 But I think that we will start, and Paul will discreetly join the panel. So let me say that I am very moved to be here because I was the first president of the ESRB at the moment where we were starting the ESRB as an immediate new institution created immediately in the crisis and from the crisis, and I have with Francesco Mataferro a lot of good memories and tough memories on the creation of the ESRB. It is a great privilege to, Paul you're welcome just here if you wish, it is a great privilege to introduce this panel, which is a very, very, very important one in terms of quality and experience and vision of the members. So let me only mention the fact that Pablo has been in the ECB as advisor of the executive board as director general and is now governor of the Central Bank of Spain and chair of the Basel committee, so with an absolutely central vision of what's going on and what's going on, not only theoretically but operationally. We have Stephen, we work together in the BIS, Stephen, you've been in the past and you are now in Brandes University, chief economist of the overall BIS and also member I think of the executive board of the BIS and you have worked a lot on these matters with great skill and I always appreciated in the BIS our private discussion in 5 May. William, you've been chief economist of the EBRD, chief economist of CITI now, professor in various universities including in Cambridge and of course author of a number of books and Paul, you've been deputy governor of Bank of England, you are presently in Harvard, in the Harvard government school if I'm not misled and your chair which is even much more important, chair of the systemic risk council and author also of a very important book recently. So again it's a pleasure because we will have some kind of multilateral vision clearly in this panel with various experiences and various vision which are not alike which is good. Of course Pablo will stick to what is the present state of the art of what is being done in the Basel committee today and I think it's absolutely essential to realize where we stand and in a way Pablo, the other speakers will really challenge what, not what has been done I guess but what should be done, are we done yet and I suspect that they will say no we are not done yet and perhaps with various nuances. Let me only myself having experienced the crisis at its very beginning and again ESRB has been created because we had a crisis in 07, 08, 09, 10, 11 and that was very very impressive I have to say to realize that we were in the worst crisis since World War II without realizing that it was really the worst crisis since World War II. I remember myself when we had the start of the crisis in August 07 with our money market out of order exactly like the New York money market is a little bit out of order it was the same phenomenon and we had to inject 95 billion euros the first day and then something like 70 billion the next day and then something like 50 billion the day afterwards. All in terms of full allotment because we didn't want to limit the delivery of liquidity and I happen to say afterwards don't be misled this is not a crisis this is a technical issue we took technical decision to solve a technical issue and I pronounce the world crisis only after Lehman border collapse but now with the benefit of the hindsight we see clearly that it was something which was big and it reminds me a little bit again what happened recently which is a little bit of a wake-up call on what perhaps could happen that being said let me also mention as part of a very rapid review of my understanding of what is what are the main characteristics of this materialization of the systemic risk when it comes it's multi-dimensional it's unfolding is always non-linear the contagion might be extraordinary rapid and we have to be prepared for that and the all the decorrelated indicators or asset classes or whatever or markets that were observed before this materialization of the systemic risk are brutally sharply abruptly recal correlated and you are in a totally different universe and that that is something which we have to remember it seems to me because it's a characteristic again of all the situation where you have a materialization of a systemic risk I remember that when we had we had of course a lot of observation when we were in the full fledged crisis after the collapse of Lehman border but after this event on our money market the 9th of august 2007 I remember what struck me the most was that the overall spreads variable OIS that was at a very low level before that phenomenon was sharply abruptly as exactly a phases transition that you observe in physics we came from quasi zero to something like 60 70 basis point and for me it was the first time I could see in finance something which was behaving like that overnight a change of course we had the control of our market with the supply of liquidity without an element we could control the market and we avoided a disruption of the market we avoided skyrocketing of the interest rates which was a threatening at the very beginning but still we had something that had profoundly changed the spreads on that market were different totally different from one day to the next day so I draw your attention to this phenomenon of what I would call phases transition by analogy to what we observe in physics now I would say that perhaps the audience as well as myself are expecting that we have elements of response to a number of questions that it seems to me are very important I don't expect that the response would be the same or even that we would and the speakers will all agree on that on the contrary because the multi dimensionality that I mentioned as a main characteristic of course supposes that we have very different views and we can rely on very different angle of vision that being said to make a long story short I would say I would be myself very happy to have elements of response on the following questions first question to which extent should we be worried by the high level of global finance leverage continental finance leverage Europe in particular national finance leverage I know that the ESRB is very keen on that and has addressed the question of real estate and the leverage that we are observing the financial leverage that we are observing in this domain I would say that I am at the level of the entire globe very very afraid to see and I tell that to Pablo particularly to see that the I would say overall that outstanding as a proportion of GDP continue to go up and up and up after the crisis more or less at the same pace as before the crisis and this seems to me very worrying particularly in a universe where a lot of some economists and a lot of market participants are saying we are in a situation where interest rates are so low that there is absolutely no point in being prudent and cautious as regards leverage you can leverage a lot because the interest rates are low and it reminds me exactly what I heard when we were telling in the ECB governments and and the European institutions well we see that leverage continued to go up and up and up in some segment of markets and in in some countries and that at a time will prove devastating and we started to say that in 2005 at the time we were not heard and you might remember that in 2003 even the big countries in Europe decided to reject the stability and was packed as it was at the time so I don't insist more but this is a very important point it seems to me you discussed already a lot on shadow banking it would be my second question does shadow banking in structure as well as the size now constitute a systemic threat for financial stability I am very very impressed by what has been already said but do we have the regulations the credentials that would permit to take control of the embedded risk of materialization of a systemic risk that are in this 120 130 trillion dollars that are in the global market in the form of other financial intermediaries another question which is a regular question is are the is the global implementation of credentials correct fair do we still have regulatory arbitrage another question would be in Europe in particular do we have national credentials that are adding up to the European credentials and the global credentials and are creating particularly difficulty for the banking sector or the financial sector in general I suspect that we have there a real real issue and if we could have some views on that I think it would be very good another question of course is that it's excellent to try to prevent future crisis future systemic crisis it's a job of the ESRB are we equipped to deal with the crisis are we equipped to have an appropriate crisis management when the crisis come the crisis can take various form of course but we are sure we don't know when that there will be a recession in the US we are sure we don't know when that at the time probably we'll have a recession in Europe by way of contagion we are very sure that we would have market corrections at a certain period we don't know when of course all this phenomenon will happen but are we equipped to deal with them not to speak of I would say more dramatic or demanding crisis another series of very important questions but of course we are limited in time I would be very interested to hear more on the embedded pro cyclicality in the system are the accounting rules perfect or pro cyclical in some respect are the rating agencies perfect and well controlled or potentially pro cyclical in many respects are our prudentials carefully non-pro cyclical and there are a number of course of other questions including and that would be my last remark the question which is very important to know and I think that academia has to work a lot on that which kind of new emerging properties are coming from the financial system the global financial system with the combination of it and the technology technology surges on the one hand and globalization on the other hand which might create new phenomenon we discovered clearly that immediate contagion was a new property of the system in 08 or 9 we we did not realize that things could go that rapidly we also discovered that sudden stops were things that could happen and we were not really prepared intellectually to accept sudden stop and as I already said phases transition even without sudden stop but but overnight abrupt change of the functioning of segment of markets our entire markets was also something which was in my understanding coming from the new combination of globalization and very intense utilization of IT and new technologies so these are a set of questions again as I said we are privileged because we have an extraordinary panel and I will give immediately the floor