 And to get started, I would like to call Martin Helvig up on stage. He is, of course, as you all know, a leading expert on financial reform. And the author of a widely praised book on the issue, please a round of applause for Martin Helvig. So we have heard in the previous panel a lot about the progress in financial reform. Some are saying more needs to be done, others are saying we've done too much. What is your view? Maybe we've done too much of some things and too little of others. I mean, my metaphor for reform after the crisis is suppose you have a truck that's speeding at 150 kilometers per hour, hits a curb, over turns, and the chemicals in it explode. You get a discussion on reducing the speed limit to 60 kilometers per hour, at least in inhabited areas. The industry says, well, this would raise transportation costs and harm economic growth. So you end up with a lowering of the speed limit to 140. And in addition, since the political system must show a sign of activity, we impose a limit on the gasoline consumption of SUVs. This has been on some people's agenda all the time, has nothing to do with the accident. We've actually not had a serious analysis in Europe of what the causes of the crisis were and what regulatory measures should be calibrated to dealing with those causes. We've had too little by way of raising equity requirements. I'm much less enthusiastic about structural reform. We still haven't solved the problem of cross-border resolution. We still have no, for central bank this is of course very interesting, we still have no satisfactory approach to providing liquidity to a bank in resolution. So there are lots of things that haven't been done. So that's the trains which haven't been regulated properly. What are the SUVs that now have been regulated although they don't have to do anything with the matter? Well, if you think about regulation of short sales, regulation of hedge funds, even structural regulation, these are things that some people have always had on their agenda. But if you look at the sources of the crisis, they had very little to do with it. Last short question, why do you think, why do you think this is the case? So why has regulation been tilted in this direction, which you think is probably for political reasons, are these powerful interests? I think political economy plays a big role. Banks are where the money is. We all heard Commissioner Hill this morning about the need for banks to fund growth, about the need to find funding for infrastructure investment, and about the prospect for reducing equity requirements for infrastructure funding. In that context, I did not hear a single word about whether this was appropriate for the risks involved. OK. Thank you. Thank you very much, Martin Herbig. Now, my next guest here on the panel is an extremely successful commercial banker, but not only this, she's also very active in many public initiatives, such as the UK Business Advisory Board, and a warm welcome, please, to Anna Boutin from Executive Chairman from Santander. So we have heard in Commissioner Hill's contribution a lot of capitalist market unions, or some insights on capitalist markets union. The way I understand the concept of capitalist markets union is it is also aimed at reducing the dependency on banks in Europe. Now you are a banker. What do you do with this concept? You can think about capitalist markets union, I think, in two ways. One is, as you described it, i.e., market-based finance versus or against bank lending, or you can think about it, about a deeper integration and less fragmentation in Europe. And I think the way I see it, it's the second view. And so the clue in CMU is actually in the EU, the union. And I think what we need to do is to leverage the scale that the European economy has to have a more efficient allocation of debt and equity. So we can actually connect SMEs with the right funding. And so what would be success in capital markets union for me is that a bank like Santander, where we have thousands, actually hundreds of thousands of SME customers in Spain, we can lend to these companies. And I absolutely agree with the simple, transparent, and standardized securitization. We can then securitize this and place it in other European markets where the capital is. So I don't think it's one or the other. I think the complementary both banks and markets are mediators of risk. What a bank does better or should do better is actually having lots of small risks, what markets do better is taking a large single risk and distributing this risk among many investors. So that is how I think Europe can benefit. I mean, you said they're complementary, but still these are different approaches. And there's a lot, nevertheless, there's a lot of complaints about Europe being too dependent on bank compared to the US or other economies. Is this a problem or an advantage Europe has, this dependency? What is clear is that sometimes I think we're trying to have the same financial system and rules for banks in Europe as in the US, and that's not possible. That's not going to be possible for many years. So if you look at bank lending SMEs in Europe, that 75% is coming from banks. In the US it's 25%. But it's not just about capital markets union legislation in Brussels. There's two other things that are very important. One is the average size of European companies, it's much smaller. So the average is six employees versus 20 in the US. And the second is equally, which by the way favors the fact that banks are going to be what I just described, having access to information lending to these SMEs and then being able to allocate this efficiently with the investment. But the second very important point is a cultural one. So if you look at Americans' households, 40% of them have IRAs. If you go to Europe, Spain, for example, only 15% are investing in equities. Belgium, I think it's 17%, even Italy is like 9%. So unless we can actually change that cultural bias towards more conservative, this gets reflected in pension funds and so on. So there's a lot of work we need to do and it's not just about new rules. Yeah, last question you mentioned, unless we change the bias, should we? I mean, should this be a policy goal to make Europe a little bit more like the US in terms of the financial intermediation? Well, at the end it's about funding growth. And I think, as I said, when companies are much smaller, it's much harder for capital markets to actually lend to them. And so that's why I think we need to not, as we write the rules, and this is a very important point, on CMU, let's treat everybody on the basis of what we do. So banks, asset managers, other funds are now going into the banking business. There's a lot of people, a lot of companies doing the things that bank do, and we should all have a level playing field. Because I think banks' capillarity and the fact that, I think Mr. Dunkel was saying this morning, and this is our model. Also, we have millions of customers and a lot of access to information. And this is very valuable in that efficiency of the capital markets and banks working together. Okay, thank you. My next guest doesn't need an introduction here. He has led the ECB through turbulent times and of course done a lot of work on financial stability. The Vice President of this institution, Vidur Konstantzio. So I've looked into some of the recent publications in your department on financial stability. And of course also write the last financial stability review, which mentions an increase in financial risk taking. And also a sharp increase in asset prices relative to fundamentals in the euro area. Is that something you should, you worry about as a central banker? Yes, certainly. Of course, the main mission of the central bank of monetary policy is to deal with the price stability. But financial stability is also of concern because medium term, episodes of great instability in the end also will have effects on price stability. So that cannot be ignored. There was a traditional view, well before the crisis, that ensuring price stability would be more or less enough, almost enough to also ensure financial stability. Why? Because it was thought that inflation or high inflation was a cause of instability because high inflation would coincide with booms and then with increase in asset prices. And so if one would address and solve the question of controlling inflation, then we would also cater for the