that perhaps policymakers and regulators should respond to them. Do you think that's a valid point and do you think the recommendations of the ICB should be watered down? No I don't think they should be watered down I think they've come up with a workable way forward I think first of all we must never imagine that it is a panacea and that's a point I've often made that we will ring fence the basic retail and commercial activities in the UK from a wider set of wholesale activities or perhaps retail elsewhere but let's suppose it was just wholesale and investment banking. I think anybody who thinks that once you've done that you can be indifferent to what goes on in the wholesale and investment banking spaces is forgetting the huge role of lemons in being the proximate cause of the real acceleration of the crisis in October, September 2008. So what this really is, I see the ICB proposals just so people understand that this is the independent commission in banking in the UK, chaired by John Vickers which proposed not to Neuriel's point a full glass legal separation but within an integrated banking group you should have to have internal ring fencing, some separate internal legal entities with a separation of activities and I see that fundamentally as increasing the resolvability they are increasing the options available to the regulatory authorities and the resolving authorities in the case of crisis and I think that will be a useful extra for us to do. I also think that there's an interesting macroeconomic element of this which has not been focused on which I think is once we have those ring fenced retail and commercial banks within the UK some of our macro prudential tools may actually be located at that legal entity because those will be the legal entities which are the fundamental drivers of credit supply to households and small and medium enterprises. The final thing to say is the interface between the retail and commercial bank, the ring fenced bit and the other wholesale activities will not be a straightforward a fence to supervise because there are some very subtle and complicated things when you get to treasury operations as to what is hedging versus market making and customer facilitation versus proprietary trading and exactly the same problems are going to have to be faced in the US with the Volcker rule which fundamentally says you can't do proprietary trading, proprietary trading is buying and selling things to make money except when it is for hedging, market making or customer facilitation. Now you then need good supervisory processes to try as best possible to work out where you draw that line but I don't think it's impossible and I think this is therefore it's not a panacea but I think it is a useful addition part of our armory of tools to make sure that these large complicated banks are to a greater degree resolvable and indeed easier to supervise. Gentlemen I have a question. It is just a more ethical question really regarding how is our capital market in function and mean price. Do we really to trade every day or the frequency of trading with the market open for trading every day if we just extend the trading for say one week once a month because really this create a lot of momentum just to give an example Apple over the last which everybody I think love the value of Apple has changed almost like 20 percent does really the mental value of Apple has changed fundamentally by 20 percent this create a lot of momentum in the market people are benefiting and tax payer are paying indirectly hedge fund making profit for example in the Swiss franc and the rich bond it's a more ethical part. Do we really need a capital market that should be traded instantaneously on every day of the basis. Who is that directed to? Peter Sands. I'm having your answer. Robini to some extent. We could all answer. I fully agree of the fact that technology permits today things that were absolutely impossible yesterday and are creating new systemic risks that's absolutely clear and we have to be prepared because the more low continues the function perhaps doubling every two years and not one year and a half but we have to prepare for even more dramatic changes in the functioning of IT in the functioning of communication and therefore in the functioning of markets and we cannot say we won't use technology but it is really something which is of an incredible intellectual exercise to try to catch up with this new tools that are permanently putting into question the wisdom of our own regulation I have to say and that's true for all what you said but even much more. Let me only say that we are looking at it and to go back to this systemic responsibility of the central banks I have to say on both sides of the Atlantic in the advanced economy this idea that the central bank would be a good location for the European systemic risk board for the systemic risk entity that has been created in the United States of America with special attention I said there to macro prudential is your question is also part of it and we are working on this high frequency trading we are working on a lot of elements that is creating perhaps potential systemic instability in a world which has proved already its fragility and I will not say like Nouriel that we are in a worse situation than we were in 08 but I remember at the beginning of 07 we were not very numerous to say risks in the global economy are underpriced risk premium are too low volatility is too low a market correction will operate. I said that myself in Davis five years ago you were much more pessimistic and you proved right Nouriel I would say today we have as much hard work to make the system more stable as there also agrees as it was three or four years ago and the technology is part of our problem but also the herd we don't understand yet how herd behave and that is fundamental non-banks herd, banks herd market participants