to Pablo if he wishes so many thanks Jean Claude well many thanks president if you allow me for those who have worked for you you will of course always be our president and also let me thank the ESRB secretariat for the organization of the event of this conference also for the invitation to participate so as Jean Claude was announcing I will take profit of being the first speaker and I will try to do the easy part which is making maybe first at least a quick summary of what has been agreed in terms of the financial sector reform during the last decade although contrary to what Jean Claude said I will also try to do some challenge of my own so in this slide what you have is I put a list of the main post crisis reforms Basel III mainly but also additional global bank reforms taken by the financial stability board in particular let me go very quickly through it but I think it could be helpful in order to put into context the remarks that will be made later so the these reforms encompass first higher minimum capital requirements this we all know a revised definition of capital with a greater focus on truly loss absorbing capital through common equity tier one in particular the explicit introduction of a macro potential dimension I think this is particularly relevant in the in this contest of course and in this conference in particular most notably through the introduction of capital buffers and some of them are also listed in the in the slide a comprehensive review of to the risk weighted framework was was done with basically two aims first to enhance the robustness and risk sensitivity of both the standardized and also the internally model approaches and second also to incorporate new risk some of them are also listed in the in the slide the introduction of a leveraged ratio requirement to complement this risk weight weighted capital requirements and to act as a safeguard against unsustainable levels of leverage a revised large exposures framework to mitigate excessive concentration risk was also agreed and this also incorporates a macro potential dimension on it by imposing a higher tighter limit for intra gcp exposures for the first time we now have a set of international liquidity requirements covering the liquidity coverage ratio and also the net stable funding ratio in addition to all these pillar one revisions the committee has also substantially revamped is pillar three disclosure requirements which now cover a broader set of risk and a broader set of information and of course we cannot forget that the financial stability board has complimented this reform by introducing a set of total loss absorbing capacity requirements for gcps so i guess we all agree that these reforms have translated into a banking global banking system which is now more resilient that it was in the past and let me just give some numbers to illustrate this point so since 2011 city one capital resources for international active banks has increased by 85 percent banks holdings of high quality liquid assets have increased by over 60 percent the average tier one leverage ratio for banks has increased from three point five percent to five point eight percent in the same period the average city one risk weighted ratio has gone up from seven point two percent to twelve point seven percent and of course we have also to take into account that the bustle three reform is all is in the transitional period still and we have the transitional period till 2022 so these numbers are likely to continue to increase over the next few years so this is what we've done the question that Jean Claude was was making in his introduction was to what extent is this enough or not and well there are many possibilities to try to answer this question one possibility is of course to look at the economic literature and in particular to the economic literature on optimal capital ratios or perhaps more precisely on the marginal macroeconomic impact of higher capital ratios and this is what it is i've tried to illustrate in this in this slide and of course what i will try to do is to compare the results of this literature with the and compare it with the bustle three framework in order to reach some conclusion by the way this chart is taken from a recent paper that was published by the bustle committee which basically what it does this paper is to summarize all the literature on this optimal capital ratios so as you can see what you have in the in the slide in the horizontal axis is the different levels of capital ratios and on the vertical axis what you have is the net benefits of these different capital ratios measured as basis points of our GDP depending on the on the on the on the paper of course the the reference is also different i will not enter into the details because the papers are not fully comparable some of them look at some definitions of capital other papers look at other definitions of capitals but perhaps what it is perhaps interesting to to notice is that these papers find that the net benefits are positive over a very wide range of capital levels which go for since seven percent to around 16 percent or even higher numbers of around 20 percent so where does bustle three feet in these estimates so taking step by step as it is done with this vertical lines that you find in the in the chart we can start with the bustle three four point five percent minimum ct one requirement which is clearly on the lower end of the studies but adding the capital conservation buffer takes us closer to the midpoint of these studies and if you then include the additional buffers for systemically important banks and you assume and this is important you assume that the statistical capital buffer the ccyb is activated up to 2.5 percent then you can see that you are well within the range of the studies and that this will be my main first point that the bustle three reforms are broadly in line with the range of estimates of that come from this literature on optimal capital ratios or you can put it in a different way i think there is little evidence to suggest that we have overshot in terms of the of the level of capital that we are requiring to to bank which i think is an important an important point in itself but of course this assessment and this would be my second message is is based on the fact that the bustle three framework is implemented by all jurisdictions in a full and timely and in a consistent manner by the way something that the g20 leaders are always emphasizing that this is again a very important message is not only that we have agreed but now it's important that we all implement these measures adequately and perhaps something that it's sometimes forgotten or at least not sufficiently emphasized is the fact that it also requires supervisors to carefully and continuously oversee the application of the standards and i will try to illustrate this point also with this chart too in this new slide so this slide what it shows is the result of a hypothetical portfolio exercise that was conducted by the bustle committee a few years ago and basically the exercise what it does is banks were asked to calculate their capital requirements for the same set of hypothetical bank and corporate portfolios okay and the results that you can see in the chart is i think is quite telling in the sense that with this there is a worrying degree of excessive variability in the bank's model risk weights which is the one that is measured in these two bars the left one for the bank exposure and the right one for the corporate exposure of course the bustle three reforms what they have tried is precisely to reduce this excess variability but my point is that the reforms will only truly be successful is supervisors actively and continuously monitored by banks and this micro potential dimension and the importance of the micro potential dimension of supervisors is sometimes not it's not sufficiently emphasized so let's assume that we all implement the standards let's assume that we have also micro supervision that is sufficiently rigorous still we have to make the question and it is legitimate to make the question whether we are done or we are not done and in order to to answer such a question my answer which is probably not an answer is that we need to take a step back and carefully evaluate the effectiveness and impact of our post crisis reforms and in this table what i'm basically trying to describe is the work that the bustle committee is currently doing in terms of the evaluation of the different standards the bustle committee is currently embarked in a very comprehensive evaluation work that incorporates an evaluation of individual reforms that incorporates also an evaluation of the interaction and coherence of the different reforms and that it also incorporates an evaluation of the macro impact and the structural changes that these reforms might require and maybe before trying to anticipate one of the comments that probably Steve will make later i think it's important we also the academics are joining us in this evaluation but of course this will improve a lot also the legitimacy of the whole of the whole of the whole process so uh of course i think we have to be honest on the resource of these reforms in the in the sense that if we find that there are scientific some side defects of the reforms that we were not expecting we should of course look at them and try to modify them if necessary and of course if we find that there are some regulatory gaps that we're not taking on board at the very beginning we have to also to take them on board in our discussions but one point that i wanted to also to make i think is also important in the current context and it was also emphasized by president Trichet before is that i think what we should avoid by all means is the well trodden regulatory cycle so the fact that the memories of the crisis start to fade over time best interest start to grow and the temptation to water down standards is is there and there is some evidence that this already happened in the past and this is what i'm trying to illustrate in this chart three in this new slide what you have there is the simple leverage ratio measure for example of internationally active banks okay and it is normalized in the year 2008 which is the year of the crisis and what you can see is that before the crisis between on the slide between 2000 and 2008 banks leverage ratio fell by about 15 percent then to increase after the crisis by almost 40 percent of course these changes are also a reflection of the cyclical conditions something that Jean Claude was also emphasizing in his introduction but i think there is also they also highlight the dynamic of a regulatory pendulum that my message here is that we should try to avoid now and