avoidance of instability. Well, that view was never really in my view really true. Because we can find historical episodes where the two objectives were not compatible. Well, take the 1920s just before the big depression. Prices were controlled, sometimes even going down, and there was huge buildup of financial imbalances and instability. Take the great moderation period just before the crisis. Also inflation was under control and everyone was happy. Central banks were quite successful and so on, but below that financial imbalances were building up and then we had the crisis. So no compatibility. Indeed, and the present situation. We have low inflation, but there is what you just said. These risks of search for yield of too rich valuations building up and so on. And that is the cause of concern. But let me tell you that in our analysis on average for the Euro area, and we have said that in our financial stability review, there is no general situation of over valuations. That's even more true now after the development since last April that saw the yields of corporate bonds or equities moving in a direction that puts the average levels in the Euro area at historical levels. So there is no general problem. There are pockets of where some assets are perhaps a little bit overvalued, but not a general situation. We monitor that very closely, but let me tell you. And that's to finish the point or at least the main issues raised by your question, which is the question about what should be done. Should then monetary policy also try to address financial stability issues directly, in particular, trying to have some sort of goals in terms of asset prices? Should it be done? I would say no. What should be done if not monetary policy? So there are several reasons why monetary policy would not be really appropriate to do that. It's very difficult to identify bubbles or to know exactly when the imbalances are there. Second, there are no reliable models to calibrate what should be the increase in interest rates to deal with those risks in asset markets, and which means that history proves that the increase in interest rates would have to be in certain situations quite sizable to try to address those asset price risks. And then we would risk to have a recession or aggravate the recession without necessarily a justification. So monetary policy cannot do it. And then there is only one answer. Is that the central banks have to be given macro prudential tools in order to try to address more directly the sources of financial instability and the increase in asset prices. And that's the move that has been happening around the world. But I would say that in Europe we need more, we need more institutional clarity about the sort of tools that are given to central banks and more clarity about the objectives of a macro prudential policy. We have created the SRB, which is a good thing, but it can only issue warnings and recommendations. So we don't have yet in Europe the proper setup to deal with a strong effective macro prudential policy. We come back to this issue later in the discussion. One last question. How can I think about this? So if you're on the governing council and you're doing monetary policy, you have one head on, then you're writing the financial stability report. You put your monetary policy head away and you put your financial stability head on. I mean, do you have a line in your head or a wall or how do you? No, as I said, it's very simple. First, as I said clearly, monetary policy is about price stability. And that's how we and I reason about monetary policy. Then I have to be concerned as any central bank with financial stability issues and have to analyze, monitor, surveillance, and that's what we do in the FSR. And then now after the creation of the SSM, the ECB was given via that new regulation also some tools, some possibility of intervening in macro prudential policy for the first time. And we are indeed working on it. We have internally the proper procedures to continuously discuss between the SSM and the financial stability function in what is the central bank part of the ECB. We continuously discuss the situation and what to do. And now we have some tools, indeed, if a generalized situation would emerge that would justify measures at the level of the SSM perimeter, which now coincides with the Euro area, as you know. Thank you. We'll come back to this later. My next guest was very influential as a Treasury Undersecretary in Shaping the International Financial Reform Agenda and is now at least equal influential as a member of the Board of Governors of the Federal Reserve System. Please welcome Leal Breynand. Well, as I just said, I looked into the ECB's reports. I also looked into the Fed's reports for the preparation of this panel. Which one was better? Yeah, excellent. I came across a speech you gave in 2014 where you said that the Federal Reserve may consider monitor policy for financial stability purposes more readily than some of its foreign peers because of the structure of macro potential instruments and so on. Would you say that we are at a point where now this should be considered? So let me just step back for a moment and contextualize this discussion and say firstly that, like Vitor, my conclusion from having seen a variety of historical episodes where financial stability and monetary policy considerations may not be wholly aligned, and there's quite a bit of work in this area as well, that ideally there should be a separate set of instruments. Monetary policy instruments are already fully occupied with the price stability and in the U.S. case also full employment mandates. And since business cycles and financial cycles are often not wholly synchronous, it's extremely important to have a separate set of tools that can operate on macro prudential concerns. So that is by far the preferred outcome. In the U.S. context, I should say that we have a much more elaborate toolkit than we've ever had before. Dodd-Frank Act for the first time actually explicitly mentions financial stability as a kind of core goal for our work in supervision and regulation as well as more broadly. We have built out in particular our prudential framework from what used to be an entirely micro prudential framework that was very focused on the safety and soundness of individual firms to one that looks at risks to the system and builds in additional structural resilience to protect the system. And that's where some of the regulations that we were talking about earlier come in. The surcharges for the largest institutions, for instance, the very thick capital buffers. Now in the U.S. context, we also have some ability to vary those in order to try to see how resilient institutions' balance sheets are to particular stresses. And so our capital planning and stress testing framework every year is an integral part of that macro prudential framework. The flip side of that, however, is that we have a much more robust capital market in the United States relative to the banking system and that the Federal Reserve is one of many regulators. And so our ability to create incentives across the system with some of the prudential tools we have is somewhat limited. And so that's the trade-off that leads us in the United States to be somewhat more limited. The final thing I would simply say is that periods where financial stability have become most consequential for the macro economy tend to combine asset price distortions with very large build-ups of leverage, particularly in the household sector. Housing booms and busts are particularly difficult for authorities to deal with. And in some frameworks, there are tools that are very specifically targeted at the borrower side. In the United States, the Federal Reserve doesn't have authority, for instance, over loan-to-value ratios. And a lot of that lending is done outside of the regulated banking system. So that's another reason that we have to be somewhat cautious about believing that we have an adequate toolkit to deal with the full range of macro prudential risks. And if you look at the financial stability situation in the U.S. now, are there issues which lead you to be concerned and which you think there should be action for coming? Yes. So you mentioned that you had taken a look at some of the work that we've done in the financial stability area. One thing I will say is that we have a much more elaborated surveillance