Andreas Dombret - "Reform Fatigue" One of Biggest Risks

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Aug 20, 2014
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Andreas Dombret - "Reform Fatigue" One of Biggest Risks

Deutsche Bundesbank board member interviewed from Salzburg Global Seminar by Bloomberg TV on state of banking in Europe Andreas Dombret live on the terrace at Schloss Leopoldskron

Deutsche Bundesbank board member and chair of the Salzburg Global Seminar session The Future of Banking: Is There a Sustainable Business Model For Banks? Andreas Dombret talks about European Central Bank stress tests and risks to financial stability in the euro area. He spoke on August 19 in Salzburg, Austria, with Jonathan Ferro on Bloomberg Television's "The Pulse." (Source: Bloomberg)

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

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

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

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

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

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

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

 

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

 

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

 

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

 

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

 

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


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Andreas Dombret was the Chair of the fourth session of Salzburg Global Forum on Finance in a Changing World. The session The Future of Banking: Is There a Sustainable Business Model For Banks? was supported by our main partners, HSBC, Ernst & Young and Oliver Wyman alongside our sponsor Oesterreichische Nationalbank and co-sponsors BNY Mellon, Byron Boston, Cleary Gottlieb, The Cynosure Group and Davis Polk. For more information, please see the session webpage: www.salzburgglobal.org/go/546 and follow the daily discussions on Twitter via the hashtag #SGSfinance