then maybe last remark and with this i will end and i can be very brief because the conference has devoted the last two panels today to these two issues that i wanted to to emphasize of course it's very important and the and the basic committee is is indeed focusing very much not so much on the the past risk but the risk that are emerging and i will try to emphasize at least two of them that on which at least myself and i'm relatively worried the first one is the one that is illustrated in this chart what you have there is the share of the banking system assets in total financial institutions assets and the message is very clear Jean Claude was also emphasizing this at the very beginning in his introduction what you can see is that the the the banking sector is reducing let's say it's in the total financing of the of the economy and of course this means that we have to ensure that risk are not migrating to the shadow economy to the shadow banks that are subject to less stringent regulations as we perfectly know and for this what it is very important is that we closely monitor the regulatory perimeter of the banks and also that we guarantee that the principle of same activities same risk same regulations is is is is is is guaranteed and then finally and just with this i will end my initial remarks another important element is all this technological risk and i can also be very brief because the keynote speech that was given before this panel was concentrated on on on this but here is just one way to illustrate the the issue if you ask the bank chief six officers what are the main important new risks that are emerging well what you find is around 80 percent of them find that the severe risk is a top issue requiring the most attention as compared to only 10 percent five years ago so again the the Basel committee is actively working on this topic and is in general terms is working in a broader operational resilience issues including the of course severe risk financial technology and crypto assets and i think this this is well justified thank you thank you very very much indeed it was Pablo it was striking and i'm sorry to be obliged to compress the time let me only mention also because it came in the occasion of the crisis that the Basel committee was the privilege of the industrialized advanced economy for a long period of time and then it opened up to the emerging systemic countries and so that it is really a global entity today and that is one of the major lesson of the crisis but now Stephen we turn to you thank you thank you very much let me start by by thinking President Trichet again if i may and also i think that what many people in this room may not know is that at least in my mind you and your role as chair of the governors and heads of supervision that oversees the Basel committee are in many ways responsible for the fact that Basel 3 exists today so i think we all owe you a tremendous thanks for that and having seen that close up i will i could tell you stories i could tell everyone stories about President Trichet's role as a in that and how i do i really truly do not believe we would have this agreement today without your without your your incredible work so thank you very much for that it's obviously my privilege to be here i want to thank the the the ESRB secretariat and the members for including me in the advisory scientific committee i i obviously know i agree with with the many of the implications of Governor Hernandez that closes that the that the reforms over the last decade have been critical in making the system more resilient uh than it was a decade ago it is more resilient but the question is whether it's enough and uh and where do we still have work to do these are the questions that we ask um this is a sort of question that Patrick Bolton Jean-Pierre Dantin and Xavier Vives and i set for ourselves about a year ago and we produced a report the name of which i have on the slide here which is actually relatively long it's the first in a series of the future of banking that's being produced by the banking initiative of the esa business school in Barcelona um so if you want to know the details they're there uh in the few minutes that i have i want to talk about three things i want to talk about basal three a little bit a little bit about resolution and then a minute about about the role of central banks so first of all here's the picture uh which has the data that Governor Hernandez DeCos was mentioning uh here you can see the rise in both the risk-weighted uh capital ratios for a consistent set of banks that comes from the uh twice a year quantitative impact studies of the basal committee uh and the red line is is the the equal weighted leverage ratio um i actually uh i i'm a regular reader you you know i i seem to have time on my hands of the quantitative impact studies after you've been reading the firm for as many years as i have you sort of know where to turn in the things to look for the critical bits um what's very troubling and this is actually the downturn at the top uh that that we're seeing now i i think that uh what we're seeing is uh some evidence of forbearance and it's fairly uniform this is a global these are global numbers um now um but in looking at this i wanted to emphasize that there's been this big increase in and there's also been a huge increase in requirements uh the the basal committee changes which were which you heard about just a few minutes ago have have dramatically increased requirements it sort of looks like they've only gone up from maybe four to seven or eight or nine but they've gone up way way more than that because of the changes in the definition absolutely and so i think it's it's important to understand that basal two if you computed on a basal three basis had a risk weighted requirement that was vanishingly small below one percent below one uh i would say probably even less than that so here i think there's been serious progress the question is whether or not the new levels of capital are enough um and uh have we overshot um and and and here i think that we want to think about uh two things uh i don't have an answer to the question one of them is that we've created these requirements for subordinated debt which are really quite stringent and so in many ways we've substituted higher instead of having high capital requirements we now have subordinated debt instead now maybe we should change uh for my own taste we should change the balance a bit towards capital which is really the ultimate absorber of losses um as wet and and so i i think we we haven't done quite enough here i'm going to talk about liquidity requirements for just one minute and if you'll bear with me um these are these are completely new and in terms of uh of the construction and implementation i would say that we're really finding our way uh there was some discussion of that by one of the uh one of the prize winners earlier where there's theoretical work that's ongoing i have a very simple balance sheet construction that i want to show you um and um so if you look at this simple example i want to think about a stripped down balance sheet of a banking organization where assets can be divided into just two categories they're either liquid or they're illiquid i should be able to do this um for anybody then i can also i mean yes there's degrees and stuff but let's just assume we can do this um and then uh then assets uh so assets are liquid or illiquid and then uh and then i have liabilities and liabilities are either runnable or stable again i should be able to do this if they're off balance sheet exposures for all of you that spend your life worrying about those will convert them to on balance sheet equivalents and we'll put them in there somehow okay so the basal the basal three framework has two liquidity requirements it has something called a liquidity coverage ratio and then the net stable funding ratio again one of the prize winners mentioned this one of them says liquid assets have to be greater than runnable liabilities the other one says illiquid uh assets have to be less than stable liabilities well this is all great except for the fact that there's a balance sheet identity and the balance sheet identity tells you that assets equals liabilities that's sort of inescapable um and when assets equal liabilities at least in this very simple stripped down version what i've got is that these things are kind of the same um i mean the exactly the same okay so um and uh and so um you know so i should say that this exact correspondence is broken by the combination of the existence of off balance sheet positions and the fact that balance that balance sheets of institutions can't be cleanly separated quite the way that i have there's stuff that's neither liquid or illiquid and there's stuff that's not runnable or stable in these definitions but the fact is that there's still going to be a condition that really tells you that you're only bound by one of these for sure okay um and so the question really in my mind is whether we need both of these when we look at liquidity requirements i think we should be thinking pretty hard about how they're structured i understand how it is that the two primary capital requirements are binding different bank business models if you come to me and say why do i need a risk-weighted capital requirement and why do i need a leverage ratio requirement i said well you know i've got these guys and some of them have housing loans that have really low risk weights and i kind of worry about them and maybe you know and then there are these other guys out there that you so i i can talk about that i can explain the behavioral reasons for that i can't do that here um now maybe it's just my lack of imagination but um but i think that we have a job to do and we have a job to do as part of what uh what Pablo says part of our evaluation our post implementation assessment we have a job to do and i think we have a really big job to do on the on the liquidity requirements and understanding in understanding what they're doing and and my right now what i would tell you if you if you ask me is we only need the liquidity coverage ratio we just need to make it work properly and it probably doesn't work quite properly so there was a discussion so in asking the and president trichet asked about this as well uh ask about non banks there was a whole discussion of non banks earlier this morning um uh uh because as uh as richard port has said we're not allowed to call them shadow banks anymore because i guess they've come out of the shadows i usually they've come out of the shadows though that's why they're not shadow banks um and um so that we know um that when we try to control an activity people try to find a way to