framework. It's much more systematic. I think this is also true here in Europe, that we now proactively look across all of the financial markets in pretty great detail to try to figure out where we might see that combination of debt buildup and asset price distortions. And similarly, the extent to which this is in pockets or the extent to which it's starting to spread across markets. So when we have done our most recent assessment across the financial system, and I want to be modest here too, our information set is incomplete. We're in early stages. But I will say that some of the volatility that we've seen in recent months has also had the effect of taking some of the incipient buildup of asset valuation and bringing those back down to more historical levels. So while we see a few pockets in the area of high yield corporate bonds and leverage lending remains in the area where we're very carefully surveilling underwriting standards, for instance. And similarly, there's been kind of heightened competition in the commercial real estate sector. Those are areas that we're looking at, but we don't see broad buildups of leverage and asset valuation distortions. So market volatility is not only a bad thing, apparently. It has also its good aspects. Okay. Thank you. Next on stage, he was the chairman of a very small central bank. Now he's the vice chairman of a fairly gigantic financial institution. Please welcome Philip Pildebrand, vice chairman of BlackRock. So we've talked about banks and central banks and now I would like to talk to you about shadow banks. You might prefer to call them differently. The BlackRock fought against being labeled a systemally important financial institution in this year until the summer. My question would be why? What's your problem with being a systemally important financial institution? You're quite big. First of all, on semantics, you know, I think. You and your institution. One shouldn't get too bogged down on semantics. The, when you listen to Lord Hill, it seems a little strange that we somehow attached a term shadow to something that we actually think is going to be the answer to growth in Europe in many ways, at least in Europe. So, but I think we've probably lost that battle in terms of semantics. So we should move on with it. The question, the relevant question is under what circumstances can asset management create systemic risks? I think that's the way to approach this topic rather than saying which institution should be systemically relevant. And my view is that there certainly are conditions in which asset management or under which asset management can create systemic risks. And I would point to three dimensions that one has to look at. One is if you have leverage. As we've seen and Martin referred to it as the brute cause of the crisis. Whenever you have leverage, you should pay attention. The second one, if you have liquidity mismatch. Again, this is something we know from experience. That's when you can run into problems. And I think a third specific issue to asset management is if you have insufficient cash buffers that are unable to deal with rapid or large scale redemptions, which you can have particularly in liquid products. If you look at those three dimensions, I think it's pretty clear that the way it makes sense to think about these systemic risks and what to do about it is to focus on funds or activities rather than the asset management company as a whole. And that's where the debate has ended up. We supported that. The FSB has ended up there. And I think it's the right place to end up. So to the extent that my company or any other company you find activities or funds that have a lot of leverage built into it that may have insufficient cash buffers and that have mismatches in terms of liquidity, then that is very much something that regulators should look at. If you look at the company as a whole, it's not clear to me at all how you would take, if you agree with that framework in terms of evaluating whether or not there's systemic risk, you conclude pretty quickly that focusing on funds and activities is the right way to go about it. And if you look at the universe of what's called alternative financial intermediation vehicles instead of using the much shadow banking, how do you see the situations there? Are there pockets of risk or is everything all right? Yeah. I mean, I think one way, if we wanted to fight for a different term, I think maybe one should focus on market-based activities rather than shadow banking activities, because we're not shadowy in that sense. We're outside of the banking system, but we're certainly not shadowy. So are there pockets, I would defer also to the sort of general assessment that on the whole it's hard to point to overall systemic risks in that regard or excessive valuations, but I do think there are pockets where we should pay attention and we shouldn't be surprised by that. I want to remind us all that QE originally was called portfolio substitution. That's the way Chairman Bernanke referred to it originally in his famous Jackson Hole speech. He talked about the portfolio substitution effect. So the whole purpose of these policy measures was really to very simply put to drive up equity prices to essentially take the private sector out of the fixed income market and push them into riskier assets. And we have seen, of course, that this has worked quite well. If Chairman Bernanke were here, I would imagine he would say that part of what he tried to do actually worked out beautifully. He may not have gotten the growth he wanted from it, but asset prices have certainly moved. If you look at the S&P since 2011, it is up 65%. Nominal growth in the U.S. over the same period is up 18%. So I would say what we've done effectively, we've borrowed from the future. Now we should expect in that environment that you're going to have pockets where those valuations, where we may have borrowed a lot from the future. And the question is how does that re-equilibrate over time? Does growth catch up or do asset prices come down? If I had to pick to one or two specific pockets, I would look again at areas where we've seen a lot of flows, an emerging market that comes to mind, and where you see low cash buffers that may have trouble dealing with redemptions when the flows reverse. So I think the high yield space is one area where we've Vitor referred to it. I think the emerging market space have been areas. Now we've seen some corrections over the last couple of months and they have gone reasonably well from a systemic perspective. They've certainly been painful for the areas concerned, but they've gone reasonably well from a systemic perspective. So I would say there are pockets we want to be mindful of. We shouldn't be surprised. That was the purpose of QE to drive up asset prices. But on the whole, I would agree with what Vitor has said in Lail earlier that it's hard to point to kind of an overall vast mismatch of prices. You said growth could pick up or asset prices come down. What do you expect to happen? My view is growth will continue to accelerate. I hope that asset prices will not come down, but that we will probably continue to see a lot of volatility around price levels until we kind of reequilibrate things. Maybe we can pick up here for the general discussion. And I'd like to start on the global level. The IMF has warned in its latest global financial stability report about the risk of a premature tightening in the U.S., monitor policy tightening, and said that this is one of the main reasons to global financial stability. Would the panel agree here? Who wants to start? Yeah. Well, I mean, just a very brief comment saying that some emerging markets who are particularly affected or could be by this interest rate rise in the U.S. have actually asked for this to happen, because if it's going to happen, at least take out the uncertainty. And this volatility, which I don't disagree is a good thing in certain cases, and others is actually creating more problems. So I think there's arguments on all sides. What I would say is we are in year seven or eight, depending how you measure it after the crisis. We are finally seeing growth picking up in Europe. We're seeing reasonably robust growth in the U.S. not perfect, but it's all right. I think China will continue to transform, slow down a bit, but the underlying growth is there. Things are heading in the right direction. I found