herd and that is something where we need academia as well as practitioners. Alright Mr. Rubini your response to that Well I would tend to agree with Trichet on the issue of speculation in trading I don't think you can ban it I'm comfortable if a hedge fund takes risk of its own investor and does speculation if they do well they do well if they fail they fail I'm less comfortable with using taxpayers money is insuring deposits and so on to allow financial institution to engage in those kind of activities and more broadly of course even if those activities are done by non-bank institution we have to think about potential systemic effects like LTCM was leveraged almost one thousand times and it was a source of systemic risk so we have to think about these issues and figure out what are the appropriate forms of regulation supervision not just of traditional banks as it was pointed out non-bank financial institutions the shadow banks had a bigger problem because at least the banks had deposit insurance and land of last resort support to prevent the run while we had this whole scale run on the shadow banking system that was has leveraged as the banks even more so in terms of short-term maturity of their debts and longer term illiquid assets and did not have either the deposit insurance nor land of last resort and yet the collapse of a good chunk of the shadow banking system so expanding the regulation supervision to those shadow banks is maybe part of the agenda we should be discussing as well alright, Lord Turner you're nodding your head there is there anything you want to say well I agree with that but I also wanted to just comment on what I think is a great question I mean there are two startling things about the financial system in the 20 years before the crisis well as many startling things but among them there are two one is a quite extraordinary increase in the amount of trading activity where the amount of financial trading activity relative to the real economic flows to which you might think it bears some relationship went up by multiple so if you work out how much foreign exchange trading there was as a proportion of the size of long-term capital flows or trade flows you know you have a multiplication 5-10 times you have the same in commodity markets you have lots of markets where there is just much more trading activity a lot of credit which had not previously been traded become actively traded and before the crisis there was a very strong belief within the economics profession that we knew that this was good because it was axiomatically good because it was quote completing markets and we know from the market efficiency hypothesis that you have more markets to have the more allocative efficiency there will be the more that risk will be the better price discovery we will have I think we need to have a much more nuanced approach to this I think it's absolutely clear that liquidity of markets up to a point is a clearly valuable thing the world cannot work without a reasonably liquid foreign exchange market equity markets cannot work without the possibility of people coming in hour by hour minute by minute and buying and selling equities in reasonable quantity at relatively fine bid off the spreads I think it's quite reasonable for us to ask and I think we need to ask searching questions in a way that we didn't before the crisis is whether this is limitlessly good whether once you've got a reasonably active liquid equity market is there any real value in high frequency trading which appears to be doing some price discovery process at the nanosecond level rather than at the second by second level I find it quite difficult to know what real economy benefit that is actually giving now as long as it is not also creating a financial stability disbenefit then maybe we don't need to worry but at least we should be more cautious than we were before the crisis of allowing sort of iconic words like liquidity and price discovery and efficiency of markets to be sort of things that made us back off and say well we can't interfere we've got to have a nuanced understanding of the role of trading activity within the financial system Miss Ortiz I know that you're keen to respond to that Mr. Turner's comments there about liquidity of markets being very valuable but you know does it have is that necessary limitless but if you could keep your response brief Well I think that we are going into the direction of asking whether you know financial activity and financial innovation which is responsible in many ways for the very large increase in trade that I was talking about is something useful to society or not and I think that the asset test here is to ask yourself whether you know new products innovation is something that benefits directly or indirectly the real sector of the economy the households whether it allocates it helps to better allocate resources are the fundamental functions of finance to distribute risk better or are we just talking about bets that are being taken in the financial sector and have nothing to do with the real activity so it's very difficult also to distinguish them and to put the border there but I think that this is an asset test and a very valid question Pete's answer I'm going to get a very quick reaction from you Well as a bank we don't do proper trading all our trading is client business but fundamentally I think deep and liquid markets are better than illiquid occasional markets and indeed if you look at through the crisis it was the illiquid markets that got us into trouble markets like FX and equities didn't so much get us into trouble Well thank you okay short and sweet thanks very much indeed to our panelists and so with those final thoughts it's time to draw the Bloomberg Davos debate to a close I'd like to take the opportunity to thank our procedures panel and you the audience of course from all of us here goodbye