move it outside the perimeter of regulation and they're often successful that's just a sort of that that's just the way it works this chart provides implement some information from the financial stability boards monitoring exercise and what it shows you is that globally banks have declined in importance while non banks have increased so the non banks are the are the are the yellow things basically now interestingly there's a lot of regional variation in this banks have actually slightly increased in importance in the united states where they were small to begin with they've decreased in europe i do wonder whether this is really a problem for europe i thought that was an intended move in some of the in some of the regulations that were being put in place uh at least in the capital markets in europe was to try and and uh and create more uh uh more alternatives to bank uh to bank finance but that said i think there's clearly a missing framework so to answer the question that you asked president trichet uh we don't have a framework for controlling systemic risk that arises outside of the regulated banking system the ability and willingness of authorities to do something about this very substantially across jurisdictions for example in the united states uh legal authority is lacking and political will is non existent okay so in the united states it's like we're dead in the water when it comes to this in some jurisdictions you have much much better systems but what we need i think is a five part five we need five parts we need data we don't have enough data to monitor we need analysts to assess what's going on outside of the banking system and in these things we need authorities who have capacity uh both the analytical capacity and the legal authority to designate regulate and then supervise what's going on um and um i don't have much hope for this in the short run but we need to do that um and this is i think what i would call activity based uh regulation and supervision but activities not based on instruments but based on balance sheet structure okay so there was some discussion earlier about how maybe it's the case that that insurance companies should be doing certain kinds of mortgage lending that's right but it's a question of whether they're doing the maturity transformation or the liquidity transformation that banks are doing and if they're not doing that then they're not banks um so to conclude my whirlwind tour then of bozzle three we need to take a holistic approach and think about these requirements all together turning very briefly and i'm way over time to resolution here i think the purpose of resolution the resolution reforms is to avoid and reduce spillovers but banks are large and they're very complex we have 20 banks at least with more than a trillion dollars in assets most of these operate in dozens if not more countries city for instance operates in about a hundred um and many of them have hundreds if not thousands of legal subsidiaries so they're they're quite complicated they'll make excuses about how it is that they're they're not really so complicated but i'm not so sure um so from the perspective of too big to fail reforms to the resolution regime are the most important if you ask me and the question is whether the framework's going to perform well or not and i don't know mervin king has has half ingest suggested that one of the it would be great if one of the g-sibs were to volunteer to fail for us and so we could test it out um well i uh but i don't know if this is going to work i should say that there is one insufficient there is one part that's clearly insufficient in my view and that that remains the provision of liquidity in resolution not in every in every year we do not in every jurisdiction have a mechanism for what in bankruptcy or administration would be called debtor in possession finance um and we especially don't have it for foreign currency so if you're if the consolidated entities home if you have a problem there you might be able to turn to the central bank uh but if what you need is liquidity in a in another currency it's harder to see uh where you're going to go so i think that's a that's a very very big hole if you ask me i mean maybe the spoe the single point of entry stuff is going to work i hope so i think you know it's a great idea but we do need liquidity provision to finish the role of central banks i think here since we're sitting inside of a i guess this isn't technically a central bank today we're in the esrb not the ecb but you know we can decide how we feel about that but um i think that there we've we've gone uh central banks have been asked to to do a lot of things here i'm encroaching on some of paul tucker's territory in his uh his excellent book on unelected power um but they're not what they were a decade ago or 15 years ago and as a consequence of the crisis they've been forced to do things that they never thought they would uh they would have to do and that we never thought they were going to do um and and and they've done all of this in large part without a public debate uh that would lead to uh to uh to us agreeing on the legitimacy of this i think this is a problem i think this is a huge problem that we face today and i think that what what's essential uh to strengthen the democratic accountability of these institutions is that we have uh this discussion so to summarize i think the system is more resilient than it was a decade ago that's great uh but we need to finish the job i'm not sure we're done uh on resolution there's been tremendous progress uh but there are glaring gaps and finally to ensure democratic accountability i think we need a clear public discussion about what the right what the appropriate role is of the central bank in our uh societies not just in our economy in our financial system but in our societies and if i if i may make a one last closing point and that is that we've we've improved the process dramatically of how it is that we do uh regulation and we reform regulation how we set standards at the international level um in his role as the as the chair of the basal committee uh uh uh polo described a process that includes uh the x anti assessment of proposed rules and their calibration the monitoring of implementation and the post implementation assessment and then we should see revision this is a completely new thing it makes total sense but before basal three this was not how we were doing it but i will say one thing and that is i do remember in 2009 sitting inside of the basal tower and saying it took 10 years to get basal two done we can't let this happen again but we did it took 10 years again it can't take 10 years again we have to be way faster now and i don't i'm not sure what the answer to that is but we we must figure out a way to increase the speed at which we're doing this thank you very much thank you very much indeed dusty we uh we learn we are learning from all interventions let me pick up what you said on the fact that the question of democratic accountability of the central bank was very important that they took in the crisis decisions that were extraordinary and unexpected at least unseen let me mention theory which is interesting namely independence of the central bank was designed to permit central banking to reflect on the medium long term basis and not being hampered by short term views of politicians i'm oversimplifying in the case of the crisis the independence function exactly in the reverse direction the central bank could do things that the political sphere would not have done clearly it's the us is a fantastic example with the top program which was impossible to decide at the start and then took time to be decided and the criticism of what the fed did at the time was based upon the fact that as a matter of fact the central bank was very bold and it was necessary to be bold in the circumstances so independence functions in a two direction if i may in some respect and it was the same of course in your bilm could you take the floor thank you i will use the pulpit since i'm of dutch extraction okay i will spend some of my time no i don't need this talking about a compliment a sense of supplement to financial stability regulation supervision in support of that that is the road the land of last resort and the market maker of last resort which has not been prominent in the discussions here just very briefly as you got the regulations concerning capital adequacy on the basel 3 and for solvency 2 for insurance companies they've mitigated the worst capital deficiencies for these institutions i'm assuming here that the finalized basis really forms the period in december 2017 they'll actually be implemented in full we still have to see that and so it's very important to have the addition of the leverage ratio as an additional strength of the size and composition of the balance sheet because banks continue to use inappropriate property risk models to compute risk-weighted assets and one should never trust these calculations despite the presence of these counter-signal capital buffers i think the net operation of the basel 3 system is still likely to be pro cyclical in some sense you have to address it's important that similar capital adequacy requirements be imposed on all finance institutions that are characterized by high leverage and material asset liability mismatch in duration liquidity very little progress has been made here this is one illustration of the failure of regulation to move from regulating name plates to regulation regulating admittedly institutions and legal entities or natural persons but from the point of view of the activities or the risky behavior they're engaging and basically even entity passes the duct test for being a bank high leverage mismatch right then it should be treated as a bank but it calls itself an investment fund the money market fund an etf insurance company a pension fund the treasury department of a commodity corporation a private equity fund the clearinghouse or a blockchain based peer-to-peer platform so a natural and a central complement to leverage and asset liability mismatch portfolio constructions is to have a lender of last resort and a market maker of last resort to provide funding liquidity respectively market liquidity think uh northern rock like your bank that failed but the Bear Stearns layman brought us AIG and in the earlier crisis along to capital management none of those were banks they all required last minute bailouts very briefly here something that hasn't mentioned either in the euro area basically all euro denoted denominated debt because there's no national sovereignty over senorage is foreign currency denominated debt de facto ergo own sovereign debt continues to be treated