it unfortunate that the fund seemed to sort of emphasize that the negative scenarios prior to these meetings. So my view is that appropriately timed and communicated this initial departure from the extreme monetary policy stance will be confidence enhancing. And we'll show the marketplace that indeed we are on the path to recovery with much higher capitalized banks, which will be able to respond to a pickup of demand and get credit flowing again, particularly here in Europe. Do you want to add something? Well, I think in trying to assess the situation and assess volatility, there are two factors that bother me. One, which was mentioned in the previous panel, we're still in difficult times. Profitability is low. There is a lot of excess capacity, and we still don't know how far the downsizing goes. Now, another feature, a low interest rate or zero interest rate environment makes it difficult to compute fundamental values because if you just go by standard valuation principles at zero interest rates, well, fundamental values of some assets are unbounded, and it's difficult to do computations with infinity. A practical aspect of that is, of course, this is not to be taken literally, but the practical aspect of this is that if rates go up again, a 10 basis point change starting from the low levels at which we are can have very large implications for asset valuations. And we see some of that in the increased volatility in markets that we've observed over the past six months. In the US, I have the impression that the Fed is in some sense in a zero interest rate trap where the fear of the implications of raising rates have the effect that they aren't raised. I mean, we've seen this discussion for over two years now. We are going to get into the same discussion in Europe, so if I add these two components, I just see a lot of fragility underlying, which makes me wonder about how are we going to get out of this. Lea, do you feel trapped? You have to take the microphone. So I would say that there are some aspects of the US outlook that are encouraging. The improvement in the labor market has been extremely steady. We have seen job creation over several years now. We've pulled some portion of the working population back into the labor force. Long-term unemployment, which was very sticky, is now coming down. We still have a greater number of people who are working part-time, involuntarily, who would prefer full-time jobs. So there's still some margins of slack in the US labor force, but we've certainly made some progress there. I mean, the one puzzling aspect that we continue to look closely at is we have not seen the kind of wage growth that one would normally expect to see if slack had really been eliminated in the labor market. So it seems like there's some room to go there. I think on the inflation front, the second part of our dual mandate, core inflation, which perhaps is the best measure of the underlying trend of inflation given that we've seen some very large movements in energy prices over the last year or so, core has remained somewhat below our target range. So we have been very carefully monitoring that. And of course, also measures of inflation expectations, survey measures have been reassuring for the most part, but some of the market-based measures of inflation compensation have dipped lower over the last year or so. And so that's something that we want to be cautiously monitoring as well. Overall, I'd say consumers continue to demonstrate moderate consumption, but encouraging. And that's something else that is very important to continue nurturing along. So the domestic outlook is an encouraging one. When we look more broadly across the global landscape, of course, what is important is that we've seen a lot of cross-currents coming from some of the advanced economies where demand has been very slow to recover from the crisis. And more recently, very significant cross-currents from China and from the many emerging markets that are tied to the Chinese growth cycle either through commodity exports or because they are closely tied through trade and investment ties. So if you look at the cross-currents, one measure of those is the extent to which the currency has appreciated as expectations of divergence have grown. And we've seen about a 15% broad real appreciation of the exchange rate over the year, over the past year, which is a drag. It's a drag on prices. It's a drag on exports. And so we've already seen by that measure some material tightening in the United States. So we're going to continue monitoring those cross-currents very closely. And the communications from the committee are that this is a very active subject of debate. We've got a very clear framework for our monetary policy going forward, and it remains very dependent on how incoming data shapes our outlook. But you're not trapped. Because that was a suggestion by Martin Helbig that you might be trapped because you cannot. So I think obviously we are more broadly across the major economic areas of the world. We are in an environment which I think many would believe is characterized by a lower neutral rate of interest, which means, and with inflation well contained, that means that we will be likely to see across many of the advanced economies more frequent returns to or being in the neighborhood of the zero lower bound. And that does have implications for risk management, in particular for the asymmetry of risk management, which certainly is something that personally I take into account. You wanted to say something? Well, it's part of the diplomatic protocol among central banks that central banks do not comment, at least publicly, on the policy of other central banks. So I cannot answer your question directly. But let me make some comments about the trap. I think that central banks should never assume, accept the idea that they are trapped by the markets. Because central banks also in some cases must be independent from the markets and not just independent from other things. Central banks don't have a duty to follow the market. They must lead and take decisions according to the data and the objectives. So that's I think one of the remarks I would like to make. And so any central bank can always take decisions and explain them if the data, if the situation has evolved. For instance, I'm sure that the assessment of the policy for the U.S. Fed six months ago was different than now, or let's say five, four months ago, is different from what it is now. Many things have happened. Meanwhile, shocks happened, things that Lyle just mentioned, on the international front, the effects on the U.S., the difficulty that all central banks have to really gauge the slack in the economy. Because we have to use a set of indicators. It's not simple anymore. I think in the Fed you have an indicator that is built up out of 22 different indicators of slack. So this is really very difficult and this can change. And then the assessment and the decisions should move accordingly and then have to be explained to the markets. Also a second remark picking up on one thing that Martin said, which is that indeed the very low interest rate environment creates difficulties to valuations and so on. But just to highlight that this is the result of other things. Because what we see and now we have several estimates that point clearly to that, that the so-called long-term equilibrium rate, or if you prefer the natural real rate, has moved down consistently during at least 20 years. And the recent estimate for the U.S. by John Williams and a co-author gives a negative natural real rate of equilibrium. And monetary policy cannot ignore that, of course. And nominal rates also reflect that situation. In Europe we have a very low inflation on top also of a big deceleration of long-term growth. And as far as I know there are no recent estimates of what would be the real equilibrium rate in Europe. But it should be also very low indeed, if not indeed also negative as in the U.S. And so monetary policy reflects that, did not create that situation. By the way, the only hope to indeed be able to normalize the situation is to bet that we with our accommodative policy will be successful in moving up the economy so and inflation so that interest rates will follow that and we also not be normalized. It's not the other way around. We are just reflecting fundamental evolutions both in the real economy and the real interest