Dr. Wolfgang Schäuble, Germany’s Federal Minister of Finance, about the future of Europe’s financial architecture

22 March 2016

The single currency is the core of Europe’s financial architecture and it will remain so, underlined Dr. Wolfgang Schäuble, Germany’s Federal Minister of Finance, speaking at the invitation of CFS President Otmar Issing as part of the CFS Presidential Lectures on 22 March 2016 on the topic of “The Future of Europe’s Financial Architecture”. The euro will continue to develop step by step, remaining stable and repeatedly overcoming crises, the Finance Minister went on.

Financial market crisis as a driver of integration

One of the lessons of the financial crisis is that markets do not function without regulation. We must clearly recognize, however, that we cannot anticipate the unknown, we are always playing catch-up, Schäuble said. What is more, the professionalization of consultancy services and the spread of knowledge through modern communication technology have now led to a situation where loopholes can be identified before proposals have even been fully formulated. It is vital to draw the corresponding lessons from this.

With the aim of making the financial markets more stable – more crisis resistant – and breaking through the vicious circle of bank debt and sovereign debt, policy-makers have taken the crisis as an opportunity to make structural changes to Europe’s financial market architecture, Schäuble explained. Risk and liability have been bound together more closely and the danger of banks having to be bailed out with taxpayers’ money has been reduced. This was also a response to the problem of moral hazard – when opportunities lie with the financial market participants while taxpayers are left to shoulder the risks – and it set the right incentives for the future, said the Finance Minister.

More harmonization through newly created institutions

Numerous guidelines and directives have been passed that now form a “single rule book”, a kind of constitution for the banks. These include, first and foremost, the rules on the banking union – the single supervisory mechanism, the single resolution mechanism and the harmonized deposit protection standards – and the classic banking regulation, particularly with its rules on equity capital and on remuneration systems, Schäuble explained. He underlined that smaller credit institutions should not always be subject to the same requirements as major international banks.
Schäuble took a clear stance on the commoditization of deposit protection. It is essential to first reduce risks and to risk-weigh government bonds on bank balance sheets before this liability can be communitized, he said.

The Finance Minister also took a skeptical view of the ECB’s current low and negative interest rate policy. He outlined a clear conflict of objectives between ensuring price stability with low interest rates and responding to concerns over major credit institutions having a sufficiently solid equity base. Currently a shift can be observed from conservative to higher risk investment strategies, and this also applies to insurance companies, Schäuble indicated. Countering the effects of this development before the risks materialize will not be easy for regulators, central bankers or policy-makers.

Digitization brings new challenges

Digitization – and FinTechs – pose new, key challenges for regulators that must be taken seriously and kept under close observation, stressed Schäuble. He took a critical view of the current method of working largely with agreements between individual states, since this is not an institutional and communitized approach. “This is second best,” said the Finance Minister. “Although second best is sometimes better than nothing.”