as safe then risk rated asset calculated for new area banks banks everywhere effect many sovereign obligations are subject to non-trivial credit risk and should be weighted accordingly uh in addition exposure limits of course the tracer limit should be imposed for own sovereign debt and possibly for aggregate euro area sovereign debt exposure as well there's no reason at all by europe's rate for the rest of the world to come on board to some fsb sponsored initiative here because the situation in the euro area is unique because of this absence of sovereign control over senorage and finally then on this capital issue financial engineering approaches to safe asset creation securitization pooling and trancing should be encouraged to appropriate regulatory treatment of these instruments i don't know why there is no action on that it's not something that is hard to do for me the defining moment of the great financial crisis came when the fed created the swap lines with the ecb in december 2007 in one year with a dozen other central banks they were heavily used between september 2008 and january 2009 this volume speaking is 585 billion right it's quite extraordinary without these swap lines most of the european banking system would have been destroyed during the great financial crisis the fact the fed effectively acted acted as global end of last resort it is disappointing and i'm worried about this that during the taper tantrum of the summer of 2013 the fed did not extend swap lines to the central banks of the emerging markets where the eye of the storm and i very much hope that the bank of england has access to all the necessary swap lines if no deal brexit materializes um again we have to hope that in the next financial crisis the fed will be willing and able to act in this manner again in the absence of the imf taking on a larger role which i think is unlikely uh the only pseudo land of last global end of last resort is the fed there has been technical regress in as regards to the ability of the key financial center central bank the fed to act as land of last resort that market maker of last resort and the section ten a of the federal reserve act emerging advances to groups of member banks extorting financial support that is to member bank that have no access to etiquette collateral can only be provided by a federal reserve bank to groups of five or more banks in its district so it's a case of hard luck if only the four largest bank in your district go bust extraordinary post crisis uh self inflicted wound and section ten b of the federal reserve act act to individual member banks effectively restrict such advances to institutions that are deemed viable by the federal reserve bank in whose district they're located and again you cannot determine viability in the midst of a crisis you first you know provide the liquidity and then you decide whether they're going to be liquidated in orderly manner or kept alive it is so there has been a weakening of the land of last resort and market maker of last resort capacity of the most important central bank in the world um of course the quick pro quo for unrestricted land of last resort and market maker of last resort authority is full openness and accountability for all financial and other interventions by the central bank in its proper time i recognize there has to be a lag six months maybe a year between the date of the central bank financial intervention rescue and the date at which all relevant information about the operations in the public domain but it can be no compromising on the principle of full openness and accountability and central banks have a terrible record here uh the the Fed had to be forced by uh uh court case to provide information on how it's without uh uh AIG AIG and all our large corporations again not a proud moment um liquidity liquidity is probably good when there's optimism confidence fearlessness and trust almost every asset can become liquid when there's pessimism lack of confidence fear and mistrust almost nothing is liquid from the liquidity shortfalls triggered the stress sales of assets that result in the varnishing of market liquidity for these assets only the domestic currency obligations of the central bank are the ultimate liquid assets in the worst case now the purpose of banks and most other financial institutions is financial intermediation sent to this a maturity transformation liquidity transformation and risk transformation and this should not be impeded by certain restrictions on liquidity and liquidity has to be provided by the land of last resort and the market makes the last resort on a routine basis i know the Fed has forgotten how to do this apparently judging by its advantage in the repo market for the last week but uh it is important that we uh do not uh request as the NSFR request which is a front economic reason this requires the available amount of stable funding to exceed the required amount of stable funding for a one-year period of extended stress the dealing is a one-year period before a land of last resort can get its act in order this is completely crazy so let's say do away with the NSFR the lcr is is innocuous it really forces you to hold no more than the liquidity would hold anyway for ordinary commercial reasons now um two final remarks uh which are not directly related to this but the regulatory implications of climate change are uh surprisingly on the indivision field of many leading central banks uh marcani has been a leader in this field and there is a recognition that even financial institutions don't have an esg agenda even if objectives are constrained narrowly to financial risk and returns global warming will demand growing attention from the corporate leadership and from regulators and supervisors so um if highly unlikely i think but if adequate measures to limit global warming are implemented stranded asset risk will be massive should as seen more likely global warming proceed apace the massive physical damage it is likely to be the result will challenge the solvency of financial and non-financial entities that are exposed to it directly indirectly whether through insurance and reinsurance or through card bonds and similar instruments some programs have been made in this area but i think it ought to be a standard element of uh any corporate risk including financial risk analysis and then finally on cyber risk it is clear that the prevention mitigation of cyber risk both accidents and attacks by private and state actors it is becoming an integral part of politics policies and regulations to maintain financial stability the implication of cyber risk is that there's a growing need for socially inefficient but socially necessary redundancy a duplication in a financial way and i think we have to be prepared to make real sacrifices in on the cost and and the prima facie efficiency side to get this redundancy and duplication i'll stop here thank you thank you merci thank you very much william indeed it was very very stimulating i think that your presentation of the fed being the lender of last resort at the global level because we had the swap between the ecb and the fed could be a little bit challenged because you could say the dollar being the global currency there was a lack of dollar obviously in the crisis which after all was born in the u.s and the fed was only taking a risk on the best central bank you could imagine with an enormous capital gold reserves of an immense magnitude and the risk of the fed was taken on the ecb and not on any particular bank that would be in a desperate situation so i mentioned that en passant not saying they had a crazy risk but they acted as lenders of last resort because they had a good counterparty in frankfurt doesn't mean that they weren't they weren't doing it yeah i mean when you have the global currency without disputing that position which is again not really disputed it entails a number of consequence absolutely and this but okay thank you very much indeed william it was very stimulating paul you have the floor now will you take the you stay on your armchair yeah i'm going to sit here if i may um jon claude while my slides are coming up steve earlier paid tribute to jon claude's massive contributions as chair of the g-house which i heartily endorse but but also it should be said as the first chair of the esrb as well i was the bank of england member of the esrb because merving king was the first vice chair it's tremendously important that the president of the ecb takes the esrb with complete seriousness and i look forward to following that in the years to come francesco thomas thank you very much for inviting me um again um i'm going to save just a little bit about the state of play and then i'm going to outline three policy proposals um because i'm going to express dissatisfaction with the state of things i think it's important to underline that i remain very proud of what our generation of central bankers achieve both both in terms of avoiding the great depression and in terms of making the system more resilient but on the second um you really should take away this point that the system was horribly unresilient before steve said that the um the basal requirement was essentially under two percent if you under one percent if you converted into the implicit leverage cap it was over 200 times so basically there was no equity in the system before i would urge you pablo to move in your term as office as um basal committee chair one of my mentors was the jord blundin was the first basal committee arm chair in the 70s to get rid of the term capital just talk about equity and debt that can be bailed in there is an industry out there that it aims to exploit you some of them in the room in terms of at one and at two um and it's uh it's a game it's a game with private advantages and social social costs but more importantly because the the costs of financial crisis are so gigantic and i'll say something about that in a second the the best approach for policymakers to take to it is one of of dissatisfaction there are some areas of public policy where you can declare an achievement i think in this area one should be constantly carrying around dissatisfaction why if you think about the crisis just taking the 20th century and the early 21st if you think about the crisis of 1907 late 20s early 30s and then the early part of the 20th 20 the 21st century then we'll just follow by economic dislocations and downturns but by social disruption cultural disruption political disruption even constitutional disruption we have no idea yet what the long-lasting costs of 2007 through to 2009 2011 2012 are going to be and i think most of the the work that estimates the costs of crisis doesn't get this at all because