rates and the very low inflation environment. That's what we have, of course, to react to, respond to and that's why we have the monetary policy we have. Did you want to add? Throw in one number which I find interesting. We should not only focus on the risks of the beginning of normalizing of policy or moving away from a very extreme policy stance. There are also opportunities. Take earnings. We've looked at S&P earnings most recently. More than 100% of the S&P 100 earnings are going into either share buybacks or dividend payments. Surely that's not a sustainable nor desirable situation. I think this is the type of thing that if confidence can return that we are indeed on a sustainable recovery path, you will start to see very different behavior from corporates. They will start to invest more rather than simply paying back shareholders or buying back their own shares. I think there is, as Lail said, there is enough evidence that the underlying trend is robust enough that properly timed and communicated and framed in terms of the longer term, the end of the extreme policy stance can very much be confidence enhancing. I'm convinced. You will begin to see different corporate behavior from a situation which has to be unsustainable when the S&P 100 companies are paying out more than 100% of their earnings in either dividends or share buybacks. If you believe Larry Summers, then this point might be very far away and we are in a permanent situation where companies don't want to invest. I think the evidence is that part of that is because they have not had faith in the recovery coming back to a sustainable path. As Lail has mentioned, increasingly we are seeing the evidence that things are being more robust and if the international environment presents fewer risks from a US perspective, then it seems to me that window will open. I would like to rephrase this point we are just talking about in more general terms. There is a huge literature on fiscal domination in the central banking area where the central bank is forced to do certain stuff it would not like to do because of the fiscal authorities misbehave. Is there also a risk about financial domination, i.e. that you are forced to adopt a course because financial markets are not going to allow you to change your course or the risk of changing your course might be so high that you're creating so much disorder that you're forced to continue with a certain policy stance? Anyone? That goes back to my first answer indeed because fiscal financial dominance would exist if one would accept the idea that central banks should use conventional monetary policy meaning mostly interest rates to address questions of instability in asset markets, financial asset markets in particular and fight the bubbles or other situations with interest rates. But that's not my view as I said before so there is indeed with this concept no risk of financial domination in that sense and there should not be that and as I said and Lael also confirmed central banks must have other instruments to deal with those other risks to financial stability but not make conventional monetary policy the slave of those other objectives. If you define a bubble as an excess of market valuations over fundamentals at very low interest rates the problem is not such an excess but the fundamental itself and the volatility of the fundamental which goes back to the problem I was mentioning before. I don't think you can really distinguish between or it's very important to distinguish between misallocations and distortions from bubbles and misallocations and distortions from the fact that we are in a situation where fundamentals are very difficult to compute and where the risks to those computations becoming obsolete a year from now are bigger than they would be if the discount factors were more what they used to be. I think this is a problem independently of what the causes are. I wasn't saying that this is just due to central bank policy I appreciate that there may be real causes but the difficulties of how to do investments how to do risk management in such an environment are there anyway. I agree okay point settled I'd like to continue with what has been alluded to in certain remarks on macro potential instruments as the way out of this dilemma in a way and I'd like to hear from the Spanish experience because Spain was a country which has early on experimented with these instruments still had a gigantic property bubble so how confident are we that this time it will be different? You mean the counter cyclical buffers that were created yeah well first thing I think it's important to say is that in Spain half the system survived pretty well the crisis so all the listed banks didn't get any public support during the crisis that's 50% of the system we actually contributed to the other side among other things without deposit guarantee fund which we contributed to the 50% that did need support so it did help. I think we need to question though whether the best tool for these macro potential is the counter cyclical buffers which by the way is being done now with Basel 3 and I think macro prudential needs to be very granular and so it's not easy to implement but we've seen very successful implementation of this recently in the UK for example so I think that's worked pretty well and it's a more direct way of taking care of bubbles than just a broader measure where you apply counter cyclical buffers on capital which then prevent actually credit going to SMEs for example where you might want it to go so I think macro prudential tools if they're applied in a way that is as has been done again in the UK or Canada are very effective. I find it you know harder to do this in Europe and I think as we heard it's being worked on it's very important it gets done in the right way otherwise it's going to interfere potentially you know in a way we don't want so I'd say it's it's something we should look at and I think actually the counter cyclical buffer worked well in the Spanish case in half the system the issues were actually different yeah so you know in the case of the US I mean we really think of macro prudential well outside of the counter cyclical buffer which is a important tool but if we look across the system our capital buffers structural capital buffers are a piece of that macro prudential framework and the fact that they are now much more sensitive to risk that this is higher quality capital and that the capital requirements are augmented based on very specific factors having to do with the scale and the riskiness of the activities of the institution through the what we call the GSIP surcharge and those are very sizable those elements are also important to our macro prudential framework our liquidity buffers which are intended to be drawn down during times of liquidity runs are an important part of our macro prudential framework even though those are to a large part structural the stress tests in the United States are a critical part of the capital planning framework of any large institution and there too the intent is to try to get at some of the granular risks that Anna was talking about it's a little different again we don't have the ability to move the loan to value ratio over the course of a housing cycle for instance that doesn't sit in our toolkit but we can use the stress tests in particular there's a very substantial market shock that stresses the trading activities of some of the larger more complicated firms we have a counterparty shock and every year those scenarios can be varied for instance to take into account if we think there's a loosening of underwriting standards in the high yield sector for instance so those things together those are all tools that we didn't have before the other thing I would say is and this doesn't go strictly in the arena of macro prudential but I think it it does matter for the resilience of the system for the first time we are also have a framework where large institutions can and will fail and have to plan for failure and have to structure themselves to be resolvable that is an incredibly powerful tool and most recently we've put out a rule that would add a long-term debt requirement a requirement that institutions hold enough debt at the top tier holding company that they could recapitalize the major operating subsidiaries in resolution there too that makes the system much more resilient which is really the point of macro prudential and it also provides incentives for the managers of those firms as they approach the point of insolvency to think more like bondholders to try to preserve the long-term value which is a which is a big departure from what we've seen in the past maybe we can go back to the to the structural issues i.e resolution at a later stage and continue with the the macro potential debate i so when i got that if i get that right is you're saying that sector specific measures work better than just a general buffer in in the system which obviously for me as being an economist trained in the german auto liberal tradition means so the central banks and that's so now comes the central bank and decides which sector should grow and which sector should stop grow and be put into decline how how should how do you know us i mean should central bankers be so powerful well it's i mean not responding in the german context i live that to martin of course but in general terms it's not about picking sectors we are talking about just real estate housing which is a major a major factor in business and financial cycles and that is not picking successful sectors against others that's not the issue the issue is that we have learned from history that big booms in housing and real estate never then come to a crash and then we should mitigate if not avoid but mitigate the boom cycle that's that's the issue and not then conflicting with any sort of liberal approach to economic policy i agree with what ana said and the assessment she made about the spanish experience indeed because the dynamic provisioning in spain was not enough to impact the development of the housing price boom uh but it gave a contribution and there is literature showing that that it gave a contribution to the resilience of the system and here we have the two objectives of macro potential policy one is to just increase the resilience of the overall financial system and the other one is also to try to smooth the financial cycle uh and the first one is in a way simpler to achieve to have a sort of measure structural capital buffers and so on to increase the resilience of the system measures to try to mitigate the cycle are more difficult but in the field of housing prices we do have instruments now and we know they are effective and these are of course caps to loan to value and debt to income and so on it has worked well in several countries in south korea in turkey in the uk recently also in ireland so uh uh one some case is more successful than others but indeed we can see in those cases when these instruments were used they impacted the development of the uh bubble in housing prices and that's the sort of instruments that should be available are not widely available uh several countries in europe gave those powers to the macro potential authorities which in most cases are the central banks uh that's the case in the Baltics that's the case in the uk that's the case in ireland but it's not the case in many other countries and certainly and unfortunately is not the case also at the central level of the ssm ecb so it's something that has to be really discussed uh because we do need these sort of instruments taking into account that the housing and real estate are at the core of economic fluctuations some years ago uh in the jackson old paper uh edward limmer even said and tried to demonstrate that the business cycle is the housing cycle uh and uh little else uh so uh this really underlines the importance and there's nothing to do uh about uh picking uh sectors in the perspective of ire growth of a central plan okay but uh philly putterburn first and then martin herby just i mean i think it's interesting to go back both in theory if you think of ken rogoff and rinehart's book as well as in practice the one thing we do know and you can go back in history for a long time and you can look at the experience of this crisis things get really bad in terms of the economic impact when you have the combination of a housing and a banking crisis uh leil you made reference to it earlier it's this sort of dual hit and in fact you can see at the crisis the countries that had both they have taken much longer to recover than those that had simply severe financial crises so uh it's pretty clear that that's what we have to look at when we think about uh macro potential measures so it seems to me the first order of defense has to be much greater loss absorbency capacity in the banking system which is of course what the core of the reform basal three was all about in my view we should have focused almost only on that frankly to take the theme from martin earlier namely capital we have created much greater capital levels now particularly if you take into account the quality of capital as well as the quantity of capital the other piece is housing and i agree with vitor i think you can you can do quite a bit provided you give someone the power to override the very difficult political considerations that come into play when it comes time to sort of cool down housing we know that that's very difficult to uk right now i think is a is a very good example that some of that may be possible i think that's going to be a question of political will the worry i would have um is and and it's too early to tell but assume that we have another great disinflationary wave hitting us let's say from technology that we are seeing the beginning of what will perhaps be a much greater technological revolution that we can imagine and assume that this continues in a protracted kind of way to put enormous disinflationary pressure on the whole system in an inflation targeting regime in a more or less it's not mechanical but a reasonably rigid inflation targeting regime this will of course mean that central banks will have to be would have to be very very aggressive for perhaps a long time to get inflation back to price stability as long as we stick to the current definition of inflation so in this type of environment of course you could start to see a much more pervasive sort of impact on on the whole financial system and i think that would then become a much greater challenge and we should remain humble as to what we can achieve in that type of environment but you know we're not at that point yet uh they'll mention it you're beginning to see some wage pressures emerging in the u.s same in the uk so i don't think we need to conclude right now that we're unable to get inflation up but that would be a much more challenging environment to then create the kind of governance structure around macro potential measures that would allow you to to deal with that type of environment as long as it's limited to housing and as long as we have sufficient capital levels to be able to absorb losses i think we should not be too pessimistic as to our ability to make progress here do you think we could reach a point where we have to call into question the inflation targeting regime that has been set up almost globally with 2 as the target level no i wouldn't go this far i think the the key will be um you know at the s and b we were very lucky we have a slightly different mandate both in that we don't talk about the close to two percent let alone the two percent but more importantly we give ourselves a much more flexible time horizon to reach the definition of price stability so i think that the concern i could have is that in those countries where you have let's call it for the sake of argument a sort of reasonably mechanistic definition of price stability in other words one that forces you to get back to price stability fairly quickly in that in those cases you could see a challenge around the current frameworks if you had a very powerful additional wave of disinflationary forces hitting the cpi that have nothing to do with with macro but come from let's say technology martin i think first and then i'd like to comment the two central bankers on this time horizon i agree with the view that housing is special because it's so important about 50 percent of wealth in ocd countries private wealth is in housing moreover even though it's lots of little buildings they're subject to the same shocks namely all shocks that have to do with the longevity of the stuff i think it would be appropriate to have the regulation pay a bit more attention to precisely those aspects that have to do with the longevity and if i look at bars two or three i actually find that that if one