you have to you have to factor in into the costs all the bad policies that get adopted afterwards so i'm first of all going to list some sins of omission then i'm going to be a bit more constructive so there's no general policy on shadow banks this is a very bad thing there is no excuse for it there is no resolution policies to speak of for central counterparties this is even worse particularly for legislators whereas banks became too big to fail by accident ccps are too important to fail by mandate i was part of that decision i remain proud of it there are not resolution regimes or plans to resolve them in a crisis in some capitals i think not in europe but in some capitals some agencies actively actively impede the development of such policies um on resolution i think there are issues in europe rightly or wrongly the single resolution board has not yet established a reputation even amongst its peer supervisors and resolution bodies that it is that it could live up to the challenge that it would have to face and i i believe in these spio things i'm one of the fathers of them almost everywhere particularly in the united states but here as well um so-called internal tea like requirements the things that move excess losses from subsidiaries up into holding companies have not been articulated um and properly applied yet but the directive in the latest directive in the EU will help in europe the common equity requirements um do not take account of the fragilities in the macroeconomic framework i think one can make a respectable case that where we calibrated basal three and essentially it was calibrated in 2011 um that it that we didn't um factor into that a world in which productivity growth was going to stay so low and so real interest rates were going to stay um so low and therefore nominal interest rates wouldn't have as much room for maneuver that's a world where where you don't have fiscal policy as in the euro area you actually need higher capital requirements rather than lower capital requirements and finally too many of the nation states the member states of the euro area are too fond of forbearance um and i hope that the leadership of the ssm and the new leadership of the cb will be really tough on that so three policy proposals very um briefly the first one could be implemented nationally or at a regional level in europe fairly quickly um the second and third i don't think could be um the opacity in my generation of central bankers saw an incredible increase in transparency and monetary policy um which amongst other things improved the quality of public debate on monetary policy i am reasonably knowledgeable about supervision and regulation it is almost impossible from outside to judge when some the cumulative effect of small changes in regulatory policy and supervisory policy are having a material effect on capital requirements and liquidity requirements on banks and this this gives policymakers the capacity and in some circumstances they have the incentives to actually ease policy without anybody noticing um in the short and medium run or tighten policy what i would like to see is every year that um the chief supervisory and regulatory bodies the srb could organize this for um the the u will be to announce the cumulative effect on the capital requirements and liquidity requirements of every single significant bank by name of all the changes in regulatory policy and supervisory policy including changes to the equations in stress testing models which is kind of one of the one of the games one of the games is those equations what the effect of that has been the the second thing i want to say is and this would take longer the one one of the ingredients of good policymaking when the political window closes is to have your eyes have your ideas ready for when the political window reopens the political window may not reopen for two to three years it may reopen next month um if there's a you and therefore one has to here's here's what i would like to see i i think we should move to a world this is second stage reform move to a world where policymakers are clear about which liabilities for asset managers which assets are going to be safe for those of you that are economists in the kind of homstrom sense of of safe assets informationally um insensitive i think that means two things um first of all i think it means that um banks and near banks should be required to cover 100 percent of their short term liabilities say going out for a year with the discounted value of assets that can be taken to the central bank in the discounted window so to be clear that could sound a bit like the lcr no discount for retail liabilities because of stickiness because they're not sticky in a serious run 100 percent um so the action would move to what are the what assets are eligible at the central bank window and what are the haircuts that are set by central banks on those on those um assets now will it may disagree with this that is not going to work um although that would be a big step forward that's not going to work um when a potential back potential borrower is fundamentally insolvent and villum says you villum says something that child's good house says you can't tell in a crisis sometimes you can't tell let me promise you sometimes you can um it's it's this remark that a number of people make you can never tell it is not true sometimes you cannot sometimes you can i've done it and i've what been in the room when other people have done it over many um years if you if a central bank an independent central bank lends to a bank that it knows to be fundamentally insolvent it is essentially preferring the short-term creditors at the expense of the long-term creditors the long-term creditors are made worse off that's a fiscal decision that's where resolution comes in so we have a resolution policy which i think is good but i would where when equity is um ruled out where i'm wiped out the losses should go on these bonds that can be bailed in i think that's great and i think in certain circumstances that can work a sane policymaker will prepare for when does the total tealout requirement turn out not to be enough and in those circumstances if you assume that bailout is ruled out the policymaker this is going to be a political policymaker by now is going to have to decide which creditors after bond holders it wants to put losses on to does it want to put losses on to trade creditors does it want to put lots losses on to derivatives counterparties does it want to put losses on to uninsured deposits from households um from small businesses does it want to distinguish those from uninsured deposits from asset managers this decision will be will be in front of a policymaker somewhere in the world eventually i hope not for a long time and you should work out what your answer is going to be i'm going to suggest two possible um capital structures and again i think over time the the basal committee should be moving towards prescriptions and proscriptions around capital structure one option would be common equity then the super subordinated tealout bonds then which are issued to the holding company then deeply subordinated bonds issued externally there may be any other senior bonds there may be um oblique other obligations with the residual maturity of over one year then maybe uninsured deposits from non households and maybe derivative stuff there may be uninsured deposits from households small firms trade creditors then maybe insured deposits of course that those would be last another one would be maybe we should distinguish between senior bonds with the residual maturity of over one year and then other obligations with the residual maturity of over one year the details don't matter it's at somebody in this room somebody young probably i hope gonna have to confront this decision even if the bail in plan is as good as wilson ervin and paul tucker says it is um this this will be faced by someone like joncle trichet um or mario drage or j pal needing to go to see a chancellor of germany or president of the united states to say actually it's gonna have to go further than that do you want to buy it or do you want to put losses on x and and y summing up a lot of progress has been made the system still isn't resilient enough part of the reasons i've suggested there needs to be more transparency on effects of changes in supervisory and regulatory policy i think that'd be good political economy um good politics more generally i would move towards 100 discount window cover for short-term liabilities um i'd be more prescriptive and proscriptive of banks capital structure not as a way of being tough on the banks but a way of being realistic about the misfortunes that the world can encounter and for god's sake please do something about shadow banking and and clearinghouse resolution the last two things should be a political imperative for your community because these were identified um you know nearly a decade ago as pressing issues and the political world will not forgive again and the public won't forget the political world thank you very much thank you very much indeed pa again it was a very very important wake-up call in a way uh you mentioned very very eloquently the non-banks issue stefan did the same uh william also and of course it is something which pablo knows better than anybody i was always wondering why there was such infuriation against the banks when we had a crisis and of course in some cases the taxpayer had to step in and no not much infuriation a part of little bit against the fed or against the simple bank of europe others as regards the intervention on markets and my understanding is what was that the political economy was not the same because a bank is an entity that you see which has shareholders managers CEOs and so forth when the market is the market so you intervene on the market it's less visible it's less of an identity a possible identification and it's it's clear that we were pushed rightly so to improve considerably the potentials on the banks even if a lot remains to be done as you said but it's true that we were not pushed with the same vigor to see exactly what are the systemic risk and bettered in the markets in general say the non-banks to oversimplify but okay it's a it's an open question that being said perhaps you would like to correct a little bit what has been said by all the speakers or engage in a very short dialogue before we ask questions uh sure so i think my reading at least maybe i'm a bit optimistic is that there is a certain consensus on at least some of the of the issues that are still pending let me maybe just make two remarks one of general one that second a bit more specific and related to to some things some elements that were