takes risk calibration seriously one would have to deal a lot more with things like interest rate risks for loans in the bank book because that is a risk which may come you as the s and l is realized in the early 80s even if there's no market valuation involved that being said i also believe that the same attention i mean this goes back to your question about why specialize on housing the same attention should be paid to other sectors where you have similarly long-lived investments such as ships i mean the shipping crisis is small fry relative to the overall economy but has been disastrous for quite a number of financial institutions so my answer to your question about aren't we going towards the regisme would be well let's identify the risks that are not properly taken into account and then think about these risks in a uniform manner over different investments if we have talked a little about the institutional structure i'd like to come back to this point because now i imagine i'm a bank so i have the central banks setting my refine short-term refinancing financing rate and have the macro potential authority playing around with my loan to value ratios then i have the supervisory authority sitting in my neck supervising me so how do you and maybe with conflicting signals so the central bank might become more expansionary why the macro potential authorities might become more restrictive in certain sectors how do we how do you put that all together or does it not need to be coordinated is that a question for me or yeah you're a banker because you said just think you're a bank well i am a bank yes thanks it's not easy being a bank these days no if that is what you want to know so you know with margins that in some cases 1.8 percent and you have to pay you know for cost of credit and many other things and i think commissioner hill said that the you know that growth is the biggest threat to to financial stability and i think financial instability is also a threat for growth and i think the fact that banks are not covering the cost of equity for many years now is an issue we should really think about and and given that we're probably going to be in a low interest rate environment for some time i think that's something we should have as regulators as bankers as you know anybody and all of us are in the same boat on this so we all need profitable banks so we can then lend to companies and i think that has to be something we think about in in these days so however as i said before i think and especially true by the way in europe to find macro prudential tools when you have countries that are so different one of the reasons and i've said this before that spain had a real estate crisis and a banking crisis again 50 percent actually were not the banks were the savings banks so there's other issues behind what happened but one of the reasons was that we had negative real interest rates for three or four years so that is i think one of the reasons why our regulator very wisely said we're going to have a counter cyclical buffer so if you just rely on monetary policy it's not enough and that's why i it's not something that it makes my life easier but i think if it's done in a proper way and it can be done and it's not easy and we have to find a way it's a much better response that just monetary policy or qe right so you know so i think for growth to happen again we need qe we need investment we need structural reforms and these are the most important ones in the long term i just like to take the opportunity to say that spain is going to create 600 000 jobs this year and created 400 000 last year so one million jobs and again structural reforms are the key but the other part is that we also need banks that can finance growth and much more in europe where 75 percent of company financing is coming from banks so i think those four things are important and within that whole let's say toolkit i mean what we need for growth to happen i think macro potential has a role has an important role would life be easier for you if there was just one institution which dealt with you i.e. with the macro debt potential the supervisory and the monetary policy issues or doesn't it matter well we have different situations in different countries so in europe we have a more integrated regulator in d us as was mentioned there's quite a few regulators the issue is that we're having to apply in some cases you know american rules to our business in brazil which doesn't have a lot of sense i have to say because you know our brazilian competitors are not it's not a level playing field and so i think the bigger and broader issue is how do we get to a level playing field as much as possible i think that is what we should fight for and that's not happening by the way among other things because many companies are doing the things that banks do as i said before taking deposits doing payments and i think we're pushing a lot of the risk taking outside of the banking system and that is i think the broader issue not you know regulators these days i mean they work together more and more so i don't worry but why on this point why is it being pushed out that outside the banking system because of regulation or just because of things changed and actors adapt to changing environment well i mean there's many reasons i think for that i mean it's you know some businesses are not profitable for banks anymore and companies that are doing the same thing but have different capital requirements or different conduct requirements can do things differently and we have very specific cases in many markets around the world where you know the same business we were doing is being done by others i mean that's good or bad i'm not going to give a view on that but that's happening okay on the institutional structure and do we need one hand one shop regulation or not who wants to well not for everything of course you cannot have um in under the same roof securities regulators and insurance and banking and the so-called shadow banking and so on that would be of course too much so that cannot really happen i think that in what regards the main tools of macro-prudential policy they should be close to central banks because that's the only way to ensure the sort of coordination that was in your first question no doubt for instance now we are discussing internationally the problems or the potential risks that asset managers and investment funds and so on may create and what to do about what if the FSB issued some time ago recommendations about dealing with the money market funds should it do the same now to investment funds and asset managers and so on we are discussing that but that is not then to concentrate any powers in one particular institution is then these has to be done in in a different in a different way but what is more close to the main aspects and one main aspect as we just talked about is the housing and real estate sector central banks should have an important say in in in that respect and by the way which means that we also have to think another dimension which is that these sort of instruments like LTVs and DTIs should also be thought about not just for banks but be issued from the perspective of any borrower and any institution that would provide this type of loans to housing and to real estate because if not if we just apply these instruments to banks then indeed the risk of these operations moving to other sectors now we have situations where in different ways insurance companies engage into mortgages and loans to housing and then they will not be subject to such LTVs and DTIs regulation no these has to be thought about from the point of view of the borrower which means that any entity would should be subject to such instruments so that is then the issue that some instruments that are at the core of the interface within the tasks of central banks should be very close to central banks too but not everything on the one roof so you know institutionally I think there's a strong case to be made for the separation but close interaction of the macro prudential and monetary policy authorities for the reasons that Vitor and Anna have talked about that there's an intense interest in financial stability from the perspective of monetary policy but that is not the objective function it's the it's not the right tool and the reverse is also true that it matters greatly from a macro prudential perspective what the macroeconomic outlook is but the the the purview is slightly different I think there's a an additional question I tend to think that it also makes sense to have some separation between what is traditionally being considered micro prudential and macro prudential in the sense that the micro prudential authorities are really trying to understand the risks within particular institutions some risk which may not be readily apparent to the markets and of course you know they're in the case of banking it's associated in part with access to the discount window and the traditional deposit insurance funds and so that's a slightly different set of concerns and perspectives whereas the macro prudential authorities really need to be thinking about systemic risk and interactions of risks you may have risks that are within a large number of very small institutions where if you looked at them individually they would not be of concern but if you see the same pattern of risk taking across a very large number of institutions that may actually be a material systemic risk you might not catch that if you are a micro prudential authority so I think there's a reason to have those various perspectives in independent committees if you will but it's very important for them to work together and in particular some of the same tools that are used for micro prudential regulation will be also pillars for macro prudential regulation now to you know when you then ask well well how do you the US stack up it's a very mixed picture monetary policy and macro prudential are done in different committees with some overlapping membership when it comes to the institutions that are under the purview of the Federal Reserve so bank holding companies for instance but are outside that committee all together when it comes to a lot of the market-based finance risks that may be arising and and so we have an overlay of this financial stability oversight council which is intended to do that but is really is really in early stages and imperfect work in progress I would like to take issue with the normative appeal of level playing fields in two senses the first if two businesses do the same activity they should not necessarily be subject to the same regulation if they have different risks some 10 years ago we had a strong banking lobby complaining that in derivatives markets insurance companies were not subject to the same rules as banks now if you think about something like the risks involved in holding long-term assets an insurance company which has long-term liabilities is a natural holder of those assets and the bank that has short-term liabilities is not so that's a situation where I think there is absolutely no reason to apply the same regulation to both types of institutions if we do and there has been a tendency in the combination of Basel and Solvency to homogenize regulation if we do that means that we lose complementarities in the financial system which are important for a proper allocation of risks the other point where I would like to take issue is we need to think about the fact that the competitive success of our banks is not necessarily in the national interest if the risks involved in those competitive successes may in the end hit the taxpayer competitive successes of any one company being in Germany at this point of course I think about cars rather than banks are not necessarily in the national interest but the car's issue doesn't follow the taxpayer as much as the banking issue probably we'll see we see about that okay I take two or three questions from the audience if there are any if not I have a lot myself anyone yeah maybe for mr. Costanzio I think we have learned that most financial crises are associated with something happening on real estate finance and I think that's what needs to be stressed this is not just an industry this is an asset it's highly tangible highly easily used for collateral it is a near fixed supply least desirable housing as such it responds price responds massively to move an interest rate or credit availability anytime of kind of excess saving it's a natural place where a say overvaluation can be expected I do think we need to think very structurally the factor regulation has to treat long term asset and your echo Martin of that are almost pure rents differing there are the industries you specify a little bit what you are waiting that I will answer well please answer what you want but I will but I wonder what can we do in terms of macro potential policy that would target this kind of long term pure rent assets differently than other industry yes there is this question that by the way their Turner addresses a lot in his latest book that urban land is limited and that's a big part of wealth tends to go to to housing and real estate and there is this scarcity and then the sort of situations that you portrayed emerge I'm sure that there are other types of licensing policies and tax policies that would be also useful to deal with this fundamental structural problem that indeed tends to create these episodes of housing price booms easily but if that is not addressed by those other policies taxation and licensing and urbanization policies and so on then it is the duty of the financial system supervisors and regulators to try to mitigate if not avoid that these price booms develop fooled by the financing of the financial system it's our duty to do that and and it's not easy to do that just via the counter-secretary capital buffer or dynamic provisioning or sectoral capital requirements because the cost the additional cost that these capital measures introduce is small in comparison with the possible returns of big price increases you will never do it through via these instruments because then it would it we would have to put capital off banks or sectoral capital requirements at absurd levels so that's why LTVs, ETIs are in the end the only way and this has to be used otherwise we will face these booms and busts which disturb the whole economy as we have seen many times and so we cannot really refrain ourselves from doing our job if others don't do it properly Warren Buffett has famously called collateralized debt obligations financial weapons of mass destruction would you agree here that housing loans are the true financial weapons of mass destruction no housing loans are necessary of course because we need the people need housing and we need this sort of development the problem is the excesses and control the excesses when they start to emerge and we have to act and fulfill our duty in that respect okay we're almost there I'd like to ask a last round of questions to everybody and I will start the sentence and I would like you to end the sentence so depends on what you say so we start with Anna with Anna Bettin if I could make one change at the SSM I would that is a very very loaded question that's why I chose it yes I mean but I'd say not just one no no is there one thing that would you that you really would like to change no I I mean I think the one thing that would be and I've been they've done this already so I think it's yes but no I mean I think is that we continue to get clarity I think Europe has been slower than the US and the UK and other markets and implementing the changes post crisis so it's it's not the SSM itself who it's been incredibly fast actually if we think as we're hearing this morning they've done an amazing job in a very short time period but the issue is that we're coming from behind and I do think a level playing field is critical and I refer not just between banks and non-banks but between regions and I think that we are at the level of the US and we we are playing all according to the same rules as soon as possible is very important so I think you end the sentence thank you Larry Brainerd in December the Federal Reserve will okay that was difficult to withstand you if I have to choose between price stability and financial stability I'd choose our mandate it's our primary mandate it's very clear we have an hierarchical mandate and it's very clear okay Martin Harvick the next big financial crisis will be caused by undercapitalization of banks when global interest rates go up financial markets will go up that was good well thank you very much that was an interesting and exciting panel I hope you enjoyed it as much as I did I learned a lot and I think now it's time for lunch thank you to the audience and to the panel thank you to you