raised by by steve but i think also by by by paul i mean this i think because i think it's particularly important so this democratic legitimacy you know accountability i think i think this is this is particularly important in the current political political context um of course i don't have a an explanation paul you were suggesting well to to provide more information regularly on the changes or the implications of the changes in the supervisory domain for example it's not obvious to me how this can be done practically but i mean of course it's something that we can i mean in the sense that it's not obvious it's very difficult not to to even to identify the changes in the supervisory domain of one specific bank but i mean i guess that you've thought about it much much deeper than than me so i'm not saying that it's a crazy idea but what i think is uh is is important and i think it's already a response at least is a response by the basal committee as you were saying steve is a disevaluation framework i mean this is a new thing that an international setter enters into an evaluation program for the following years which basically the main principle is that it's questioning the reforms that have been approved within the within the the the the the the basal committee i think it's already something that i think it improves a lot the accountability at least if we do it in a very transparent and honest way and of course involving the academia as i was also emphasizing in my in my remarks and then just a second a second comment on this lcr ms fr issue uh but you were also emphasizing this steve i mean it's true that the there is an issue there you were very clear but also you were also very simplistic and you were making this this point the balance sheet of the banks are much more complicated in the end this is an empirical question okay so we did some exercises at the basal committee and internal exercise looking at the banks because of course if it is redundant what you would expect is that banks meeting the lsr who will also meet immediately the nsfr and this is not the case okay there are a group of banks that meet both of them there is a group which is the majority of them around 85 percent of them there is a small group of banks that do not comply with the lsr and there is a small group of bank that do not comply with the nsfr but of course what it is important is you get the data and you and you can make the test yourself steve just directly on that point i i i'm aware of that and uh but the but i think that what the logic of this these simplistic oversimplified balance sheets tells you is they tell you that you can then reform the lcr to make sure that this happens so there just needs you really only need one two very quick comments um one of them i i think maybe back more to your original questions uh presentry shea the first one is that the about about real concerns that i have i think that that uh technology and finance is increasing uh is increasing cross-border sort of transmission of various kinds it's increasing the need for global cooperation and global coordination on not just standard setting but on the implementation and the actual supervision but at the same time politicians are going in the wrong direction politicians are going towards less cooperation and they're instructing there they're instructing their people to be less cooperative so i'm very very worried about this divergence of the political system from the way in which the the the what technology is really forcing on us and and how that's going to be resolved the second point is uh is i think vellum made this uh made this focused quite uh quite rightly on the importance of the swap lines here again i'm very worried um i'm i'm worried i'm worried not uh i'm worried that even the ecb credit will not be good enough next time uh and and i'm serious politics i'm a hundred percent serious yeah it's it's entirely for for politicians for politicians right and so what will happen is they will come and they will say oh you know look your banks are your problem uh why should i give you and the fact that they that they have dollar that they have dollar assets and dollar liabilities that's your problem and so there's no acceptance i think inside of the united states of the fact that this has dramatic benefits for the united states and with those benefits come responsibilities i think that's really this is a really dangerous thing that's uh that's happening and and it's getting it's getting worse not better it is one of the aspect of the u.s uh some money in the u.s shooting in their feet to diminish and diminish and diminish the use of the us dollar yes iran is another story but well it's we could we have a long list but on that so other remarks other no no wait a few questions okay but let's go you're well the last to speak in any case incorporate your reaction so who wants to ask question please ma'am this is a uh a general comment to the speakers and i would pose to you that uh i don't think we've resolved the too big or too important to fail issue and none of you mentioned that because if there's a full blown crisis again uh i honestly don't see um the the financial uh sector not being bailed out again so wow Paul mentioned that but you want to respond yes one of the comment and that was uh to both uh william and steve uh you know will mention that uh you know the IMF could be called upon during a global financial crisis but we all know that we simply don't have the sufficient resources and that's why what you said is absolutely correct the swap lines would be great if they were indeed extended to emerging markets uh and there was a lot of pressure put on the u.s for example there was a lot of study done by ourselves and academics which showed there are spill overs first the u.s said there are no spill overs so we did a lot of work prove there are spill overs so then the u.s came back and said okay we can only take it into account if there are spillbacks to us so then they did then the u.s the fed did some studies and we did two and we found they were very little spillbacks so even if see what you say is not true or is true it's a separate issue that uh you know if they don't find even if they were well intentioned politicians but if they don't find spillbacks it's not going to happen okay could you respond a little bit or comment on the on the comments on to on too big to fail um i don't know whether you take this view of it but lots of people frame this question although it's binary we either have solved too big to fail or we haven't solved too big to fail and i think this is an absolutely fundamental problem and i must say some leading policymakers have have encouraged this way of thinking about it think about it as circles of hell and some crises are worse than others and when i was devising the bail in plans what i had in mind was that the prime minister of my country or the president of the united states the chancellor of germany their only sane choice wouldn't be bail out before i left office in 2013 um late 2013 i made a speech in washington where i very prominently said that i sincerely believed that already then the u.s security stealers if they failed could be resolved through bailing without the whole world financial system falling apart i still believe that i think if your organization doesn't think this it needs to set out in detail um with the bank of england and with the federal reserve and the fdic why that is so and i think that you also need to invite those of us that are including if not me people like andrew gracey who are real experts in this field and ask us to evaluate your work i doubt very much frankly whether there lies a great deal behind assertions like that because if they're right you should be pressing this at g20 level and g7 level because it would mean that everything that we have said on this panel including president trichet is profoundly wrong i haven't heard christine say that at all over the recent years when i've talked to david i haven't heard him say this um so you know i'm i'm challenging you on the substance and i'm actually challenging you on the policy um debate um as well because i think there is nothing more serious and i think in that sense you're right to raise the issue let me let me let me let me just yeah let me get very quick well that's quite important for the media the media presence i'm sorry i'm not engaging direct dialogue all right all right so uh tableau and steven no no no that's very very quick element to add to what topol has said is that the the fsb is evaluating the tlac yeah right now so let's wait right right no i i think i think in order to to to to give an answer the proper uh proper answer well i think where it's very easy to agree is that if one of these institutions starts to fail that there's no politician on the face of the earth that if they believe that the institution's failure is going to bring down their financial system there's no politician that will not bail this institution out absolutely okay yes question is i agree with that the question is whether or not we have a system as paul put it where they have an alternative that they that is in fact palatable and that they trust and that i think is exactly as paul said the fsb and claudia book who i who was here yesterday i don't think she's here today is uh is is running a um an evaluation of the too big to fail so i think that that's really where we need to go do we have a um sufficiently powerful way of uh bailing in in systemically important insolvent entities in a crisis my belief is no we don't it is precisely what has to be to be checked but i mean there are degrees in the in crisis and i think obviously we we cannot exclude of course an absolute drama and experience has also demonstrated whatever you have devised and designed ex ante you find out what has to be done in the circumstances at least it is what we had experience in the in the last crisis but if we could go up to the ranking of everything and the algorithm which permits to have some kind of consensus on the way you deal with such events of course it would oversimplify the life of those who would have taken who will be responsible for take this terrible the political decisions we had a question over there please thanks jack chiclar from mlex um in a letter that was published today uh valdez dombrowski's who is hoping to be the next EU commissioner for financial services said the EU will implement basal three i'm going to quote in a way that preserves european specificities and the diversity of the EU banking sector does that kind of language worry you does uh does it make you worry in particular that the EU will seek to continue the loopholes it's had in the basal system that favour its own banking sector um and what would the consequences of that be good questions pablo of course i'm not going to interpret what the others have said i would just stick to what i've said in my initial intervention is that all jurisdictions all jurisdictions should implement basal three in a full timely and consistent manner now this is simple and clear okay thank you question in the session on the on the uh possible problems of the financial system globally that we just have i'm a little bit astonished not to hear anything about china i mean we are thinking about where could the next crisis come from we're asking ourselves what have we achieved what are our problems i i guess when you take paul's impressive list of grievances um this is really a description of china plus you add in in uh transparent state um banking you add excessive leverage you add uh excessive digitalization including uh riskiness of cybercrime as we learned this morning etc so you add all the stuff that comes to your mind during these one and a half days uh isn't that something which should make us think about how do we address the next financial crisis in particular sort of a question of is it better to do more in terms of in fact even more in terms of international cooperation or maybe they even maybe there were even reasons for sort of ring fencing let's make sure that if there's a major problem in china it doesn't hit us too badly stimulating question who wants to answer china is participating of course in all your meditation paul yes and of course and uh it's a it's a member of the of the basal of the basal committee well indirectly i was uh mentioned in china and it was one of my slides when commenting on the on the shadow banking uh you made also the point uh well the role of the shadow banking in china is probably higher than in other and by the way this has been given accepted by the authorities by the by the chinese authorities no uh so it's not only the level of debt but also the distribution of that of this debt between official banks let's say or and shadow and shadow banks and of course given the importance of the chinese economy for the whole and the world economy which is true that i think in terms of having a crisis i think china must be leading candidate in at some time in the not too distant future but the spillover through the capital account will be limited yeah because of the the capital controls that they have so there will be transmission of course through real economic activity and trade links and everything else but um i think that the chinese financial crisis would first and foremost be a chinese financial crisis uh rather something that would have the kind of international repercussions uh that we saw during the during the great financial crisis yeah as long as the renminbi is not a convertible currency part of the international monetary system we are a little bit isolated but the time will come quite quickly in my opinion if you make the currency convertible you'll probably see if you were to do that tomorrow you would have a financial crisis in jenna tomorrow because the the exodus would be yeah just enormous so probably i think it would be also be a crisis in the rest of the world it would it would but only open up but nevertheless which remains probably extraordinary likely when time comes is that progressively of course the i mean it will become a convertible currency and we would be in a different universe it's a question of time maybe a long time perhaps fortunately a long time for the reason of transition cost of the transition that you mentioned other questions yeah i agree with you i mean we have advanced a lot this is my idea but i agree with paul talking about ccps i am really surprised that we have not advanced on the resolution of ccps because it's not that they are big to fail it's that they are huge to fail and also it knows that only that they are huge to fail but if one of them fails then the whole system because the interconnections are so big especially with banks that the problems are going to be very very big so my question is why do you think that we have not advanced on that well i i think it's partly because quite a number of important supervisors and regulators of clearing houses have a position that recovery will always work and the resolution is essentially unnecessary and i think it's i think it that's more in the united states in washington and you can see traces of that in the response of the former chair of the cftc to a paper that the system at risk council published on on that in europe i think it's slightly different i was this isn't a secret although it's not well known i was a consultant about four years ago i think the european commission on the work they were doing on a directive for resolving ccps and the then commissioner had a view which i think was completely understandable that he wanted europe to move in tandem with the united states i think that you know if you were made commissioner with that brief tomorrow i think that would be your first thought and to work it out through the fsb i think it's less easy to explain why there hasn't been a kind of global breakthrough i won't bore you with the technical details but some technical details tend to get thrown up and for what it's worth i i think they're either invalid or can easily be um resolved i think there hasn't been enough political pressure i would i would encourage the esrb to try and get when when john claud was was chair of the g hoss and mario was chairing fsb i was chair i was chairing cpm i because it's now called on one of the fsb groups one of the tricks and i mean tricks in a grown-up way is to put reports up to the g20 summit that then give you instructions to get on with your work in various areas and um i i would i'd enter to what extent esrb can get the eu and the fsb to to constrain people a bit to have a to have a breakthrough in this area because if ever there is a problem it will just i mean there will be no forgiveness it's i simply don't understand it but this is bureaucratic infighting and some and some attempts to be global so some goodwill and some ill will coming together so i have a quick comment on this i think that i mean what amazes me is for for for you know all of you who i hear in this kind of in in this kind of gathering i think will will recall the episode now only a year a year ago of in our os and yeah and and the and the bankruptcy um and and the what you should what we should have learned from that and we didn't is the way in which these things are transmitted quickly so what happened was that this one guy managed to build up a position he went bankrupt and leaving behind losses of roughly 100 million euros and um and those losses were then immediately immediately distributed in the form of a capital call to the clearing members of this little exchange and what we should have learned from that is that these that first of all this can happen and secondly that when it does happen it is transmitted very quickly to the clearing members and so if it was very large it would be transmitted and it would cross borders because of course the clearing members are not just in one jurisdiction now why is this why have we done nothing i am actually way more cynical than well paul's pretty cynical but i'm even more cynical which is i think that these things because we allow these things to be private for-profit operation that too i think i think that's the first thing we have to change then we can start arguing about how to structure them but the first thing is if you are private then of course you don't want to have any capital right because it's because your return on equity for your owners becomes low as you increase the capital so so that that seems to me to be the first place to start that's where i would start is get rid of private ownership yeah the fact is that they factor these are utilities and no yes we don't recognize it's not the u-ray yeah other questions other remarks other comments no meaning that you ah one question over there please it's very far far away far away it's very dark thank you very much pretty interesting remarks and following up on the ccp question um if one were to actually um nationalize or make them public entities um at the end if a ccp were to fail somebody would have to bear the brunt of the loss or take take the bill so as long as they are um private entities their old duffy has put out a proposal where you would do initial margin haircutting so the losses that go in excess of the default fund and excess of the um the capital of the ccp which isn't intended to be to be losses sorry it would to be distributed similar to a bail in of the banks it would be distributed to the members if the entities were public um wouldn't that incentivize actually um the use of public funds rather than use of private funds can i respond to this so so the this is the technical issue i was alluding to and that i think there's a solution to so there is an argument that haircutting initial margin or haircutting variation margin is highly pro cyclical um except to the extent that the failure of the ccp ccp comes completely out of the blue like a sunspot if it doesn't if there's any notice at all um people will cut their positions in the ccp or take opposite positions which could exacerbate the market crisis which is given rise to the pressure on the ccp um the way around this i personally believe and so my personal position is this is a good solution the src's position is that this is something worth thinking about that's subtly different and importantly different um is that what should happen is that ccps should issue bonds which um the owner has first call on they can subscribe to them if they don't they should go they the clearing members should have to subscribe to them and the value of the bonds would be some slow moving average of the initial margin positions of individual clearing members and the default members so it's the same economics for the same financial hit for the clearing members who would become equity holders but the pro cyclicality is removed because the bond is just something that they have got and can't do anything about because of the slow moving um average i said it would be a bit technical um but this you know that may be a bad idea but it's it's the the point about the pro cyclicality has stopped people pursuing this variation margin haircutting um thing and somebody's got to come up with something else thank you very much paul i see that the audience is fully informed fully aware of all the hard work which remains to be done paul and in all domain and i have to thank the panelists very very much they were extremely good and eloquent thank you very much thank you very much